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Miami

Cypen & Cypen
NEWSLETTER
for
DECEMBER 4, 2008

Stephen H. Cypen, Esq., Editor

1. THE FEDERAL GOVERNMENT RECOVERS $1.34 BILLION UNDER FALSE CLAIMS ACT:

The federal government has secured $1.34 Billion in settlements and judgments in the fiscal year ending September 30, 2008, pursuing allegations of fraud under the Federal False Claims Act, with the largest share coming from health care lawsuits. The fiscal year recoveries bring the amount of total recoveries since 1986 amendments to the act to more than $21 Billion, according to a report from The National Law Journal. The Department of Justice reported that almost 78% of this year’s recoveries are associated with suits initiated by private citizens (known as “relators”) under the False Claims Act’s qui tam provisions. These provisions authorize relators to file suit on behalf of the United States against those who have falsely or fraudulently claimed federal funds. Such funds run the gamut of federally-funded programs for Medicare and Medicaid to defense procurement contracts, disaster assistance loans and agricultural subsidies. Persons who knowingly make false claims for federal funds are liable for three times the government’s loss, plus a civil penalty of $5,500 to $11,000 for each claim. Relators recover 15% to 25% of proceeds of a successful suit if the United States intervenes in the qui tam action, and up to 30% if the government declines and the relator pursues the action alone. In fiscal year 2008, relators were awarded $198 Million. Seems like nice work ... if you can relate.

2. BUT FALSE CLAIMS ARE DOWN:

In the above item, the federal government was quick to announce that it had secured $1.34 Billion in settlements and judgments in the fiscal year ending September 30, 2008 under the Federal False Claims Act. Well, according to The American Lawyer, the Department of Justice failed to tell us that this year’s recovery is a steep drop from the $2 Billion in recoveries in 2007 and the $3.1 Billion the government collected in 2006. Why the big decline? As it turns out, there is a backload of about 900 whistle blower cases at DOJ, waiting for government lawyers to decide whether to intervene. Hey, we are not complaining: $1.4 Billion ain’t bad.

3. IS YOUR COMPANY DB PLAN’S LIABILITY OVERSTATED?:

If you have a defined benefit pension plan, its net liability on the balance sheet is probably overstated by between 3% and 10%, assuming it is 80% to 95% funded. Thus, according to actuary Thomas Schryer, its annual cost reflected on your bottom line is probably overstated by 1% to 2%. In total, pension liabilities in the United States are probably overstated on balance sheets by nearly $25 Billion. Essentially, most actuaries have used a good answer to the wrong question, but Schryer proposes asking a better question. Most pension plans in the United States pay death benefits, but only to spouses of employees who do not survive until retirement. Traditionally, actuaries simply asked what proportion of employees were married, and, thus, entitled to preretirement spousal death coverage. Actuaries looked at marital statistics for male and female employees, and used those statistics to value these death benefits. Fortunately, actuaries are required to review such assumptions periodically, so one actuarial practice actually took some time to look at the situation in more depth. Of course they looked at changing divorce rates, but they also spotted a statistic that really stood out: Mother Nature applies one set of mortality rates to married people and roughly double those rates to others. Married men simply have a marked advantage in this regard. Actuaries have been asking the wrong question because not all employees are subject to reasonably similar mortality rates. A better question is “what proportion of deceased employees were married and qualified for a preretirement spousal death coverage?” Typical current actuarial assumptions say that 80% to 85% of deceased males and 50% of deceased females will trigger spousal survivor benefits. If we reflect how mortality rates vary by marital status the rate should probably be about 60% for males and 40% for females, which translates into a 25% decrease in liabilities associated with these death benefits. Apparently, divorce is bad for our health, but no one seems to know exactly why. It could be that people chosen as marriage partners might tend to be healthier. It could also be that marriage discourages things like unhealthy diets, inactivity and the like. All that matters, however, is that your actuary analyze this issue to assure your numbers reflect today’s best practices.

