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Cypen & Cypen
NEWSLETTER
for
DECEMBER 23, 2004

Stephen H. Cypen, Esq., Editor

1. BUSH SIGNS USERRA BILL INTO LAW:

As expected (see C&C Newsletter for December 2, 2004, Item 1), President Bush on December 10, 2004 signed into law the Veterans Benefits Improvement Act of 2004. The law requires employers to provide those eligible for rights and benefits under USERRA with a notice of said rights and benefits. The notice requirement may be satisfied by posting a notice where other required notices are customarily posted. The Secretary of Labor will provide the text of the notice within ninety days from enactment: by March 10, 2005. Among other things, USERRA has a COBRA-like law, which provides employees the right to continue with employer-provided health coverage for themselves and dependents for a period of up to 18 months. Employees who elect such coverage may be charged a premium of 102% of the regular cost. The law now expands the period of coverage from 18 months to 24 months, for elections made on or after December 10, 2004.

2. GFOA RECOMMENDS PRACTICES FOR EARLY RETIREMENT INCENTIVES:

On October 15, 2004 the Government Finance Officers Association Executive Board approved a recommended practice for evaluating use of early retirement incentives. Governments occasionally offer early retirement incentives to employees as a strategy to reduce payroll costs or stimulate short-term turnover among staff. ERIs are temporary, offered during a window that usually covers a period of months. They increase the economic value of the standard retirement benefit. Historically, ERIs rarely have succeeded, since costs are often greater than initially anticipated by the government offering the incentive, and savings are lower than projected. GFOA recommends that governments exercise extreme caution if considering ERIs. Governments should take the following actions prior to the decision to offer an ERI:

1. Goal-Setting for ERIs. Governments should be explicit in setting documented goals for the ERI. Goals can be financial in nature (realizing permanent efficiency in staffing or achieving budgetary objectives) or be designed to achieve human resource goals (create vacancies that allow for additional promotion opportunities and new staff).

2. Cost/benefit analysis. In judging whether an ERI should be offered, governments should assess potential costs and benefits of ERI proposals; the cost/benefit analysis should be linked to the goals of the ERI.

3. Budgetary considerations. In order to develop accurately budgetary estimates for the ERI, it is necessary to estimate the incremental cost of the ERI, which will vary according to level of employee participation; any budgetary analysis should project multiple scenarios for employee participation levels.

4. Implementation. At a minimum, governments should take into account the following points: communication to assure that employees understand the ERI in context of overall retirement planning; impact upon service delivery after employees retire, with identification of critical personnel whose services must be maintained; duration of the window to account for ability of retirement staff to manage retirement application workloads; and performance measures to ensure ERI goals are met.

GFOA emphasizes that the scope of this recommended practice does not cover Deferred Retirement Option Plans or other similar programs, which are often designed to promote employee retention.

3. DESPITE “PREVAILING” IN ERISA ACTION, NO ATTORNEY’S FEES FOR CLAIMANT:

Alfred Perreca sued his former company under the Employee Retirement Income Security Act of 1974, claiming pension credit as of 1959. The company claimed that Perreca should receive creditable service only from 1966. Although a federal jury found that Perreca was entitled to creditable service before January 1, 1965, it also found that he was not entitled to service back to his original start date of 1959. Thus, the court ordered that Perreca recover benefits from January 1, 1965. Meanwhile, Perreca sought fees under ERISA, which provides that in any action thereunder by a participant, beneficiary or fiduciary, the court in its discretion may allow reasonable attorney’s fees and costs of action to either party. At the outset, the court found that there were no special circumstances that warranted denial of the fees and that Perreca was, in fact, the prevailing party. However, the Second Circuit, in which the trial court was sitting, applies a five-pronged test to determine whether the prevailing party in an ERISA action can recover attorney’s fees: (1) the degree of the offending party’s culpability or bad faith, (2) the ability of the offending party to satisfy an award of attorney’s fees, (3) whether an award of fees would deter other persons from acting similarly under like circumstances, (4) relative merit of the parties positions and (5) whether the action conferred a common benefit on a group of pension plan participants. Finding that all factors (except financial ability to meet an award) favored defendants, the court “easily concludes that an award of attorney’s fees would be unfair to [defendants] and would not further ERISA’s goals.” Perreca v. Gluck, Case No. 99 Civ. 1779 (S.D. NY, December 3, 2004).

4. THE CENTURY FOUNDATION SAYS PRIVATIZING SOCIAL SECURITY IS A BAD IDEA:

Following articles stating the pro-position for Social Security privatization (see C&C Newsletter for October 7, 2004, Item 5) and the contrary view (see C&C Newsletter for October 14, 2004, Item 4), the Century Foundation has come up with twelve reasons why privatizing Social Security is a not a good idea. Just by way of background, most people know that President Bush repeatedly has emphasized that one of his foremost second-term priorities will be to transform Social Security in a fundamental way. Since the program’s inception in 1935, the size of benefits has always depended on earnings of workers over the course of their careers. The President wants to change the system so that the amount each worker collects from Social Security upon retirement would hinge on the size of investments in his or her own personal account. Here’s why such change should not take place:

Reason #1: Today’s insurance to protect workers and their families against death and disability would be threatened. Those who do “rate of return” calculations overlook the value of Social Security’s insurance protections.

Reason #2: Creating private accounts would make Social Security’s financing problem worse, not better. Diverting 2% of payroll to create private accounts would significantly shorten the time when current benefit levels could only be sustained by raising taxes.

Reason #3: Creating private accounts could dampen economic growth, further weakening Social Security’s future finances. Privatizing Social Security will escalate federal deficits and debt significantly, while increasing likelihood that national savings will decline, reducing long-term economic growth.

Reason #4: Privatization has been a disappointment elsewhere. The sobering experiences in countries like Chile and the United Kingdom actually provide strong arguments against privatization.

Reason #5: The odds are against individuals investing successfully. Studies have demonstrated that individual investors are far more likely to do worse than the market generally, even excluding cost of commissions and administrative expenses.

Reason #6: What you get will depend on whether you retire when the market is up or down. In the last century, although stocks generally grew significantly, there were three 20-year periods over which the market either declined or did not rise.

Reason #7: Wall Street would reap windfalls from your taxes. No wonder brokerage houses, banks and mutual funds have been active in the campaign to privatize Social Security.

Reason #8: Private accounts would require a new government bureaucracy. From standpoint of the system as a whole, privatization would add enormous administrative burdens.

Reason #9: Young people would be worse off. Recent studies show that if Social Security is converted to a system of private accounts, younger generations will be the ones bearing the cost of transforming the program.

Reason #10: Women stand to lose most. Even though Social Security is gender-blind, various cultural and biological differences make it clear that Social Security is much more essential, and a much better deal, for women than for men.

Reason #11: African Americans and Latinos would also become more vulnerable. Because both of those groups on average earn lower lifetime earnings than whites, they would be at greater risk of facing poverty in their retirement under privatization.

Reason #12: Retirees will not be protected against inflation. Unlike the current situation, it is unlikely that the required annuities ultimately purchased will increase with inflation.

The Century Foundation says its mission is to persuade those who care about issues such as economic inequality, population aging, homeland security, discontent with government and politics and national security that significant improvements are possible even when the conventional wisdom says they are not.

Copyright, 1996-2004, all rights reserved.

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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