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Cypen & Cypen
NOVEMBER 22, 2006

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. THREE MYTHS ABOUT STATE AND LOCAL GOVERNMENT PENSION PLANS -- BRAINARD/ZORN: has published some “Myth Information,” written by Keith Brainard (of NASRA) and Paul Zorn (of Gabriel, Roeder, Smith & Company). The piece is of such importance that we will discuss it here in great detail. Significant misinformation is circulating in recent media reports about state and local government pension plans. These reports claim that most public pension plans are in a state of financial crisis, that they lack oversight and standards and, therefore, that they should be replaced with defined contribution plans. Not so, according to Brainard and Zorn:

Myth 1 - Public Pension Plans Are in Crisis. The claim that public pension plans are in crisis often is supported by references to a handful of poorly-funded plans and a statement that public plans’ unfunded liabilities amount to hundreds of billions of dollars. In fact, the pension plans covering the vast majority of public employees are in good financial shape. According to the Public Funds Survey, the average funded ratio for more than 100 of the nation’s largest public plans was 87% in 2005, with two-thirds of the plans at least 80% funded. While a handful of plans do have funded ratios below 60%, the financial health of the plans covering the vast majority of public employees is sound. When the Public Funds Survey reports unfunded liabilities of $336 Billion, it represents only 13% of total liabilities for the surveyed plans. According to the U.S. Federal Reserve, public pension plans as a whole have accumulated $2.7 Trillion in assets to pay benefits. Furthermore, pension liabilities are long-term liabilities that are amortized over up to 30 years, similar to a mortgage. (Homeowners who have paid 87% of their mortgages with 30 years to pay the remainder would not consider themselves in financial crisis.) Reports often give the impression that taxpayers pay all of the public pension benefits. However, most public plans require member contributions, and almost all public plans invest their assets and earn additional income. According to the U.S. Census Bureau, state and local pension plans accumulated $2.3 Trillion in investment earnings from 1982 through 2005, compared with total employer/taxpayer contributions of $885 Billion and employee contributions of $435 Billion. Consequently, taxpayers provided 24% of the total amount paid into public plans during this period, with the remaining 76% coming from investment earnings and employee contributions. In other words, every dollar taxpayers paid into public plans generated an additional $3, to be returned to the economy as retirement income.

Myth 2 - Public Pension Plans Lack Oversight and Standards. Recent media reports suggest public plans are not subject to oversight, fiduciary requirements or even accounting standards. In fact, all public plans are governed by federal and state laws that regulate how they are established and the level of benefits they can provide. Public plans also are governed by comprehensive accounting standards established by the Governmental Accounting Standards Board. These standards provide the framework for annual financial audits most governments contract to independent accounting firms. Since credit rating agencies pay close attention to auditors’ reports in assessing a government’s credit quality, there is significant incentive to adhere to GASB’s standards. And while public plans are not subject to many of the provisions of the federal Employee Retirement Income Security Act of 1974, state fiduciary laws governing public plans often reflect ERISA’s language. In truth, fiduciary standards established by 9 out of 10 states for their retirement plans are similar to ERISA’s fiduciary standards.

Myth 3 - Converting to a Defined Contribution Plan Will Save Money. Media reports also suggest that replacing public pension plans with defined contribution plans (similar to 401(k) plans) would reduce government costs and better meet workers’ needs. While DC plans are useful for supplementing pension benefits and encouraging additional employee savings, replacing public pension plans with DC plans is unlikely to reduce government costs or better meet workers’ needs. First, many state and local governments have strong legal protections on pension benefits -- often based in the state’s constitution. Consequently, the current pension plan still would need to be maintained and funded for current employees. Any new DC plan would be established for newly-hired employees at an additional cost to the government. Moreover, because the pension plan would be closed to new employees, stricter accounting standards would apply, effectively increasing the plan’s annual contributions. Any arguable savings from conversion to a DC plan would likely take 10 to 15 years to realize. Second, DC plans have not been particularly successful at providing adequate retirement benefits. Many DC plan participants do not contribute enough to sustain their benefits throughout retirement, and often take money out of the plan when they change jobs. They also tend to invest conservatively, earning low returns while paying high investment management fees. They often spend their assets too quickly in retirement. A recent study found that only half of older workers in 401(k) plans had accumulated enough to provide an annual benefit of at least $5,000! By comparison, public pension plans paid an average annual benefit of about $20,000 in 2005. Third, to ensure they do not outlive their benefits, DC plan participants must contribute enough to pay benefits that will carry them into their 90s. However, because pension plans can pool these mortality risks, contributions need only fund benefits over the average life expectancy of the group (about age 85). Thus, for the same level of benefit, contributions to a pension plan are significantly lower than to a DC plan. The lack of mortality pooling in DC plans can affect women in a particularly negative manner. Their DC account balances tend to be lower than men’s because of employment interruptions due to child rearing. In addition, because women generally live longer than men, they typically have to spread the smaller balance over more retirement years.

