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Cypen & Cypen
November 22, 2012

Stephen H. Cypen, Esq., Editor

1.      CENSUS BUREAU REPORTS INCREASE OF 13.2 PERCENT FOR STATE AND LOCAL GOVERNMENT FUNDS IN 2011:  The nation's state and local public employee retirement systems had $3.0 trillion in total cash and investment holdings in 2011, a $351.9 billion or 13.2 percent increase from $2.7 trillion in 2010, according to new statistics from the U.S. Census Bureau. This increase follows a $288.7 billion gain from 2009 to 2010.  These statistics come from the 2011 Annual Survey of Public Pensions: State-and Locally-Administered Defined Benefit Data, which provides an annual look at the financial activity and membership information of the nation's state and local public employee retirement systems, including revenues, expenditures, investment holdings, membership and beneficiaries.  Most investment categories showed increases, with decreases only in federal agency securities, funds held in trust and corporate bonds.  Other highlights for cash and investment holdings are 

  • Corporate stocks rose by 12.5 percent, from $930.2 billion in 2010 to $1.1 trillion in 2011. Corporate stocks made up 34.6 percent of total holdings.    
  • Corporate bonds decreased by 0.2 percent, from $424.9 billion in 2010 to $424.0 billion in 2011. Corporate bonds made up 14.0 percent of total holdings.  
  • Foreign and international securities increased by 24.0 percent, from $421.9 billion in 2010 to $523.0 billion in 2011. Foreign and international securities equaled 17.3 percent of total holdings.
  • Government securities (including U.S. Treasuries) increased by 3.8 percent, from $232.0 billion in 2010 to $240.9 billion in 2011. Governmental securities composed 8.0 percent of total holdings. 

Total revenue increased 30.6 percent, from $471.6 billion in 2010 to $616.1 billion in 2011. The increase was driven by the rise of earnings on investments, which increased to $479.6 billion in 2011. Earnings on investments amounted to 77.8 percent of total revenue, government contributions were 15.6 percent, and employee contributions accounted for the remaining 6.5 percent of total revenue in 2011. Government contributions increased 11.3 percent, from $86.4 billion in 2010 to $96.2 billion in 2011. Employee contributions increased 3.0 percent, from $39.1 billion in 2010 to $40.3 billion in 2011. Total payments increased by 8.5 percent, from $213.8 billion in 2010 to $232.0 billion in 2011. Payments consist of benefits, withdrawals and other payments. Benefits increased by 7.6 percent, from $201.0 billion in 2010 to $216.3 billion in 2011. Benefit payments covered 93.3 percent of total payments. NOTE: Earnings on investments made up just under 78% of total revenue.   
2.      SNAPSHOT LEADS TO FLAWED RATING SYSTEM:  National Institute on Retirement Securities says that flipping through old photo albums provides a view of where we have traveled.  But, it certainly does not tell us where we are today. The same can be said of the recent Pew Center on the States new report on public pension plans.  It really is only a look at pension plans at the end of their 2010 fiscal year.  For some plans, that could be up to three years ago.  Today we are in a different place, as the financial markets have improved and state legislatures have adopted pension plan changes.   While the Pew report acknowledges these pension plan changes in its narrative, it fails to take into account the actions taken in 41 states in response to the market losses caused by the financial crisis.  The vast majority of states has enacted changes in retirement plans designed to ensure their long-term sustainability. These changes are unprecedented and significant: increasing employee contributions, raising retirement ages, lowering benefits, and cutting cost of living adjustments.  In fact, a recent Standard & Poor’s report found pension funding levels gradually improving with close to one-third of plans showing higher funded ratios.  If merely presenting Pew’s snapshot of funding data were the goal of the report, then using old data and choosing to ignore significant plan changes might only obscure the hotly debated changes already made.  However, when the Pew report extends its purpose to rating plans and recommending pension reforms, then failing to consider more timely data and the impact of recent plan changes exposes a flawed model.  Using the similar plan reported data, a Center for State & Local Government Excellence report points to the future, and helps policy makers understand the pension funding is starting to turn the corner.  (See C & C Newsletter May 10, 2012, Item 1).  Under moderate economic assumptions, aggregate pension funding is projected to cross over the 80 percent level in 2015, without taking into account the pension reforms passed by the 41 states.   Fine tuning may still be needed, but we are making progress – which is not reflected in the limited snapshot provided by the Pew study.   It is also important to look at the Federal Reserve Bank’s wealth and income data from the Survey of Consumer Finances (See C & C Newsletter for October 18, 2012, Item 2).  This SCF report highlights the broad underfunding of retirement security in America that is not covered in the Pew report.   Specifically, the median 401(k) account balance was down to only $44,000, was less than the median annual income level of $45,800.  That account value is nowhere near what is needed to pay bills throughout retirement and remain self-sufficient.  The Center for Retirement Research estimates that the average family in the age 35-64 range had a retirement income deficit of $90,000 in 2010.   Using the Pew scale, our nation's crumbling retirement infrastructure for private sector workers is an issue of "serious concern."   Americans are less than a third of the way to what they need for retirement: not a pretty picture.  We need a “savings photo shop” of our retirement system, which is overly reliant on 401(k) individual accounts.  Well said.
3.      RECESSION PRESSURES ON PUBLIC PENSIONS:  A new research brief from National Institute on Retirement Security, “The Great Recession: Pressures on Public Pensions, Employment Relations and Reforms,” finds that:   