4. TAXATION OF SOCIAL SECURITY BENEFITS:

A report from Congressional Research Service, updated October 21, 2008, deals with calculation and history of taxing Social Security benefits. Social Security provides monthly benefits to qualified retirees, disabled workers and their spouses/dependents. Until 1984, Social Security benefits were exempt from federal income tax. In 1983, Congress approved recommendations from the National Commission on Social Security Reform (also known as the Greenspan Commission) to tax Social Security benefits above a specified income threshold. Specifically, beginning in 1984, up to 50% of Social Security benefits are taxable for individuals whose provisional income exceeds $25,000. The threshold is $32,000 for married couples. Provisional income is defined as total income from all sources recognized for tax purposes plus certain otherwise tax exempt income, including half of Social Security benefits. Proceeds from taxing Social Security benefits at the 50% rate are credited to the Old-Age and Survivors Insurance trust fund and the Disability Insurance trust fund, based on the source of the benefit taxed. In 1993, Congress passed a second income threshold for calculation of taxable Social Security benefits. This second threshold (often referred to as Tier 2) taxed up to 85% of benefits for individuals whose provisional income exceeds $34,000 and for married couples whose provisional income exceeds $44,000. Tax proceeds from the second tier go to the Medicare Hospital Insurance trust fund. Income from taxation of benefits to the Social Security trust funds totaled $18.6 Billion in 2007, or 2.3% of its total income. For Medicare, income from taxation of benefits totaled $10.6 Billion in 2007, or 4.7% of total Hospital Insurance trust fund income. Because the income thresholds to determine taxation of Social Security benefits are not indexed for inflation or wage growth, the share of beneficiaries affected by these thresholds is expected to increase over time. According to the Congressional Budget Office, 39% of Social Security beneficiaries (16.9 million) were affected by income taxation of Social Security benefits in 2005. In the 110th Congress, several pieces of legislation have been introduced that would impact taxation of Social Security benefits. CRS will update its report as warranted by legislative activity.

5. IRS ANNOUNCES 2009 STANDARD MILEAGE RATES:

Internal Revenue Service has announced the 2009 optional standard mileage rates used to calculate deductible cost of operating an automobile for business, charitable, medical or moving purposes. Beginning January 1, 2009, the standard mileage rates for use of a car, van, pickup or panel truck will be

  • 55 cents per mile driven for business
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations.

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008, which were raised by a special adjustment mid-year response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008. The business mileage rate was 50.5 cents per mile in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second. The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter into the calculation. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on variable costs as determined by the same study. (Independent contractor Runzheimer International conducted the study.) Of course, taxpayers always have the option of calculating actual costs of using their vehicle rather than using the standard mileage rates. Revenue Procedure 2008-72, IR-2008-131 (November 24, 2008).

6. TREASURY ANNOUNCES EXTENSION OF MONEY MARKET PROGRAM:

The U.S. Treasury Department has announced an extension of Treasury’s Temporary Guarantee Program for Money Market Funds until
April 30, 2009, to support ongoing stability in the current market (see C&C Newsletter for September 25, 2008, Item 7). All money market funds currently participating in the program and meeting the extension requirements are eligible to continue to participate. Funds that currently are not participating in the program are not eligible to enter the program. The Temporary Guarantee Program will continue to provide coverage to shareholders up to amounts that they had in participating money market funds as of September 19, 2008. Funds must make a program extension payment and submit an extension notice by December 5, 2008. The amount of payment for the extension period will be based on a fund’s net asset value as of September 19, 2008. While the program protects accounts of investors, each money market fund makes a decision on whether to sign-up for the program. Investors cannot sign-up for the program individually. The program currently covers over $3 Trillion in assets. The Secretary may extend the program until September 18, 2009; however, no decision has been made to extend the program beyond April 30, 2009. If a fund does not participate in this extension, that fund will not be eligible to participate in a potential further extension of the program. HP-1290 (November 24, 2008).

