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Cypen & Cypen
NOVEMBER 13, 2008

Stephen H. Cypen, Esq., Editor


Prior to 2007, the School Board of Osceola County allowed any employee who left employment with the board to continue participation in the board’s health insurance program, regardless of whether the former employee was also retiring under the board’s retirement system. Due to changes in Section 112.0801, Florida Statutes, during the 2007 legislative session, defining “retiree” for purposes of the law (see C&C Newsletter for August 16, 2007, Item 4), a question arose as to whether the board may continue extending coverage to former employees who did not retire under the board’s retirement system. The statute had long-required that “retirees and their eligible dependents be offered the same health and hospitalization insurance coverage as is offered to active employees at a premium cost of no more than the premium cost applicable to active employees.” As indicated above, however, during the 2007 legislative session, the following definition for “retiree” was added to the statute:

Any officer or employee who retirees under a state retirement system or a state optional annuity or retirement program or is placed on disability retirement and who begins receiving retirement benefits immediately after retirement from employment. [Under certain conditions, those retiring under the Public Employee Optional Retirement Program, established in Part II of the Florida Retirement System, are also considered retired.]

The Florida Attorney General opined that Section 112.0801, Florida Statutes, does not preclude the board from offering its health insurance program to former employees who separated from employment with the board prior to 2007 and began participating in the health insurance at that time, even though such former employees do not meet the definition of “retiree” contained therein. The Attorney General found that, while Section 112.0801, Florida Statutes, requires public agencies to allow retirees to continue participation in the same group health insurance plan offered to active employees, the statute does not appear to operate as a preemption of the matter such that a public agency could not otherwise extend coverage to retired persons who may not strictly fall within the definition provided therein. Rather, Section 112.0801, Florida Statutes, sets the minimum requirements that public agencies must provide. In his opinion, the Attorney General refers to AGO 2008-05 (February 8, 2008) (see C&C Newsletter for February 14, 2008, Item 1) and AGO 2008-41 (August 27, 2008) (see C&C Newsletter for September 12, 2008, Item 4). AGO 2008-59 (October 29, 2008).


The Pension Research Council, at the Wharton School, University of Pennsylvania, issued several Working Papers in October 2008. The following are abstracts of said Working Papers.

A. “The Evolution of Public Sector Pension Plans in the United States.”

Municipal governments in the U.S. began offering retirement plans for their workers in the mid-19th century, and state governments followed in the early 20th century. As these plans matured, they confronted economic, social and political challenges, including creation of the Social Security system, which subsequently shaped their structure, governance and generosity. After reviewing this history, the authors employed data from all 50 states to estimate a pension benefit equation for hypothetical workers, and explain differences in the generosity of plans across states and types of workers covered. They show that population growth, plan funding, union representation and participation in Social Security influenced generosity of the plans. PRC WP2008-16.

B. “Defined Contribution Pension Plans in the Public Sector: A Benchmark Analysis.”

This paper addresses best practice benchmarks for design of defined contribution plans in the public sector, where such plans are the primary, or core, employment-based retirement benefit. These benchmarks rely on the notion that providing an adequate and secure retirement income for participants is the primary plan objective. PRC WP2008-17.

C. “Administrative Costs of State Defined Benefit and Defined Contribution Systems.”

This paper compares the administrative costs of public sector defined benefit and defined contribution systems offered by the Federal government and many states. Administrative expenses are presented as percentages of both income and assets, and the authors discuss how administrative expenses might enter into the decision by a public sector employer as to whether to establish a defined contribution plan. PRC WP2008-18.

D. “Public Pensions and State and Local Budgets: Can Contribution Rate Cyclicality Be Better Managed?”

Pension fund contribution rate volatility has challenged state and local government defined benefit plan sponsors over time. Methods to contain volatility have been used for years but recent experience has placed greater urgency on the search for better solutions. This paper examines the historical approach to bring stability to employer rates as well as some of the current thinking on the issues. Because both asset and liability changes can affect volatility, governments are looking at both sides of the balance sheet for relief. PRC WP2008-26.


The Social Security Administration has announced the national rollout of its Compassionate Allowances initiative, a way to expedite processing of disability claims for applicants whose medical conditions are so severe that their conditions obviously meet Social Security’s standards. The initiative will allow Social Security to make decisions on these cases in a matter of days, rather than months or years. Social Security is launching this expedited decision process with a total of 50 conditions, including 25 rare diseases and 25 cancers. Over time, more diseases and conditions will be added. Before announcing this initiative, Social Security held public hearings to receive information from experts on rare diseases and cancers. Compassionate Allowances is the second piece of the agency’s two-track, fast-track system for certain disability claims. When combined with the agency’s Quick Disability Determination process, and once fully implemented, this two-track system could result in six to nine percent of disability claims, the cases for as much as a quarter million people, being decided in an average of six to eight days. Bravo.


