Cypen & Cypen
NOVEMBER 10, 2005
Stephen H. Cypen, Esq., Editor
If you think the two Time reports were scary (see C&C Newsletter for November 3, 2005, Items 4 and 6), you must read the October 30, 2005 cover story in the New York Times Magazine, entitled “We Regret to Inform You That You No Longer Have a Pension.” Subtitled “America’s next financial debacle,” the article recounts how corporations were happy to offer rich retirement plans to their workers as long as accounting tricks and federal insurance made it easy to delay the day of reckoning. But now the game is up. The amount of underfunding in corporate pension plans totals a staggering $450 Billion. Part of that liability is attributable to otherwise healthy corporations that will most likely, in time, make good on their obligations. But the plans of the companies that fail will become the responsibility of the government’s pension insurer, Pension Benefit Guaranty Corporation. The PBGC, which collects premiums from corporations and, in theory, is supposed to be self-financing, is deeply in the hole, prompting comparisons to the savings-and-loan fiasco of the late 1980s. Just as the S&L’s of that era took foolish risks in part because their deposits were insured, the PBGC’s guarantee encouraged managements and unions to raise benefits even higher. In such situations, individuals are tempted to take more risks than is healthy for the group; economists, in a glum appraisal of human nature, call it “moral hazard.” In effect, America’s pension system has been a laboratory demonstration of moral hazard in which insurance may end up bankrupting the system it was intended to save. Given that pension promises do not come due for years, it is hardly surprising that corporate executives and state legislators have found it easier to pay off unions with benefits tomorrow rather than with wages today. Since the benefits were insured, union leaders did not much care if the obligations proved excessive. During the previous decade especially, when it seemed that every pension promise could be fulfilled by a rising stock market, employers either recklessly overpromised or recklessly underprovided -- or both -- for the commitments they made. The PBGC, which is now $23 Billion in the red, does not protect government pensions, but dynamics similar to those in the private sector have also wrecked the solvency of public plans. Even in states where budget restraint is gospel, public-service employees have found it relatively easy to get benefit hikes for the simple reason that no one else pays much attention to them. In the corporate world, stockholders, at least in theory, exert some pressure on managers to show restraint. But who are the public sector “stockholders?” The average voter does not take notice when the legislature debates the benefit levels of firemen, teachers and the like. On the other hand, public-employee unions exhibit a very keen interest, and legislators know it. So benefits keep rising. As a matter of practice, those benefits are as good as insured. Because public pension benefits are legally inviolable, default is not an option. Sooner or later, taxpayers will be required to put up the money (or governments will be forced to borrow the money and tax a later generation to pay the interest). Thus, unions can bargain for virtually any level of benefits without regard to the state’s ability, or its willingness, to fund them. This creates moral hazard indeed. At least in the private sphere, there are rules -- ineffectual rules maybe, but rules -- that require companies to fund. In the public sector, legislatures wary of raising taxes to pay for the benefits that they legislate can simply pass the buck to the future. (Not in Florida!) Some people believe that the Bush administration would just as soon be done with pension plans altogether. Elaine Chao, Secretary of Labor, recognizes that defined benefit plans have their advantages but feels that in an increasingly mobile 21st-Century workforce, lack of flexibility of DB plans is yielding to greater usage of defined contribution plans. If defined benefit plans are on their last legs, then it would make sense to try to incorporate their best features into 401(k)s. The drawback to 401(k)s, remember, is that people are imperfect savers. They don’t save enough, they don’t invest wisely what they do save and they don’t know what to do with their money once they are free to withdraw it. Quite often, they just spend it. Here there is a lot the government could do. For instance, it could require that a portion of 401(k) accounts be set aside in a life-long annuity, with all the security of a pension. Behavioral economists have demonstrated that you can change people’s behavior even without mandatory rules. For instance, by making a high contribution rate the “default option” for employees, they would tend to deduct (and save) more from their paychecks. If you make an annuity a prominent choice, more people will convert their accounts into annuities. All in all, as depicted by this article, the situation is getting quite scary for employees, public and private.