Considering the unrelenting onslaught against defined benefit pension plans in general, public plan trustees and members would do well to have a working knowledge of the myths perpetuated by DB opponents.


Like David Letterman, SmartMoney is known for its “lists” of things people generally don’t know and won’t be told by others. Here is SmartMoney’s List of Ten Things Your 401(k) Provider Won’t Tell You:

  1. “We’re making a mint on your 401(k) -- even if you’re not.” In a practice known as revenue sharing, providers get a cut of the expense ratio on funds in your 401(k) to cover day-to-day “administrative costs.” Since the fee is charged on a percentage of assets, that revenue increases as your 401(k) grows, even though those costs stay virtually the same.
  2. “You’re buying wholesale, but we’re charging you retail.” Asset managers sell mutual funds in different share classes, each of which has a different fee structure. From the most expensive to the cheapest class of funds, the range could be as much as a full percentage point.
  3. “No one in his right mind would buy these funds -- given a choice.” Your 401(k) may not offer top funds because your asset manager may not have them in each category. While it might offer stellar large-cap stock funds, its small-cap picks may be mediocre. And providers may charge extra for better alternatives from other sources.
  4. “Our ‘target-date funds’ may miss the target.” Many 401(k)s will have “target date” or “life cycle” funds as their default option. These funds address one of the worst mistakes 401(k) investors make: keeping all their savings in low-return investments like money markets or stable-value funds that will not produce enough for retirement. The research shows that even these funds may become too conservative too early.
  5. “We offer tons of investment options. Too many, in fact ... .” When it comes to picking funds for your 401(k), the more choices the better, right? Wrong. Surveys show that, on average, 401(k) investors have 19 fund options, but with more than 10-12 the average participant goes into paralysis.
  6. “... but you still aren’t diversified.” The two most popular holdings in 401(k)s are stable-value funds and company stock, neither of which may be appropriate.
  7. “If you quit your job, you’ll have to pay to keep your 401(k) here.” Studies show that 32% of people who quit their jobs wind up leaving their 401(k) with their old company. Some employers foot an upfront fee for costs associated with running the plan while you work for them, but an increasing number are pulling the plug once you are off the payroll.
  8. “You’re better off in a Roth 401(k) -- too bad your plan doesn’t offer it.” Sometimes a Roth is the best option for obtaining your goal, but only 5% of plans offer it.
  9. “You want to see some outrageous fees? Try a variable annuity 401(k).” Insurance Companies that run 401(k) plans often package them as annuities. The insurance company slaps a fee on top of the expense ratio you pay for the mutual funds in the annuity. Despite insurance companies’ clout to negotiate lower expense ratios on the underlying funds, the combined total of expense ratio and insurance fee may still be higher than the cost of other plans.
  10. “Your nest egg could be a whole lot bigger.” In truth, 401(k) plans are getting better. Still, it’s difficult for 401(k) investors to grasp how a small difference in expenses can make a big difference for their retirement. If one can shave 0.20% to 0.40% off a plan’s expenses, it can translate to $100,000 over 20-30 years.