For those of you interested in such things, according to a news release, Dow Jones Index, a leading global index provider, announced that Bahrain, China (huh?), Egypt, India, Jordan, Kuwait, Morocco, Oman, Qatar, Sri Lanka, Turkey and the United Arab Emirates will be added to the Dow Jones Islamic Market World Index and all of its sub-indexes. The additions will become effective as of December 22, 2008. Addition of the 12 new countries increases total number of countries in the index to 54 from 42. Launched in 1999, the Dow Jones Islamic Market Indexes seek to measure the global universe of investable equities that pass screens for Shari’ah compliance. Dow Jones Islamic Market Indexes combine Islamic investment principles with Dow Jones Indexes’ objective, transparent and rules-based methodology. Allrighty, then.


In most large cities, information is only a keystroke away for residents seeking police reports, maps plotting car break-ins and statistics about burglaries in their neighborhoods. But not yet in Cleveland, according to Although the information is available to police internally, the department’s website provides scant amounts of useful information and lags behind those of similar-sized departments. Crime reports in many large cities are available within 48 hours, and basic details are available on the internet. Other cities allow residents to find the contact numbers for police units, information on unsolved crimes and the crime history for any location, by simply typing in an address. The only online form available to Cleveland residents is for making a written complaint against officers. The site provides contact information just for the five district headquarters -- not individual officers or units, such as the auto-theft or financial-crime squads. Police promise the foregoing will change by year end. The police department’s site will be upgraded in the coming months when the sites for all city departments are revamped. The city has hired a company to create crime maps online and a system for residents to file police reports from a computer. The city expects to spend $40,000 for the system and about $2,000 a month for the crime data and maps. Eventually, residents will have access to reports online. Ten-four.


In order to assign private pension benefits, the Employee Retirement Income Security Act of 1974 requires there be a Qualified Domestic Relations Order spelling out the nature of the assignment of benefits. (As we have long said, QDROs are generally not effective as to public plans, at least in Florida.) A QDRO is a Domestic Relations Order that creates or recognizes existence of an alternate payee’s right, or assigns to an alternate payee the right, to receive all or a portion of the benefits payable with respect to a participant under a plan. Fransisco, a long time participant in the General Motors Corporation pension plan, was divorced from Belen, at which time a QDRO was entered (and determined to be “qualified” by the GM plan administrator). The QDRO was very explicit, providing for benefits to Belen, including if Fransisco were to die before benefits could commence. However, the QDRO was silent regarding the circumstance of Fransisco’s predeceasing Belen after commencement of benefits. A United States District Judge has affirmed GM’s decision denying Belen surviving spouse benefits. Silence regarding this foreseeable circumstance when made in conjunction with all the expressly listed circumstances, each granting benefits, can only lead to the conclusion that survivorship benefits are not envisioned for Belen. Just another trap for the unwary lawyer representing the alternate payee in a domestic relations case. Compo vs. Cuellar, Case No. 3:08 CV 1666 (ND Ohio, October 30, 2008).


A new Issue in Brief from the Center for Retirement Research at Boston College deals with the financial crisis and private defined benefit plans. Between October 9, 2007 and October 9, 2008, the value of equities in retirement plans dropped by about $4 Trillion, with the decline divided equally between defined benefit and 401(k)/Individual Retirement Accounts. The decline in the defined benefit arena was in turn divided equally between private sector plans and those sponsored by state and local governments. The Brief explores what a loss of $1 Trillion of private sector defined benefit equities means for individual participants and for firms that sponsor those plans. The Brief is structured in five sections. The first shows that defined benefit plans still play an important role in the private sector. The second describes how defined benefit plans insulate participants from market fluctuations by absorbing the risk themselves. The third explores how the absorption of that risk affects private plan sponsors in terms of increased contributions and raises possibility of some stressed employers laying off workers or going bankrupt with inadequate pension assets or healthy companies deciding to freeze their plans. The fourth discusses how individual participants are protected in case of layoffs, bankruptcies and freezes but in all cases end up with less retirement income than anticipated. The fifth section concludes on two points: (1) in terms of risk bearing, neither extreme may be workable -- all risks borne by sponsors in DB plans or all risks borne by individuals in DC plans and (2) funding requirements that compel companies to increase their contributions dramatically during a recession increase likelihood of layoffs and terminations. Some key findings are

  • Defined benefit plans, unlike 401(k)s, shelter individuals against financial turmoil.
  • But falling asset values may require employers to boost contributions by as much as $90 Billion in 2009.

