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Cypen & Cypen
NEWSLETTER
for
NOVEMBER 11, 2010

Stephen H. Cypen, Esq., Editor

1.      IMPACT OF PUBLIC PENSIONS ON STATE AND LOCAL BUDGETS:   Center for Retirement Research at Boston College has issued a new Issue Brief dealing with impact of public pensions on state and local budgets. State and local pensions have been headline news since the financial collapse reduced the value of their assets, leaving a substantial unfunded liability. The magnitude of that liability depends on the interest rate used to discount future benefit promises, but, regardless of the assumptions, states and localities are going to have to come up with more money. The subject brief looks at the size of the additional funding relative to state budgets. The first section provides an overview of state and local plans and introduces the sample of six states: California, Florida, Georgia, Illinois, Massachusetts and New Jersey. The second section presents data on pensions expenditures relative to budget total for states and localities in the aggregate and for the sample of plans. The third section develops baseline budgets for the period 2010-2043 for all states and localities and for the six individual states. It then projects the annual required pension contributions beginning in 2014 under three scenarios: (a) amortizing unfunded liability valued at an 8-percent discount rate over the next 30 years; (b) amortizing unfunded liability valued at 5% over the next 30 years; and (c) continuing to pay contributions at current levels until the trust fund is exhausted, and then paying benefits on a pay-as-you go basis. The final section concludes that whereas public plans are substantially underfunded, in the aggregate they currently account for only 3.8% of state and local spending! Assuming 30-year amortization beginning in 2014, this share would rise to only 5.0%, and, even assuming a 5-percent discount rate, to only 9.1%. Aggregate data, however, can hide substantial variation. States that have seriously underfunded plans or generous benefits (such as California, Illinois and New Jersey) would see contributions rise to about 8% of budgets with an 8-percent discount rate of 12.5% with a 5-percent discount rate. (By the way, of the six sample states, Florida has the lowest normal cost, the highest percentage of annual required contribution paid in and the greatest funded ratio.) (Number 13, October 2010.)

2. HYPERTENSIVE FIREFIGHTER ENTITLED TO WORKERS COMP. EVEN THOUGH NO LONGER DISABLED:   Ortagus was a City of Pembroke Pines firefighter, who, during an annual physical examination, was diagnosed with hypertension. His physician prescribed medication, and he was assigned to light duty. Almost immediately Ortagus returned to normal duty, and reached maximum medical improvement a few days later. However, he has needed continued medical treatments since then, including medication to control high blood pressure and cholesterol, semi-annual physical examinations and annual stress tests. After paying benefits for three years, the employer/carrier terminated them, claiming that under Section 112.18, Florida Statutes, Ortagus became ineligible for workers’ compensation benefits once he returned to normal duty. A Judge of Compensation Claims ruled that the employer/carrier must pay for treatment of Ortagus’s hypertension even though he was no longer disabled by the condition and can fully perform his duties as a firefighter. On appeal, the judgment was affirmed. The Workers’ Compensation Act covers occupational diseases, provided the disease has resulted from the nature of employment in which the employee was engaged, was actually contracted while so engaged and the nature of the employment was a major contributing cause of the disease. Section 112.18, Florida Statutes, creates a presumption of compensability for any condition or impairment of health of any firefighter or law enforcement officer or correction officer caused by tuberculosis, heart disease or hypertension resulting in total or partial disability, unless the contrary be shown by competent evidence. A claimant’s burden of proving major contributing cause is fully met when the presumption is applied. After accepting compensability and paying benefits for more than three years, the employer/carrier now asserts that Ortagus was only entitled to the presumption in Section 112.18, Florida Statutes, and thus medical benefits, during the week-long period his hypertension resulted in total or partial disability. In other words, now that Ortagus’s job-related hypertension was successfully controlled by medication such that he was back to normal duty, the employer/carrier need no longer pay for ongoing treatment of the condition. Once compensability is established, nothing in Section 440.151, Florida Statutes, or elsewhere in Chapter 440, Florida Statutes, conditions the receipt of medical benefits on continued disability or limits payment of medical benefits only to the period of disability. As the judge of Compensation Claims correctly noted, Section 440.13(2)(a), Florida Statutes, requires employers to furnish medically necessary care for a compensable condition for such period as the nature of the injury or the process of recovery may require. Here, Ortagus still suffered from a compensable occupation disease—hypertension—and he proved the condition requires continued medical treatment in form of medication and routine periodic evaluation. Thus, the employer/carrier must pay for Ortagus’s ongoing treatment for hypertension for as long as the condition remains the major contributing cause of his need for medical care. City of Pembroke Pines v. Ortagus, 35 Fla. L. Weekly D2442 (Fla. 1st DCA November 2, 2010).