The Chicago Tribune reports that former Illinois Governor James R. Thompson pleaded with a state board to restore a portion of convicted former Governor George Ryan’s pension, saying he was entitled to benefits from the years before his crimes were committed. The General Assembly Retirement System board assigned a lawyer to examine Thompson’s arguments, but voted to continue suspension of Ryan’s $197,000 annual pension as a result of his corruption conviction. Thompson argued that Ryan should only lose retirement benefits he accumulated during his eight years as Secretary of State and four years as Governor because his convictions were tied to those terms in office. Ryan was sentenced to six and one-half years in prison for steering millions of dollars in state business to friends in return for vacations, gifts and benefits to his family and him. Ryan had a total of thirty-six years public service -- six years with a county board, ten years in the Illinois House and twenty years in statewide elected office. If the board rules against Ryan, he would receive a refund of his $250,000 contribution made over the years. If he prevails, his pension would be based on an annual $66,000 salary at the end of two terms as Lt. Governor in January 1991, making Ryan’s pension “only“ $50,000 a year. Incidentally, this type of argument has been raised before in Florida, but without success.


As we recently reported, two high-powered United States Senators want the Government Accountability Office to report back information on the Pension Benefit Guaranty Corporation, which insures traditional, defined benefit pension plans (see C&C Newsletter for November 16, 2006, Item 9). Those Senators cited PBGC’s record deficit of almost $23 Billion. Well, PBGC has just issued its annual management report for fiscal year 2006, and things are looking up -- in a manner of speaking. Here are some highlights:

  • Between its single-employer and multiemployer programs, PBGC’s combined net position as of September 30, 2006 was $(18.88) Billion compared to $(23.11) Billion at September 30, 2005, representing a $4.2 Billion net improvement in PBGC’s deficit. PBGC has sufficient liquidity to meet its obligations for a number of years; however, neither program at present has resources fully to satisfy PBGC’s long-term obligations to plan participants.
  • The combined net gain of $4.2 Billion for 2006 was driven primarily by a $5.6 Billion reduction in net claims for plans classified as probable (likely to terminate), $1.5 Billion in premiums and $424 Million credit in actuarial adjustments, offset primarily by $3.1 Billion in financial losses.
  • As a result of the airline relief provision in the Pension Protection Act of 2006, some large plans that were previously classified as probable terminations have been changed from the probable classification to the reasonably possible classification. The combination of a large credit related to reclassification of certain probables due largely to statutory pension funding relief granted to certain plan sponsors and positive investment performance offset losses incurred by actuarial changes and the administrative expenses of PBGC.
  • During 2006, PBGC terminated 94 plans in the single-employer program, representing a total of $0.6 Billion in assets, including estimated recoveries, and $1.1 Billion of future benefit liabilities (representing net losses of $0.5 Billion).
  • During 2006, PBGC reached agreements with sponsors of terminated plans for unpaid contributions and unfunded benefits that resulted in recoveries totaling approximately $1.8 Billion.
  • PBGC’s future exposure to new probable terminations remains high in 2006 with approximately $73 Billion in underfunding exposure to those plan sponsors, classified as reasonably possible, whose credit ratings are below investment grade or meet one or more financial distress criteria. This number is down from $108 Billion in 2005, primarily due to net reduction in unfunded vested benefit liabilities of plans whose sponsors remained at risk.
  • Overall benefit payments increased to $4.1 Billion from $3.7 Billion in 2005.
  • PBGC’s obligations for future payments to participants remained essentially unchanged at $69 Billion.

You read that right -- 69 Billion smackeroos. Wow.


A survey from Hudson, conducted on almost 2,000 U.S. workers, found many workers do not take the vacation time to which they are entitled. In fact, 24% said they took no vacation and no series of long weekends this year. One-half of respondents do not plan to use all of their vacation time this year, and 12% are not sure. Over 70% connect with work during time away from the office (every day, most days or occasionally), with only 26% not making any connection. Finally, a majority generally come back from vacation refreshed, although 21% actually feel more stressed. (Tell us about it.) The survey contains an incredible amount of information: it sorts data by nature of employer (government/private sector), company size, gender, age, marital status and income.