Any way you look at the situation, it is not pretty.


The focal point of the Emergency Economic Stabilization Act of 2008 is the Troubled Assets Relief Program, whereby the Treasury Department is authorized to purchase up to $700 Billion in distressed assets from struggling institutions (see C&C Newsletter for October 8, 2008, Item 1). The government may finally be doing something right, because it is requiring companies to execute letter agreements in exchange for participation in the TARP Capital Purchase Program. The agreement requires the company to establish specified standards for incentive compensation to its senior executive officers and to make changes in its compensation arrangements. The company must specifically agree as follows:

(a) No Golden Parachute Payments. The company is prohibiting any golden parachute payment during any period in which the Treasury Department holds an equity or debt position acquired from the company in the TARP/CPP.

(b) Recovery of Bonus and Incentive Compensation. Any bonus and incentive compensation paid is subject to recovery or “clawback” by the company if payments were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria.

(c) Compensation Program Amendments. Each of the company’s compensation, bonus, incentive and other benefit plans, arrangements and agreements is amended to the extent necessary to give effect to provisions (a) and (b).

In addition, the company is required to review its benefit plans to ensure that they do not encourage senior executive officers to take unnecessary and excessive risks that threaten value of the company. To the extent any such review requires revision to any benefit plan with respect to senior executive officers, the senior executive officers and the company agree to negotiate such changes promptly and in good faith. Well, well, well -- the federal government seems to be acting the way a prudent private investor might act. Hooray.


A plunging stock market is likely to result in a 1% to 3% pension cut for some 150,000 retired government workers in Wisconsin, the first reduction in pension payout in the retirement fund’s 26-year history. According to, although final figures will not be calculated until January 2009, state officials have already sent out letters to retirees warning that pension checks might shrink. New payment levels take effect each May and are recalibrated annually. Initial calculations estimate that monthly payments will likely drop about 1.3% if the fund ends the year down 20%. The cut increases to about 3.5% if the fund loses 30%. The average state retirement system pensioner receives $1,791 monthly, or about $21,500 annually. A 3% cut would amount to $54 a month for the average pensioner. The current state retirement system was created in 1982 to cover all government workers, except those employed by the city and county of Milwaukee. Retirees have seen their payments stay even or increase every year since. The last time payments were frozen was in 2000, when the fund lost 8.8% following the dot-com debacle. Payments were up 6.6% last year, following several years of strong market performance. Although we are not familiar with this particular fund, it must have a defined contribution-like component.


Private equity firms, already under pressure from a drop in the need for financing to do deals, are now facing resistance from another key funding source: pension funds. With both debt and stock markets slammed, long-dormant buyout firms are starting to spot opportunities, especially in distressed assets, according to the New York Post. As a result, they are calling upon their trusty partners, often pension funds, to come out of hibernation and pull the trigger on capital promised to the firms -- in other words, “capital calls.” But pension funds, which have suffered average losses of 20% in recent months, are getting cold feet. Although capital commitments are legally binding, pension partners are looking to back out of such transfers, or at least postpone them. The reluctance of some funds stems from wanting to stay as liquid as possible in order to pay retirees’ benefits while avoiding loss-making sales of securities. And although private equity firms could force their partners to cough up the cash, they are fearful of ruining their relationships if they do so. For the buyout firms, timing could not be worse, as many have been under tremendous strain since the credit crunch hit last year.


A federal grand jury has indicted Jon Burge, former Commander of the Chicago Police Department, on two counts of obstruction of justice and one count of perjury. The indictment stems from Commander Burge’s alleged witnessing and participation in years of torture and abuse of individuals being interrogated, and his subsequent false statements and obstruction of proceedings regarding the torture allegations. Among other things, Commander Burge is accused of lying about “bagging” a detainee with a typewriter cover. We think we can guess about that one.


A working group appointed by the Governor of Kentucky to study the state’s public pension system has declined to recommend moving new state workers into a 401(k)-type retirement plan. A subcommittee that has been studying individual retirement accounts said in a report that ongoing volatility in the financial markets gave “extra weight” to concerns of the group about changing to a 401(k)-type program. As reported by, the subcommittee heard testimony that the global economic crisis had cost public pension plans and individual retirement plans $2 Trillion in the last 15 months. Conservative legislators have been clamoring in recent years to push new hires in state and local government into defined contribution plans -- similar to 401(k) plans in the private sector -- that let state employees decide how much of their salaries to contribute to their retirement accounts and how to invest that money. That would be a shift from the defined benefit plan, which is managed by the state. Upon retirement, retirees receive a certain amount of money each month until they die. While 48 states, including Kentucky, offer a defined benefit plan as the primary source of employee retirement income, private companies have been dumping them in favor of 401(k) plans. The subcommittee report concluded that a defined contribution plan would not reduce the retirement systems’ shortfall. It also found that the state can deliver the same retirement benefits through a defined benefit plan at about half the cost of a defined contribution plan. Why did it take a financial catastrophe for people to see the light?


