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Miami

Cypen & Cypen
NEWSLETTER
for
December 6, 2012

Stephen H. Cypen, Esq., Editor

1.     BEWARE OF PENSION REFORM ADVOCACY KIT:  Florida League of Cities has made available to its members a pension advocacy kit entitled “Pension Reform Now!” Addressing League members, the booklet says state mandated pension benefits for local police and firefighters are hurting cities’ ability to provide services to our local citizens.  Tallahassee lawmakers insist on supporting union-driven initiatives that meddle in local pension and benefit negotiations.  We must stand together to bring sensible fiscal reforms to local city police and firefighter pensions for the future of our communities and to secure their ability to provide fair compensation and benefits to future police and firefighters.  The League is asking members to do two things:  (1) take the time, in the very near future, to meet with your state legislative delegation and explain why these reforms are necessary for Florida’s future. (2) Encourage your city to pass a resolution in support of real pension reform. (Sample resolutions are included for your convenience.)  When meeting with Florida Lawmakers, please stress the following points:

  • We respect the work of our local police and firefighters.  First and foremost, we respect, admire and appreciate our local police and firefighters.  We also want them to have good salaries and sensible benefit packages for a long time to come.
  • Union driven pension mandates are hurting our future.  We care about the future and we care about our police and firefighters.  If we are to have a sustainable future, state lawmakers must roll-back union-driven initiatives that force taxpayers to pay far more than negotiated wage and benefit packages.
  • State required benefits help unions, hurt taxpayers. Local unions already have collective bargaining rights -- let’s respect them.  The pro-union initiatives supported by state lawmakers undermine local contract negotiations, drive up costs and put upward pressures on taxes.
  • Multiple Constitutional Amendments have hurt our ability to meet pension demands.   Beginning with Amendment 1 in 2008, lawmakers have put a series of amendments in our State Constitution that severely restrict local governments’ ability to meet the rising pension demands forced upon us by those same lawmakers. Enough is enough! We need to work together to lower taxes, roll back union-mandated pension benefits, and bring fiscal common sense to local pension systems. 
  • We need to end state meddling in local decisions. Local pension plans are negotiated locally and are paid by local taxpayers, using local tax dollars. State lawmakers and local officials  need to work together to end the state’s meddling in local affairs and find a way to bring sensible reform to union-driven pension demands that are unsustainable and unworkable.   (Actually, statistics show that, by far, the greatest contributor to defined benefit plans is investment return – as much as 80%.) 

 
2.      FLORIDA AUDITOR GENERAL SKEWERS CITY OF HOLLYWOOD:
  By letter dated November 26, 2012, David W. Martin, CPA, Auditor General, State of Florida, has notified the City of Hollywood and its Community Redevelopment Agency of the preliminary and tentative audit findings that may be included in a report to be prepared on the operational audit of the City and the CRA.  Here is a list of the nine findings as to the City.  (There are three additional findings against the CRA.)  We only went beyond the list itself in situations where we thought our readers might be interested in details: 
 
Finding No. 1: The City did not consider all available funds in its determination to declare a financial urgency.  The City had significant available funds in the Water and Sewer Utility Fund  that potentially could have been used to help offset General Fund shortfalls rather than declare a financial urgency.  Using a conservative 90 day-working capital requirement for the Water and Sewer Utility Fund, the City had $12.9 Million and $22.7 Million in excess of working capital potentially available as of September 30, 2010 and September 30, 2011, respectively, that could have been used to help offset the General Fund budget shortfalls. 
 
Finding No. 2: The City needed to develop a formal plan to replenish General Fund   balance reserves, as required by its fund balance policy.  It is not apparent why the City’s policy would not require a plan for reaching targeted levels regardless of the reasons why fund balances are below the targeted level.  
 
Finding No. 3: The City needed to establish minimum target levels of working capital that should be maintained for its Water and Sewer Utility Fund. 
 
Finding No. 4: The City had not adopted a funding policy for its defined benefit pension plans to ensure that sufficient resources would be available to fund benefits promised to employees. Additionally, scheduled wage increases and rising costs of pension benefits pursuant to collective bargaining agreements, most of which were funded by the General Fund, may have been unsustainable in the long run.  A fundamental financial objective of a municipality’s defined benefit pension plan is to fund the long-term cost of benefits promised to plan participants, and the appropriate way to attain reasonable assurance that the pension benefits will remain sustainable is for the municipality to accumulate sufficient resources for benefit payments in a systematic and disciplined manner.  The City had not adopted the pension funding policy to ensure that sufficient resources will be accumulated to fund benefits promised to its employees.  Although since at least 2005, the City had generally fully funded its pension plans with the actuary determined required contribution, the funded ratio decreased during the period, and it will take a considerably more resource to approach full funding of the pension plans. 
 
Finding No. 5: The City’s financial management and monitoring could be improved to avoid budget shortfalls due to ineffective revenue projections and overexpenditures. 
 