D’Angelo, who suffers from vertigo, sued her former employer in the United States District Court. She alleged that terminating her -- rather than reasonably accommodating her by exempting her from working on the spreader belt and box-former belt -- constituted disability-based discrimination, both because she was actually disabled as a result of her vertigo condition and because her employer regarded her as disabled, in violation of the Americans with Disabilities Act, 42 U.S.C. §§ 12101 et seq., and parallel provisions of the Florida Civil Rights Act, Fla. Stat. §§ 760.01 et seq. The district court granted summary judgment for the employer on both issues. On appeal, the court affirmed on the first issue: D’Angelo’s vertigo prevents her only from holding a narrow category of jobs and thus does not substantially impair her ability to work. On the second issue, the court reversed: there are genuine issues of material fact concerning whether the employer regarded D’Angelo as disabled and whether she was disabled to perform the essential functions of her job in spite of her vertigo condition. The appellate court concluded that the ADA, by its plain language, requires employers to provide reasonable accommodations for employees they regard as disabled. (In a footnote, the appellate court observed that the district court had properly analyzed the Florida Civil Rights Act disability-discrimination claims under the same framework as the ADA claims.) D’Angelo v. ConAgra Foods, Inc., Case No. 04-10629 (U.S. 11th Cir., August 30, 2005).
Bloomberg News reports that mortgage-backed bond yields are at the highest relative to U.S. Treasuries in more than two years, as debt sales outpace demand from investors concerned about potential losses from rising interest rates. Yield on the current coupon 30-year mortgage security recently increased to 5.81%, or 1.23 percentage points above 10-year Treasury yields, the biggest gap since August, 2003. The yield difference was .87 points in January, the smallest in more than a decade. Sales of 30-year mortgage bonds by Fannie Mae, Freddie Mac and Ginnie Mae surged last month to $116 Billion, the most since November, 2003. Part of that wave is coming as home owners shield themselves from rising rates by switching from adjustable to fixed-rate loans, which back most agency mortgage debt.
A report in plansponsor.com says that former Congressman John Erlenborn (R-Illinois), a key architect in formation of what eventually became the Employee Retirement Income Security Act of 1974, has died at age 78. He became the ranking Republican on the House Education and Labor Committee, helping to establish the Pension Benefit Guaranty Corporation. After serving ten terms in Congress, Erlenborn decided not to run for reelection in 1984, and became a partner in a Washington law firm.
As previously reported here (see C&C Newsletter for August 11, 2005, Item 1), the United States Treasury has announced that it will raise over $170 Billion during the first quarter of 2006, by introducing the new 30-year bond on February 9, 2006. The government will announce on February 1, 2006 the total amount of bonds to be sold, according to plansponsor.com. Auctions will be held twice a year, in February and August. The old 30-year Treasury bond had been issued for almost 25 years (1977-2001).
Cagnoli challenged a Judge of Workers’ Compensation Claims order dismissing his petition for Workers’ Compensation benefits for failure to include a Social Security number as required by Section 440.192, Florida Statutes. On appeal to the First District, the Court agreed with Cagnoli that the requirement of including a Social Security number violates Section 7 of the Federal Privacy Act of 1974, 5 U.S.C. § 552a note. That section makes it unlawful for any federal, state or local government agency to deny an individual any right, benefit or privilege provided by law because of such individual’s refusal to disclose his Social Security account number. On further review sought by the Division of Workers’ Compensation, the Supreme Court of Florida affirmed the First District’s decision and adopted its opinion. Thus, the Judge of Compensation Claims was directed to reinstate Cagnoli’s claim and consider it on the merits. Florida Division of Workers’ Compensation v. Cagnoli, 30 Fla. L. Weekly S747 (Fla., November 3, 2005).
Tina Lunsford and Robert Lunsford were divorced. At time of Mr. Lunsford’s death, he was an employee of the Young Men’s Christian Association, where, as an employee, he was a participant in the YMCA Retirement Fund, an ERISA-governed pension plan. Mr. Lunsford had designated Tina Lunsford as primary beneficiary of the pre-retirement death benefit provided by the Fund. He named his three minor children of a prior marriage as contingent beneficiaries. The marital dissolution agreement executed by Mr. Lunsford and Tina Lunsford provided for mutual waivers of all rights to any retirement payment or annuity and declared the intent of each party that “this provision shall have the same force and effect as if he or she had signed any waiver forms releasing his or her aforementioned interest, but each further agrees to execute whatever documents may be required in this regard in the future, as necessary, to accomplish the purposes heretofore stated.” The probate court granted the estate’s petition seeking to divest Tina Lunsford of any interest in the YMCA Retirement Fund, and entered a Qualified Domestic Relations Order directing proceeds be paid to Mr. Lunsford’s three minor children, the named contingent beneficiaries. Tina Lunsford appealed, maintaining that ERISA preempts state law and negates any claimed waiver. In affirming, the appellate court recognized that a QDRO creates or recognizes existence of an alternative payee’s right to receive all or a portion of benefits payable with respect to a participant under a private pension plan. Thus, a QDRO is exempt from ERISA’s preemption provisions and may be used to distribute funds to a payee who is not the primary beneficiary, if appropriate under state law. (The appellate court also recognized that the trial court could have simply required Tina Lunsford to execute a waiver and a release of Mr. Lunsford’s retirement death benefit, thus mooting any issue about a QDRO.) As always, we hasten to reemphasize that QDROs generally will not apply to Florida public plans (see C&C Newsletter for February, 1997, Special Supplement). Lunsford v. Lunsford, Case No. M2004-00662-COA-R3-CV (Tenn. App., October 12, 2005).