  • Public employers would attract a different labor force if they switched retirement benefits away from pensions. Public employees would be less committed to employers and thus less likely to invest in nontransferable skills that are critical to delivery of taxpayer services.  
  • Employee turnover would increase under individual defined contribution accounts and cash balance plans. These types of retirement benefits no longer defer compensation into the future and thus offer fewer economic incentives for employees to stay with public employers.   
  • Moving from a pension structure would result in higher cost for public employers and employees because of higher investment and administrative costs for alternative retirement plans.   
  • Public employers and employees overwhelmingly choose to stay with pensions rather than moving to alternative benefits when faced with a choice, illustrating the high value of pensions to public sector employers and employees. 

Defined benefit pension plans have a track record of simultaneously meeting goals of employers due to their recruitment and retention efforts and goals of employees due to economic security they offer.  The Great Recession has presented some funding challenges to public pensions.  And states and localities are willing to address these challenges so they can effectively compete for skilled employees in the future. 
4.      HOW SOCIAL SECURITY COLA ADJUSTMENTS WORK:  As we previously reported, Social Security has announced that there will be an increase in Social Security benefits for 2013 (See C & C Newsletter for October 25, 2012, Item 2).  To compensate for the effects of inflation, Social Security recipients received cost-of-living adjustments through the legislative process sporadically from 1950 to 1974, and automatically through a trigger mechanism in all but two years from 1975 to 2012. No adjustment was made in 2010 and 2011. Benefits will be increased by 1.7% in 2013, after an increase of 3.6% in 2012. The Consumer Price Index is the measure to trigger a change. The Social Security COLA is based on the percentage change in the index from the highest third calendar quarter average recorded (more often, from the previous year) to the average for the third calendar quarter of the current year. The COLA becomes effective in December of the current year and is payable in January of the following year. (Social Security payments always reflect the benefits due for the preceding month.) If there is no percentage increase in the Consumer Price Index between the measuring periods, no COLA is payable. No COLA was payable in January 2010 because the average Consumer Price Index for the third quarter of 2009 did not increase from the average Consumer Price Index for the third quarter of 2008, and again in 2011 because the average Consumer Price Index for the third quarter of 2010 remained below the average Consumer Price Index for the third quarter of 2008. When the average Consumer Price Index for the third quarter of 2011 exceeded that for 2008 by 3.6%, establishing a new benchmark, a COLA was payable in 2012. Because the average Consumer Price Index for the third quarter of 2012 exceeded the average Consumer Price Index for the third quarter of 2011 by 1.7%, the COLA for 2013 will be 1.7%.  Because a COLA of 1.7% will be paid to Social Security beneficiaries in 2013, identical percentage increases in Supplemental Security Income will be paid, and other changes in the Social Security program will be triggered.  Although COLAs under the federal Civil Service Retirement System and the federal military retirement program are not triggered directly by the Social Security COLA, these programs use the same measuring period and formula for computing their COLAs. As a result, their recipients similarly will receive a 1.7% COLA in January 2013.   This piece comes from the Congressional Research Service, which prepares a report updated annually for members of Congress and its Committees. 
5.      TARGET-DATE FUNDS POPULAR, BUT MISUNDERSTOOD: In 2010, 7-in-10 401(k) plans offered target-date funds within their employer-sponsored retirement plans, and more than a third (36 percent) of 401(k) participants invested in TDFs. Yet, a recent LIMRA survey found only 16 percent of consumers said they were familiar with TDFs.  In 2007, the Department of Labor included TDFs as one of the three qualified default investment alternatives, resulting in tremendous growth of target-date fund assets.  LIMRA's survey found that fewer women were likely to say they were familiar with TDFs as men (10 percent vs. 22 percent). Consumers under 50 and those with household incomes of $100,000 or more were the most likely to be familiar with TDFs (respectively, 20 percent and 30 percent).  While more than half of consumers understood that TDFs become more conservative over time and provide a diversified mix of stocks and bonds, 1-in-10 consumers believe that TDFs included guarantees, become risk free at retirement or require income to be drawn at the target year -- none of which are typical features of TDFs.  Consumers who have invested in TDFs are far more confident than those who do not own TDFs that they will be able to live the retirement life style they want (62 percent vs. 37 percent). However, this confidence may only reflect consumers' self-identified knowledge level. Three-quarters of TDF owners report being somewhat or very knowledgeable about investments or financial products, compared to just 42 percent of non-owners.  Here is an interesting thought: experts estimate that 80 percent of DC assets will be held in TDFs by 2020.  We hope people do so with 20/20 vision. 
6.      PENNSYLVANIA STATE AUDITOR RECOMMENDS THAT GOVERNOR BE REMOVED FROM BOARD OF TRUSTEES: Pennsylvania Auditor General Jack Wagner believes a too-closed and tightly centralized power center at Penn State University contributed to the severity of the Jerry Sandusky child sex scandal.  In a special report, Wagner said the university’s clout, as it evolved under the former president, was weighted too heavily toward the president’s office.   As a result, according to, too many trustees learned of controversies only on a need-to-know basis, leaving almost no chance for the board to review or challenge a decision such as the one that university e-mails suggest was made in 2001 to handle internally a witness’s allegation against Sandusky.  Wagner called for the Governor, Legislature and Penn State Trustees to make changes, including:   