The following words of wisdom are from Yes, You Can!:

  • The first step is to become totally fed up at not having achieved success yet.
  • Decide on exactly what you want. What will success look, sound, smell, feel and taste like?
  • Map out your plan for success. What will you do? By when? With whom? Using what new resources?
  • Take action! Follow through with passion. Stay fit and build your energy.
  • Believe in yourself and persist. Abraham Lincoln lost 8 elections before becoming President.
  • Don’t be afraid to fail and don’t be afraid to succeed.

Sounds right to us.


Survivors of a member of a Nevada County Volunteer Mounted Posse brought a claim under the Public Safety Officers’ Benefits Act of 1976. The United States Court of Federal Claims held that decedent was a “public safety officer” who died as a direct and proximate result of personal injury sustained in the “line of duty,” and therefore met PSOBA’s requirements for an award of a death benefit to her survivors. In its opinion, the Court of Federal Claims construed “law enforcement officer,” which like a firefighter is a species of “public safety officer,” as defined in PSOBA to encompass not only officers who enforce criminal law, but also persons who have no criminal law enforcement authority, such as those who enforce only civil law. The court also invalidated a federal regulation in which the Bureau of Justice Assistance, a unit of the Department of Justice charged with implementing PSOBA, defined “line of duty,” a term not defined in PSOBA itself. Because the Court of Federal Claims incorrectly construed “law enforcement officer” and erred by failing to defer to BJA’s definition of “line of duty,” the United States Court of Appeals for the Federal Circuit reversed the judgment of entitlement and vacated the court’s invalidation of the federal regulation. PSOBA provides a one-time cash payment to survivors of public safety officers who die in the line of duty. For a survivor to be entitled to payment, the public safety officer must have suffered a personal injury within the meaning of PSOBA, the injury must have been suffered in line of duty and the death must have been the direct and proximate result of the personal injury. A “public safety officer” was defined in the 1984 version of PSOBA as “an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer or a firefighter.” (Because the death benefit claim was not filed until 16 years after death of the officer, the 1984 statutory version applied!) A “law enforcement officer,” in turn, was defined as “an individual involved in crime and juvenile delinquency control or reduction, or enforcement of the laws, including, but not limited to, police, corrections, probation, parole and judicial officers.” And although PSOBA does not define “line of duty,” BJA is authorized to establish such rules, regulations and procedures as may be necessary to carry out purposes of PSOBA. Pursuant to such authority, BJA promulgated regulations that defined “line of duty” as relating to an action the office is so obligated or authorized to perform in course of controlling or reducing crime, enforcing criminal law or suppressing fires. (Here, decedent had been appointed under a state statute authorizing each sheriff to appoint one or more deputies who may perform all duties devolving on the sheriff. However, she was neither authorized to carry firearms nor exercise police power, and had received no formal training. Tragically, while on a mounted horse posse to round-up wild horses that were entering upon and causing damage to private property, she was thrown from a horse and died from her injuries.) In reversing the entitlement, the higher court found that a “law enforcement officer” must be appointed for and given the authorization or obligation to perform duties involving control or reduction of crime and juvenile delinquency or enforcement of criminal law. In vacating the lower court’s invalidation of the federal regulation, the court held that the regulation was not arbitrary, capricious or manifestly contrary to the statute. (Lest the reader think the government acted in a draconian way, note it conceded jurisdiction below and it did not challenge the claim as time-barred.) Hawkins v. United States, Case No. 06-5013 (Fed. Cir., November 17, 2006).


Households make substantial changes to their portfolios as they age and experience health shocks, according to a new Issue in Brief from the Center for Retirement Research at Boston College. In response to both aging and health shocks, the most common and important changes to the household portfolio are to sell one’s home, vehicle, business or real estate, and to move assets into bank accounts and certificates of deposit. These results suggest that factors other than standard risk and return considerations may weigh heavily in many older households’ portfolio decisions. For example, the fact that widowed households put more assets in bank accounts and CDs when they have physical or mental difficulties indicates that liquidity or ease of portfolio management may be more important to these households than high returns. Of households facing growing responsibilities to manage assets during retirement, portfolio decisions like these may have important implications for the well-being of vulnerable groups, such as elderly widows.