3.        U.S. PENSION FUNDED STATUS SURPASSES 80%:  A second straight month of strong equity returns combined with declining liabilities drove the funded status for the typical U.S. corporate pension plan 4.4 percentage points higher, to 80.3%, the best status since May 31, 2010. According to monthly statistics from BNY Mellon Asset Management, assets for the typical plan rose 2.5% in October, as U.S. equity markets increased 3.9% (on Russell 3000 Index) and international stocks rose 3.6% (on MSCI-EAFE Index). Increase in the Aa corporate discount rate to 5.23%, from 4.98%, resulted in a 3.2% decline in the typical plan’s liabilities. Over the last two months, typical plans experienced a nine percentage-point improvement in funded status, which is significant. 

4.      HAVE IT OUR WAY…OR ELSE: The Cleveland Plain Dealer reports that the owner of several McDonald’s restaurants in Canton, Ohio, is apologizing for including GOP campaign materials with workers’ paychecks, along with a note that said their pay and benefits would suffer unless the right people are elected. (We have not done a McDonald’s story in at least a week-- See C & C Newsletter for November 4, 2010, Item 8--so we thought it was time for another one.) Specifically, franchisee Paul Siegfried’s note, on McDonald’s stationery, said “if the right people are elected, we will be able to continue with raises and benefits at or above present levels. If others are elected, we will not.” The unsigned letter endorsed Republican candidates, and even included one’s campaign flier. The worker, who was upset about the flier, did not want to take public legal action for fear of being fried. [Note to the reader Mark in Fort Lauderdale: we know it’s a Burger King slogan.]

5.      FORMER OFFICER CLIPS LAPD FOR $4 MILLION:   Jurors have awarded a former Los Angles police officer nearly $4 million, concluding he was fired for testifying against the department in a lawsuit. Los Angeles Times says the Superior Court jury awarded the money to 18-year Los Angeles Police Department officer Richard Romney in one of several lawsuits officers that have filed been over disputes that stemmed from unpaid overtime. In 2008, Romney testified in another officer’s federal lawsuit that he rarely took a lunch break because of constant patrol calls, and did not ask to be paid overtime because of unwritten department rules. The department opened an investigation, and a year after his testimony, Romney was fired. The chief had issued a written order in 2005 that the department’s overtime rules be strictly enforced despite any unwritten policy. LAPD better batten down the hatches, by George. 

6.      LAWSUIT CHALLENGES OKLAHOMA CONSTITUTIONAL AMENDMENT:   An Oklahoma Muslim has filed a federal lawsuit to block a state constitutional amendment overwhelmingly approved by voters, which would prohibit state courts from considering international law or Islamic law when deciding cases (See C & C Newsletter for November 4, 2010, Item 6). The lawsuit seeks a temporary restraining order and injunction to block the election results from being certified by the state Election Board. Among other things, reports The Associated Press, the lawsuit alleges that the ballot measure transforms Oklahoma’s Constitution into an enduring condemnation of Islam, singling it out for special restriction by barring Islamic law, also know as Sharia law. Several legal experts have also questioned validity of the measure.  (Just before press time we heard that a judge had enjoined enforcement of the provision.)

7.      STATE/ASSIGNEE OF CITIZENS’ ERISA CLAIMS HAS NO STANDING TO PURSUE THOSE CLAMS UNDER ARTICLE III:   Connecticut, on behalf of its citizens, sued eight managed health care companies, alleging violations of Employee Retirement Income Security Act of 1974. Specifically, Connecticut contended that the companies violated ERISA by using inappropriate and arbitrary guidelines as bases of coverage denials; by employing prescription drug formularies in a manner that obstructed enrollee access to medically necessary prescriptions drugs; by failing to make timely payments to providers; by failing to respond to enrollee letters and phone calls; and by failing to disclose to enrollees essential information about the health insurance plan upon which the enrollees relied. Prior to filing suit, Connecticut obtained assignments from four of its citizens who were enrollees in the managed care companies’ ERISA plans. The present action was by Connecticut in its capacity as assignee of the individual rights of the four enrollees and its capacity as parens patriae. The federal district court dismissed Connecticut’s complaint for lack of standing. Connecticut’s appeal presented an issue of first impression in the Eleventh Circuit: whether a state, after obtaining assignments from some of its citizens for claims those citizens have under ERISA, had standing to assert those claims on behalf of its citizens in federal court. The appellate court concluded that appellant, in its capacity as assignee, failed to demonstrate that it has suffered or will suffer an actual imminent invasion of a legally-protected interest that is concrete and particularized. Therefore, Connecticut does not have standing to pursue its claim, as assignee, under Article III of the United States Constitution. The court also held that Connecticut does not have statutory standing under ERISA to pursue claims of its citizens in its capacity as parens patriae (a common law doctrine that permits the states to sue under limited circumstances to enforce sovereign-like interests). Thus, the court affirmed dismissal of Connecticut’s complaint for lack of standing. State of Connecticut v. Health Net, Inc. 22 Fla. Weekly Fed. C1538 (U.S. 11th Cir. September 10, 2004). 