When the government took over mortgage giants Fannie Mae and Freddie Mac, taxpayers inherited more than just bad debts, according to the Associated Press. They are also potentially on the hook for tens of millions of dollars in legal fees for executives at the center of the housing market’s collapse. With the Justice Department investigating companies involved in the mortgage and financial meltdown, executives around the country are hiring defense lawyers. Like many large companies, Fannie and Freddie had contracts promising to cover legal bills for their executives. When the Treasury Department delivered a $200 Billion bailout to Fannie and Freddie, that obligation passed to the government, which may find itself paying for lawyers defending executives against the government’s own prosecutors! Fannie’s and Freddie’s contracts also cover legal fees from shareholder lawsuits. Thus, taxpayers could be forced to pay those legal bills, too. If shareholders can prove the companies were mismanaged and win their suits, the government could be liable for millions of dollars to make up for the executives’ failures. Just another example of the ever-expanding Law of Unintended Consequences.


Government in Utah is shrinking, as wages in the private sector increase rapidly -- at least before the economic crisis hit. A new study released shows that despite recent U.S. Census numbers indicating the government is booming and government wages are skyrocketing, that is not the case in Utah, according to the Salt Lake Tribune. The study shows that Utah’s population growth nearly doubled the growth of government from 2002 to 2007. At the same time, private-sector wages also nearly doubled the wage increases of state and local government workers. Utah’s state government maintains a goal of increasing at 0.8 percent of the population, and the rate is currently much lower. The Governor’s office attributes the small government growth rate and booming private sector rates to efficient government workers and incentives to businesses. When large jumps in inflation are factored in, local government workers actually make less than they did in 2002.


In an Illinois city, the mayor had been asked to use the city’s emergency telephone calling system to alert residents about a bomb threat at a local school, according to The mayor was at home recording the message, when right at the end, his wife said on the intercom “You idiot.” The mayor checked (or thought he did) and determined that the comment had not made it on to the recording. Nevertheless, 7,000 residents received the recording with the comment. (Apparently, there was no maliciousness in the remark, which the mayor’s wife made because he had slipped a joke in between songs on her i-Pod.) You two idiots.


The Pension Benefit Guaranty Corporation announced that the maximum insurance benefit for participants in underfunded pension plans terminating in 2009 is $54,000 per year for those who retire at age 65, up from $51,750 in 2008. The amount is higher for those who retire later and lower for those who retire earlier or elect survivor benefits. If a pension plan terminates in 2009 but a participant does not begin collecting benefits until a future year, the 2009 maximum insurance limits still apply. The maximum insurance benefit is set by law. Two additional legal limits on PBGC’s insurance coverage can also affect participants’ benefits. The first prohibits PBGC from guaranteeing benefits that exceed the amount payable at the plan’s normal retirement age. The second limits PBGC’s guarantee of benefit increases made within five years prior to plan termination. The overwhelming majority of participants in plans taken over by the agency face no reduction in benefits due to the legal limits on coverage. The largest reductions occur in cases where participants earn pensions that 1) significantly exceed the maximum insurance benefit or 2) provide generous early retirement subsidies. Under PBGC’s single-employer insurance program, retirees sometimes can receive more than the maximum guaranteed benefit. In general, three conditions must apply: 1) the participant earned a benefit in excess of the maximum guaranteed amount; 2) the participant retired or was eligible to retire at least three years prior to plan termination; and 3) the plan had sufficient assets to pay benefits above the guaranteed amount.


The rules of success/survival change depending on your employer. What are your employer’s rules? Hint: What do the people who get promoted and get big bonuses do? Weigh tradeoffs that apply to your employer:

  • Take risks vs. make no mistakes.
  • Be creative vs. be reliable.
  • Put in face time vs. deliver the goods.
  • Be a team player vs. be a star.
  • Maximum profits vs. maximum ethics.
  • Find the right sponsor or projects.
  • Be a drinker vs. stay sober at all costs.

According to Leadership Skills Handbook, if you don’t like your employer’s rules of success, don’t complain: you can adapt, leave or sulk.


No one ever says "It's only a game" when their team's winning.


“When we got into office, the thing that surprised me most was to find that things were just as bad as we’d been saying they were.” John F. Kennedy. Pretty timely, eh? ]

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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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