The Society of Actuaries has issued key findings on the impact of retirement risk on women in 2005. The baby boom generation is on the threshold of its long-heralded maturity into senior citizen status. For this generation as well as previous ones, there are significant differences in life circumstances and work histories of men and women. At the same time, recent changes in employee benefit programs are transferring more risks to employees and creating challenges that are often unfamiliar. Women live longer and are more often alone in old age, and they are more likely to be adversely affected by the increased responsibility for personal risk management. These risks can easily overwhelm the unprepared, and should be understood as a critical issue for all Americans, and not just retirees. Women, because on average they live longer than men, are the majority of these older Americans, making management of their retirement security more important for them. Traditionally, retirement planning focused on the period preceding retirement. Several years ago, the Society of Actuaries, recognizing the need to address the management of risk as to retirement, instituted a Retirement Needs Framework Project. As part of the project, the Society has had research on public attitudes toward retirement in 2001, 2003 and 2005. The purpose of the latest in this series, the 2005 Risks and Process of Retirement Survey, was to evaluate Americans’ awareness of possible risks, how this awareness has changed since 2003 and how it affects management of their finances with respect to retirement. The 2005 survey provides key results and discusses issues of particular importance to women, and relates them to the life circumstances of women and to other studies. The report also focuses on differences and similarities in retirement risks faced by men and women.


The December 2006 Benefits & Compensation Digest has a very forward-looking article entitled “Reenvisioning Retirement: Challenges of Developing a Third Way.” Recently, President Bush signed into law the Pension Protection Act of 2006. That the law is 900 pages of legislation, albeit some having nothing to do with pension plans, is not a good sign for the system. The law says as much about the brokenness of our retirement system as our political process. Why do we still think the current system that worked well for 20th century economic and demographic landscape will continue to work in the landscape of the 21st century? We should not expect a system that worked well under different conditions to work well today with such a dramatically different landscape. If it did work -- if the tradtional three-legged stool still met the needs for a retirement system -- it would not need 900 pages of legislation to fix it. Clearly, the defined contribution plan does not meet the challenge of pooling retirement risks. (A defined contribution plan or any system focused on individual accounts, is not a retirement system. A retirement system is not simply a way of saving money but a way of managing risks of retirement.) It is time to advocate a revolution in our retirement system. It is time to remake our retirement system to work better for today. Actuaries are helping organizations manage strategic responses to the 21st century’s changing economic and financial needs. Actuaries are prepared to work with other retirement professionals to lead a revolution in our retirement system. Legislators have tried, with PPA, to fix what is already in place. But this fix is not enough. A “third way” is needed. It is time for new ideas that will ensure individuals are ready to face the risks of retirement. A retirement system that meets today’s challenges is necessary for the 21st century. We, as a society, will have no one to blame but ourselves if it does not happen.


Once teetering on the edge of bankruptcy, the City of Miami has regained some financial stability as its credit rating continues to rise. The Miami Herald reports that Miami’s economic upswing continues a decade after the City declared a state of “financial emergency,” and was forced to endure the indignity of operating under a governor-appointed oversight board. Moody’s Investors Service announced it has improved the credit rating of Miami’s General Obligation Tax Bonds, the latest in a string of upgrades in recent years. As recently as 2000, Miami’s ratings were at junk status. The new rating from Moody’s is A2, up a notch from the previous rating of A3. The change means Miami can issue bonds at a lower interest rate, which translates to tax dollar savings on future bond issues. Miami’s tax base has nearly doubled in the past four years -- now topping $34 Billion. And although City reserves have dropped somewhat, the current $95 Million surplus is still healthy for a city of Miami’s size.


Shortly after 1:00 A.M., two men kicked in the front door of a house, pointed a gun at the owner’s son and demanded jewelry and money. When the owner entered the room, they knocked him down and out with a gun. A few minutes later, he came to and grabbed a sword from under his couch. He then started swinging, eventually bringing the hostilities to an end when he sliced off the shooter’s trigger finger. The thieves quickly disappeared, but police were able to use the finger that was cut off to run prints, and were able to match them to fingerprints in their data base. (Where does come up with these items?) The good news is, when the miscreant is eventually freed, he will get a 10% discount on all future manicures.


“If you think education is expensive, try ignorance.” Derek Bok


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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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