8.      GFOA ADVISORY ON RESPONSIBLE MANAGEMENT AND DESIGN PRACTICES: Government Finance Officers Association has released a new advisory, entitled “Responsible Management and Design Practices for Defined Benefit Pension Plans.” State and local governmental defined benefit pension plans are the cornerstone of public employee retirement, and require systematic, sound management of their benefits structure, their funding and their investments. However, certain inappropriate practices can jeopardize the sound management of these plans, undermine their funded position and ultimately impose burdens on future taxpayers and stakeholders. GFOA’s prime recommendation is that UNDER NO CIRCUMSTANCE SHOULD STATE AND LOCAL GOVERNMENT PLAN SPONSORS ENGAGE IN PENSION CONTRIBUTION HOLIDAYS OR MAKE INSUFFICIENT CONTRIBUTIONS. WHEN EMPLOYERS SKIP AN ACTUARIALLY-REQUIRED CONTRIBUTION OR MAKE A SMALLER PAYMENT THAN REQUIRED, THEY DEFER THAT COST TO THE FUTURE AND JEOPARDIZE THE LONG-TERM FUNDING OF THE PLAN.   When governing bodies arbitrarily reduce contributions to a plan, the resulting systemic underfunding ensures future financial shortfalls and places the burden for such shortfalls on future taxpayers. These types of funding decisions compound future funding problems and are, in many instances, a leading cause of funding shortfalls. (Pension funding is premised on “time value of money” concepts, including compounding of investment earnings over defined periods of time that begin on the date of the actuarial valuation. Actuarially-required contributions are calculated with the expectation that they will be made in the same year that benefits are earned. For the plan to meet its obligations without increasing employer contributions, it has to earn compound investment returns over the remaining working lives of employees.)  GFOA further recommends that state and local plan government plan sponsors use great caution if engaging in the following and other practices: spiking of final pensionable compensation, retroactive benefits increases and ad hoc cost-of-living allowances for existing retirees. A GFOA advisory identifies specific policies and procedures necessary to minimize a government’s exposure to potential loss in connection with its financial management activities. It is not to be interpreted as GFOA sanctioning the underlying activity that gives rise to the exposure.

9.      FEDERAL INVOLVEMENT IN STATE AND LOCAL GOVERNMENT FINANCIAL DISCLOSURE IS AN UNNECESSARY MANDATE:   Speaking of GFOA, in response to suggestions made by a member of the U.S. Securities and Exchange Commission that Congress should require state and local governments to follow corporate style financial reporting and disclosure, GFOA issued a statement indicating that it will strongly oppose such a federal mandate. GFOA suggests that federal officials who think that state and local government financial information is unavailable are apparently unfamiliar with the public availability of financial information in government, open meeting/sunshine laws and the wealth of information that can be found on government websites and the internet. Those who suggest that corporate financial information disclosure is a better route seem to ignore the entire government budgeting process, the constant dissemination of financial information to state and local government legislative bodies, as well as the wealth of trend information that can be found in the so-called statistical section of a government’s comprehensive annual financial report. GFOA says that federal officials who can only recognize financial information in context of an audited annual report need to become familiar with all forms of state and local government financial disclosure in order to understand that everything governments do is fully transparent. Right on. 

10.    ALL PUNS INTENDED: Do Lipton Tea employees take coffee breaks?

11.    OXYMORON:   Always and never are two words you should always remember never to use.

12.    AGING JOKES:   Old age isn't so bad when you consider the alternative.

13.    FABULOUS RANDOM THOUGHTS:  You are never too old to learn something stupid.

14.    QUOTE OF THE WEEK:   “Be awful nice to ‘em going up, because you’re gonna meet ‘em comin down.” Jimmy Durante

15.    KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources. 

16.    PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm. Thank you. 


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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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