Section 112.18(1), Florida Statutes, provides that any condition of any law enforcement officer [among others] caused by heart disease resulting in disability shall be presumed to have been suffered in line of duty unless the contrary be shown by competent evidence, if the pre-employment physical examination failed to reveal any evidence of such condition. A Florida appellate court rejected a city’s argument that the statute was intended to be limited to permanent disability, so that the presumption would not apply to a temporary disability. Unisource Administrators v. Bridges, 30 Fla. L. Weekly D2432 (Fla. 1st DCA, October 18, 2005).
On October 17,
2005, bankruptcy reform (see C&C Newsletter for April 28, 2005, Item
1), became a reality, as the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 went into effect. The United States Supreme Court recently ruled
that IRAs are entitled to federal protection in bankruptcy proceedings (see
C&C Newsletter for April 7, 2005, Item 4), but the new bankruptcy law
goes one better. According to Financial-Planning.com, Congress designed the
bankruptcy law to curb perceived abuses by debtors in bankruptcy. The new
law, however, contains a silver lining of increased protection for IRAs,
Roth IRAs and most company retirement accounts. But this protection applies
only to bankruptcies, and does not protect IRAs from other judgments the
way that federal law (like ERISA for the private sector) now protects qualified
plans. The new law revises exemptions under Section 522(b)(3). Retirement
funds and plans that are exempt from federal income tax under Code Sections
401, 403, 408, 408A, 414, 457 and 501(a) are now exempt from the bankruptcy
estate. This exemption covers qualified retirement plans such as 401(k)s,
403(b)s, IRAs, Roth IRAs, governmental plans and tax-exempt organization
Section 148.6(a)(1) of the California Penal Code criminalizes knowingly false speech critical of peace officer conduct, but leaves unregulated knowingly false speech supportive of peace officer conduct. Because the statute impermissibly discriminates on the basis of a speaker’s viewpoint, in violation of the First Amendment, the statute is invalid. The statute’s under-inclusiveness is particularly troubling because it is necessarily limited to criticism of government officials -- peace officers. Chaker v. Crogan, Case No. 03-56885 (9th Cir., November 3, 2005).
The nation’s private defined benefit pension system, a key contributor to the financial security of the millions of Americans, is in long-term decline. Some analysts have identified hybrid DB plans like cash balance plans as a possible means to revitalize this declining system. However, conversions from traditional DB plans to CB plans has sometimes been controversial because of the effect conversions may have on the benefits of workers of different ages. The Government Accountability Office was asked to (1) review current research about implications of CB conversions for employee benefits, (2) describe the prevalence and type of transition provisions used to protect workers’ benefits in past CB conversions and (3) estimate the effects of CB conversions on benefits of individual participants under a hypothetical conversion to a typical CB plan from a typical traditional DB plan. GAO found that current pension and economic literature provides little conclusive evidence about the effects of CB plan conversions on benefits. Many cases, data and other methodological issues (for example, sampling methods) limit the generalization of results. Nonetheless, cash balance research indicates that the effects of a conversion depend on many factors, including the generosity of the CB plan, transition provisions that might limit any adverse effects on current employees and firm-specific employee demographics. CB plan conversions are posited to have distributional effects on expected pension wealth: younger, more mobile workers usually benefit while older workers with long job tenure are likelier to experience a loss, particularly if they are nearly eligible for early retirement. GAO’s analysis of a representative sample of plan conversions determined that most conversions occurred between 1990 and 1999, and primarily in the manufacturing, healthcare, finance and insurance industries. Most conversions set participants’ opening account balances equal to the present value of benefits accrued under the previous plan, although the interest rate used to calculate the balance varied around the 30-year Treasury bond rate. Most plans provided some form of transition provisions to mitigate the potential adverse effects of the conversion on workers’ expected benefits for at least some employees. About 47% of all conversions grandfathered at least some of the employees into the former traditional DB plan. In most cases, grandfathering eligibility was limited to employees meeting a specified minium age and/or years of service. GAO’s simulations of the effects of conversions on pension benefits show the following:
For those readers who do not know, GAO, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities to help improve performance and
accountability of the federal government for the American people.
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