  • Removing the university president and the governor as voting members of the board and cutting its size from 32 to 21 so power can be shared more evenly among all members. (None of the country’s twenty largest state universities has more than 19 trustees.)    
  • Ending most of Penn State’s exemptions from the state’s open-records law.   
  • Changing university bylaws to require a simple majority of the board to be present at any meeting before official action can be taken (as opposed to the present 13 out of 32), and to lock a revolving door between the university’s senior management and trustee membership.   
  • Taking additional steps -- beyond adding a public comment period at board meetings -- to improve public access to the board, including a hotline for people wanting to report concerns, and an earlier publication of board meeting agendas.  

Of course, Wagner recognizes there is no guarantee the proposals contained in his report would have prevented the Sandusky scandal, which he said ultimately occurred because of breakdowns in human character.  However, he argued that the prior president’s concentration of power helped create conditions in which such a problem could fester, and said the proposed changes will reduce the potential that similar breakdowns in human character will remain undetected for decades. 
7.      UTAH’S DEATH PENALTY COSTS $1.6M MORE PER INMATE:  In what may be the first study of its kind, the state of Utah has examined what the capital punishment option costs state and local governments.  As reported in The Salt Lake Tribune, a legislative fiscal analyst unofficially pegged an added $1.6 million per inmate from trial to execution.  Utah lawmakers may get an insight into Utahans’ views of capital punishment from a survey being conducted at Utah Valley University under which 6,000 randomly-selected people will be asked their views of capital punishment. 
8.      NUDISTS WANT RIGHT TO BARE ARMS:  A group of nudists filed a lawsuit in federal court seeking to stop the San Francisco Board of Supervisors from passing an ordinance that would ban nudity in the city. The supervisors are set to vote on a proposal by Supervisor Scott Wiener (not Anthony, but a Weiner nonetheless) that would prohibit the display of genitals or buttocks in city plazas or parklets. The ban would also apply to sidewalks, streets and public transit, a report from says.  The board last year passed another piece of legislation by Wiener (let’s be frank) that banned nudity in restaurants and required nudists sitting on benches or other public seating first to put clothing or other material atop the seat.  We wonder if Supervisor Weiner lives on Nob Hill.
9.      A BAD DAY AT HALLMARK:  Happy birthday! You look great for your age.  Almost Lifelike!
10.    DEFINITIONS:  OFFICE: A place where you can relax after your strenuous home life.
11.    QUOTE OF THE WEEK:  Who are you going to believe, me or your own eyes?  Marx Brothers
12.    ON THIS DAY IN HISTORY:   In 1967, Vietnam War: American General Westmoreland tells news reporters: “I am absolutely certain that whereas in 1965 the enemy was winning, today he is certainly losing.”
13.    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. 
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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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