Finding No. 6: The City’s adopted budgets did not include prior year balances brought forward, and budgets were not adopted for its special revenue or capital projects funds, contrary to law. 
 
Finding No. 7: The City did not provide for timely bank account reconciliations. 
 
Finding No. 8: The City did not monitor fuel usage and maintenance for City-owned vehicles.
 
Finding No. 9: Minutes of City Commission meetings and workshops were not always prepared, or were not timely prepared and approved.
 
Remember, now, that these findings are preliminary and tentative, subject to the written explanation of the City and its redevelopment agency.  Based upon statements reported in the press, the mayor does not seem the least bit concerned. 
 
3.      GOVERNMENTAL PLANS CAN ELECT SECOND CYCLE E:
Internal Revenue Procedure 2012-50 allows sponsors of individually designed governmental plans to elect Cycle E (instead of Cycle C) as their second remedial amendment cycle.  Sponsors can elect Cycle E as their second remedial amendment cycle by filing a determination letter application for their plan between February 1, 2015 and January 31, 2016, instead of the second Cycle C submission period (February 1, 2013 - January 31, 2014). Sponsors do not need to notify IRS of their intent to make this election.  Sponsors who elect Cycle E must amend their plans for all applicable items on the second Cycle E Cumulative List, and timely adopt any interim amendments required for governmental plans during the second Cycles C and D. Sponsors electing Cycle E as their second remedial amendment cycle will have their plans’ subsequent remedial amendment cycles revert to Cycle C (for example, the plan’s third remedial amendment cycle will be the third Cycle C), and second cycle determination letter expire at the end of the third Cycle C submission period (January 31, 2019).  Determination letters for individually designed governmental plans issued after the initial remedial amendment cycle expire on January 31, 2014 (at the end of the second Cycle C), even if the sponsor elected the first Cycle E as the plan’s initial cycle. However, IRS will extend the expiration dates on these letters to January 31, 2016 (the end of second Cycle E), if the sponsor elects Cycle E as the plan’s second remedial amendment cycle.  Trustees should request more specific information from tax counsel.  The Revenue Procedure becomes effective on February 1, 2013.   
 
4.      THE STATE OF STATE PENSION PLANS:        “A Deep Dive Into Shortfalls and Surpluses,” Morningstar has issued The State of State Pension Plans.  The challenges and vulnerabilities facing government pension plans have gained new public prominence and attention of late. Both governing entities and the taxpaying public are beginning to grasp and acknowledge the potential, chronic consequences of looming pension liabilities.  During the past several years, ever-escalating pension costs and liabilities have induced new, sometimes unrelenting, pressure on the finances of state and local governments still hampered by the recession.  Current data indicate these pressures are expected to persist, or even intensify. To get a better view of the presence state of major pension plans and the potential impact of their vulnerabilities on governments, taxpayers, and investors, Morningstar analyzed current data for pension plans administered by each of the 50 states. Overall, Morningstar found the fiscal health of state pension plans varies drastically, with some states having exceptionally strong plans while others are facing severe funding shortfalls.  While the majority of states are adequately managing their aggregate pension liabilities, several pension systems are coming under duress. The fiscal solvency and management of these plans vary greatly, according to two key drivers of the pension analysis: funded ratio and unfunded actuarial accrued liability per capita. The funded ratio, which is calculated by dividing the pension plan’s assets by its liabilities, serves as a good measure of the plan’s ability to meet its obligations. In addition, Morningstar highlights the UAAL per capita, which, in Morningstar’s opinion, is a useful metric not commonly applied in the current pension analysis narrative. Similar to the debt per capita calculation in credit analysis, the UAAL per capita represents the amount each person in the state would need to pay fully to fund this unfunded liability.  Here are some of the key takeaways:

  • Pension funded levels and UAAL per capita vary widely among the states.  Twenty-one fall below Morningstar’s fiscally sound threshold of 70% funded ratio. (This arbitrary level is still the subject of substantial debate.)
  • UAAL per capita is a significant indicator, as it represents how much each resident would need to pay to fund the liability, and can vary compared to funded ratio. 
  • Upcoming GASB requirements will change pension standards and accounting significantly. 
  • Florida Retirement System fares well under both measurement criteria.  FRS is 86.9% funded, and has a $1,024 unfunded liability per capita.  Both are in Morningstar’s “good” category.     