7. ARKANSAS WIRELESS NETWORK CONNECTS FIRST RESPONDERS ACROSS THE STATE:

Before Spring 2006, Arkansas’s first responders could not use their radios to talk outside their jurisdictions. However, when radio interoperability was named as one culprit in deaths of firefighters who rushed into the World Trade Center on September 11, 2001, Arkansas started a multiphase plan to build a statewide network. The result, according to Government Computer News, is the Arkansas Wireless Information Network, which incorporates old and new systems into an all-digital system conforming to standards of the Association of Public Safety Communication Officials. Engineers were able to utilize a large percentage of existing infrastructure. Each of the state’s 75 counties had unique coverage requirements based on public safety risks -- such as chemical stockpiles -- that required the radio manufacturer physically to update dozens of locations. Forty-eight existing sites were upgraded and 23 new sites were added. The system now comprises 104 remote towers, each with radio frequency equipment and microwave equipment. Although state police are “anchor tenant,” 16 other state and local agencies also use the network for their daily operations.

8. AIG WILL LIMIT EXECUTIVE COMPENSATION:

American International Group Inc. has adopted voluntary executive compensation limits, according to Business Insurance. Under the restrictions, AIG Chairman and Chief Executive Officer Edward Liddy will receive an annual base salary of $1 for 2008 and 2009. His initial compensation will consist entirely of equity grants, demonstrating his confidence in AIG and its team. Liddy will not receive an annual bonus this year or next, although he may be eligible for a special bonus based upon extraordinary performance, payable in 2010. The company also notes that LIddy will not be eligible for severance pay. The Vice Chairman and Chief Restructuring Officer (there’s a new one), will receive no salary or bonus in 2008. After this year, other than her base salary, any other compensation will be tied directly to progress of the restructuring efforts. The other five members of AIG’s top-seven-officer leadership group will not receive annual bonuses for 2008 or salary increases through 2009. In addition, AIG’s senior partners will not earn long-term performance awards in 2008. They will not receive salary increases in 2009, and their 2008 and 2009 annual bonuses will be limited. AIG’s announcement followed a November 18, 2008 letter from New York Attorney General Andrew Cuomo, in which he questioned AIG’s intentions with respect to bonuses and pay raises for executives. Cuomo has now termed AIG’s actions as a “positive step.” No doubt, AIG will have to take some positive leaps before righting itself.

9. NEW JERSEY FUND DRAWS HEAT FOR HEDGE FUND FORAY:

Reuters reports that New Jersey’s pension fund is under fire over a series of hedge fund investments. The fund, which in August 2008 just “won” the right to invest in alternative investments, made the troublesome investments in October, as the subject hedge funds were facing the equivalent of “margin calls.” In effect, the hedge funds, which had borrowed money from investments, either faced or anticipated facing demands from lenders for cash as the value of those investments fell. And catch this: at $49.5 Million each, the three investments came in just below the $50 Million threshold requiring the fund to explain an investment to an oversight board before proceeding. Rather than dump assets in falling or dysfunctional markets to meet cash demands, some hedge funds have turned to their deep-pocketed investors to bail them out and at the same time help those investors preserve their initial investments, even at the expense of new cash. Unlike Jersey, other pension funds have balked (see C&C Newsletter for November 13, 2008, Item 10).

10. FLORIDA DEPENDENT SPECIAL DISTRICT SUBJECT TO CONSTITUTIONAL DUAL OFFICE PROHIBITION:

Article II, Section 5(a), Florida Constitution, provides that no person shall hold at the same time more than one office under the government of the state and counties and municipalities therein. The Supreme Court of Florida has held that an “office” implies a delegation of a portion of the sovereign power to, and possession of it by, the person filling the office. On its face, the constitutional dual office holding prohibition refers only to state, county and municipal offices; it does not refer to special district offices. Thus, the courts and the Florida Attorney General have previously concluded that the dual office holding prohibition does not apply to officers of an independent special district. The Volusia Growth Management Commission has been designated as a special district by the Florida Department of Community Affairs. The district was created by county charter and its powers and duties are prescribed by county ordinance. The commission’s budget is approved by and is funded by the county. The commission is part of county government and its members are county officers. Therefore, membership on the Volusia Growth Management Commission constitutes an office for purposes of the constitutional prohibition against dual office holding contained in Article II, Section 5(a), Florida Constitution. Further, Section 286.012, Florida Statutes, naturally applies. That section sets forth a requirement that members of any state, county or municipal governmental board who is present at a meeting may not abstain from voting unless there is, or appears to be, a possible conflict of interest under Chapter 112, Florida Statutes. AGO 2008-61 (November 20, 2008).

11. IN FLORIDA, DEPENDENT HEALTH COVERAGE CAN BE REQUIRED TO AGE 30:

In a recent piece on a new federal statute called Michelle’s Law, we made passing reference to a new Florida law that may allow certain children to stay on their parents’ health insurance until age 30; but we could not locate the actual statute (see C&C Newsletter for October 16, 2008, Item 7). Thanks to reader C.K., in Miami, we have located Chapter 2008-32 (which amends Section 627.6562, Florida Statutes, “Dependent Coverage”). Now, if an insurer offers coverage under a group, blanket or franchise health insurance policy that insures dependent children, the policy must insure a dependent child at least until the end of the calendar year in which the child reaches age 30, if the child:

(a) is unmarried and does not have a dependent of his or her own;

(b) is a resident of Florida or a full-time or part-time student; and

(c) is not entitled to coverage under any other policy or plan or is not entitled to benefits under Social Security.

As we had heard originally, the new law is applicable to policies issued or renewed on or after October 1, 2008.

12. FLORIDA INVESTMENT FUND FAILS TO REGAIN INVESTOR TRUST:

Last fall, a state investment fund in which counties, cities and other local agencies parked extra cash temporarily was the largest in the country, at $26.1 Billion. But fears the fund had made questionable investments caused a panic, and governments yanked out billions in just weeks (see C&C Newsletter for November 21, 2007, Item 10). A year later, according to the Miami Herald, the state has structured the Local Government Investment Pool to include only top-grade securities, and installed a highly-regarded investment manager. Yet many local governments remain unwilling to give the pool another chance. Money has continued to flow out, and the pool totaled a mere $5.76 Billion as of November 21, 2008. Miami-Dade County is now managing its own money, and Broward County is using its own AAA-rated fund for cash management. In November, when municipalities and other government agencies rushed to withdraw money from the fund, the State Board of Administration shut down the fund for four days, preventing investors from getting at most of their money. Healthy investments were segregated in one account with limited withdrawals, while the troubled securities were sequestered in another, temporarily off limits to investors. Investors did not take well to that policy, because they need access to money for basic operations. Local municipalities park funds like property taxes and fees they will need in days or weeks, and they cannot take the chance they will lose money on the investment. Only 189 out of 751 current participants have deposited new money into the local government pool.

13. ON DEVELOPMENT:

Here is some common sense advice from It’s Not How Good You Are. Don’t promise what you can’t deliver. When selling our ideas, we tend to over-promise in our enthusiasm. In our vision of how we hope it will be, we leave no room for failure. The result will probably be disappointing. Not disastrous, but a little less than expected. No one will say anything, they just won’t trust you quite as much next time. Basically, you’ve blown it. If instead, you undersell, pointing out possible weaknesses and how to resolve them if they occur, you’re laying the groundwork for a trusting relationship. And if it does turn out as great as you hoped, it’s a bonus.

14. QUOTE OF THE WEEK:

“The hardest arithmetic to master is that which enables us to count our blessings.” Eric Hoffer

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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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