 
5.      STANDBY PAY NOT PART OF PENSIONABLE EARNINGS:
  The City of Pleasanton and Linhart, a retired Pleasanton employee, petitioned for a writ of mandate to compel California Public Employees Retirement System and its board of administration retroactively to increase Linhart’s monthly retirement allowance.  Linhart contended the board erred in determining a portion of his compensation as a division chief of the Livermore-Pleasanton Fire Department was not pensionable.  The trial court agreed and entered a judgment directing CalPERS to increase Linhart’s monthly pension allowance retroactively from the date of his retirement in 2006.  The California Court of Appeal reversed the judgment, and remanded the matter to the trial court for entry of a new judgment denying the petition.  Linhart joined the Pleasanton Fire Department in 1984.  Due to his employment, he became a local safety member of CalPERS.  After being promoted to fire captain in 1992, Linhart became a division chief in 1998, when the Pleasanton and Livermore fire departments merged.  Linhart retired at the rank of division chief in 2006, after 22 years of service, and began receiving a retirement allowance from CalPERS.  The central issue in the case was whether a portion of Linhart’s compensation as division chief, denominated “standby pay” in his labor agreement, should be considered part of his pensionable earnings for purposes of calculating his monthly CalPERS retirement allowance.  While Linhart worked a 40 hour work week, 8:00 A.M. to 5:00 P.M., Monday through Friday, and was off work on the City’s 12 annual observed holidays, he was assigned a “back-up schedule” that required him to be available to report for emergencies, as necessary, during certain times.  Linhart’s back-up schedule applied only to him and to the chief and the deputy chief of the department.  By statute, CalPERS members’ benefits are determined according to a statutory formula that takes into account the member’s base salary and certain items of special compensation received during the year in which the member’s compensation is highest.  Not all items are compensation paid in addition to the member’s base salary count as pensionable special compensation.  To qualify as special compensation, the pay must be received for one of eight listed purposes, which do not include standby pay.  An item of special compensation not listed in the statute cannot be used in determining a member’s final compensation for pension purposes.  Further, Linhart was not denied due process before the board because it did not preclude the advocate for the agency staff’s position from communicating with and making recommendations to the agency decision maker or its advisors about the substance of the matter as long as (1) no part of the communication is made ex parte, (2) the administrative appellant is simultaneously afforded the same opportunity to communicate with the decision maker as the staff advocate and (3) the decision maker is not subject to the advocate’s authority or direction.   City of Pleasanton v. Board of Administration of the California Public Employees’ Retirement System, No. A132586 (Cal. App. 4th, November 29, 2012).  
 
6.      IN FLORIDA WHISTLE-BLOWER ACTION, PRIOR NOTIFICATION TO HUD NOT SUFFICIENT:  Quintini filed a complaint against the Panama City Housing Authority, alleging that he was fired in violation of the Whistle-blower's Act, sections 112.3187-112.31895, Florida Statues.  The trial court granted summary judgment in favor of the Authority, finding that the disclosures made by Quintini were not protected under the Act because they were not made to the chief executive officer of the Authority or “other appropriate local official” as required by the Act.  A Florida District Court of Appeal agreed, and affirmed.  Quintini had submitted a written complaint to the U.S. Department of Housing and Urban Development, alleging that he was not being paid at the same rate as other maintenance workers.  He did not submit this complaint to the Authority’s executive director, its board of directors or anyone else at the Authority.  After Quintini was fired, he filed suit under the Whistle-blower’s Act alleging that his termination was in retaliation for his disclosures to HUD.  Section 112.3187(6), Florida Statutes, specifies to whom information must be disclosed in order to be protected under the Whistle-blower’s Act.  For disclosures concerning a local governmental entity, the information must be disclosed to a chief executive officer or other appropriate local official.  Following another district court of appeal, the First District Court of Appeal found the statute explicitly states that disclosure must be made to the chief executive officer or other appropriate local official.  This clear mandate left no room for interpretation, and because it was undisputed that Quintini did not make his disclosures to the Authority’s executive director or anyone else who might qualify as an “other appropriate local official,” he was not entitled to the protections of the Whistle-blower's Act.  Quintini v. Panama City Housing Authority, 27 Fla. L. Weekly D2723, (Fla. 1st DCA, November 28, 2012).
 
7.       IRS INTEREST RATES REMAIN THE SAME FOR THE FIRST QUARTER OF 2013:  Internal Revenue Service announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2013.  The rates will be

  • three percent for overpayments (two percent in the case of a corporation);
  • three percent for underpayments; 
  • five percent for large corporate underpayments; and
  • one-half percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.   The new interest rates are computed from the federal short-term rate determined during October 2012, to take effect November 1, 2012, based on daily compounding.  IR-2012-99 (November 30, 2012).
 
8.      A BAD DAY AT HALLMARK:
  Your friends and I wanted to do something special for your birthday.   So we're having you put to sleep. 
 
9.      DEFINITIONS:  DIPLOMAT:  A person who tells you to go to hell in such a way that you actually look forward to the trip.    
 
10.    QUOTE OF THE WEEK:  “I love deadlines. I like the whooshing sound they make as they fly by.”  Douglas Adams
 
11.    ON THIS DAY IN HISTORY:   In 1941, New York City Council agrees to build Idlewild (Kennedy) Airport in Queens. 
 
12.    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. 
 
13.    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.

Copyright, 1996-2012, 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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