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Cypen & Cypen
December 5, 2013

Stephen H. Cypen, Esq., Editor

1. WALL STREET LOOTING AMERICA’S PENSION FUNDS: Matt Taibbi, in a long piece published in the October 10, 2013, issue ofRolling Stone, recounts how the state of Rhode Island took bold action to avert what it called a looming pension crisis. Led by its newly elected treasurer, Gina Raimondo, a former venture capitalist, the state declared war on public pensions, ramming through an ingenious new law slashing benefits of state employees with a speed and ferocity seldom before seen by any local government. Called the Rhode Island Retirement Security Act of 2011, her plan would later be hailed as the most comprehensive pension reform ever implemented. The rap was so convincing at first that overwhelmed local legislatures did not even know how to react. Nobody wanted to be the first to raise his hand and admit he did not know what she was talking about.  What few people knew at the time was that Raimondo’s tool kit was not just meant for local consumption. The dynamic young Rhodes Scholar was allowing her state to be used as a test case for the rest of the country, at the behest of powerful out-of-state financiers with dreams of pushing pension reform down the throats of taxpayers and public workers from coast to coast. One of her key supporters was billionaire former Enron executive John Arnold, a young right-wing kingmaker with clear designs on becoming the next generation's Koch brothers, and who for years had been funding a nationwide campaign to slash benefits for public workers. Further, no one knew that part of Raimondo's strategy for saving money involved handing more than $1 billion – 14% of the state fund -- to hedge funds, including a trio of well-known New York-based funds: Third Point Capital, Mason Capital and Elliott Management. The funds now stood collectively to be paid tens of millions in fees every single year by the already overburdened taxpayers of her ostensibly flat-broke state. The state's workers, in other words, were being forced to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws. Backing up a bit, readers should remember that when the federal government was so worried about the sanctity of private contracts that it doled out $182 billion in public money to AIG, which guaranteed that firms like Goldman Sachs and Deutsche Bank could be paid off on their bets against a subprime market they themselves helped overheat (and enabling AIG executives to be paid the huge bonuses they naturally deserved for having run one of the world's largest corporations into the ground). When asked why the state was paying those bonuses, Obama economic adviser Larry Summers said, "We are a country of law. . . and cannot just abrogate contracts." Now, though, states all over the country are claiming they not only need to abrogate legally binding contracts with state workers but also should seize retirement money from widows to finance years of illegal loans, giant fees to billionaires and give tax breaks to multi-millionaires It ain't right. If someone has to tighten a belt or two, let us start there. If we still have a problem, then we can discuss it later. But asking cops, firefighters and teachers to take the first hit for a crisis caused by reckless pols and thieves on Wall Street is low, even by American standards. One factoid about the Pew Charitable Trusts, what most people think as a centrist, nonpartisan organization committed to sanguine policy analysis and agnostic number crunching organization, was the legacy of J. Howard Pew, president of Sun Oil (later Sunoco) during its early 20th-century petro-powerhouse days and a kind of australopithecine precursor to a Tea Party leader. Pew had all the symptoms -- an obsession with the new deal as a threat to free society, a keen appreciation for unreadable Austrian economist F.A. Hayek and a hoggish overuse of the word "freedom." Pew left nearly $1 billion to a series of trusts, one of which was naturally called the "Freedom Trust," whose mission was, in part, to combat the false promises of socialism and a planned economy. The entire piece merits reading at

2. DETROIT'S PENSIONS WELL-FUNDED (SO WHAT IS ALL THE FUSS?): We have previously written about Detroit’s pension plans and the unsupportable position that they are not well funded and are to blame for Detroit’s fiscal woes (C & C Newsletter for August 1, 2013, Item 3 and August 15, 2013, Item 2). presents a few more details and pinpoints the somewhat esoteric reason why the blame does not lie at the doorstep of the pension plans. The city’s emergency manager says the city’s pension systems represent $3.5 billion of the city’s $18 billion debt.  Actually, the city’s two pension systems are a combined 91% funded (80% is the traditional benchmark for fiscal health). The following charts depict Detroit’s actual liability:
          Current Actuarial Valuation
            Fiscal Year:    2011                                                  
            Plan                                        PFRS              GRS                            Aggregate                      
            Interest Return
            Assumptions                           8%                   7.9%
            Amortization Period                30 years          30 years
            Actuarial Value
            of assets ($000s)                   3,804,760        3,080,296                  6,885,056
            Actuarial Liability
            ($000s)                                  3,808,643        3,720,167                  7,528,810
            Unfunded Liability
            ($000s)                                  3,883               639,871                     643,754
            Funded Ratio                         99.9%              82.8%                       91.4%

            Emergency Manager Assumptions
            Fiscal Year:     2013                                      
            Plan                                         PFRS             GRS                           Aggregate                      
            Interest Return
            Assumptions                           7%                  7%
            Amortization Period               15 years          18 years
            Actuarial Value
            of assets ($000s)                   2,918,000        2,077,000                   4,995,000
            Actuarial Liability
            ($000s)                                  4,355,000         4,114.000                   8,469,000
            Unfunded Liability
             ($000s)                                 1,437,000        2,037,000                   3,474,000

The irrationale for the emergency manager’s conclusions is twofold. First, he reduces the investment return assumptions for, respectively, police/fire and general employees from 8% and 7.9% to 7%. (On this issue, we believe history is on the side of the trustees.) Second, he reduces the amortization period for police/fire and general employees from 30 years to, respectively, 15 years and 18 years. (On this one, why not extend the amortization period to 40 years? -- the point being that pension plans are perpetual.) An interesting part of the article (and what is news to us) is that the city, took a big gamble, and ended up shooting itself in the foot.  How so?  In 2005, the city sold pension obligation bonds, taxable instruments that are designed to go directly toward easing the city’s unfunded liability. However, despite the fact that Detroit sold the bonds at a variable rate, they were part of a swap designed to guarantee about 6% interest to the city. The city then made a deal with banks on the interest rate for those bonds to help them keep payments stable: they agreed to pay a 6% rate to the bank in exchange for the bank’s paying Detroit the variable rate. The deal protected Detroit against skyrocketing interest rates, but if interest rates fell, the city would be S.O.L. The rest, as they say, is history.  The $1.4 billion deal is expected to cost Detroit double, $2.8 billion.  There is another less obvious fallout from this kind of structure: it pits future employees and tax payers against retirees. Admittedly, these bonds are one reason the plans are well-funded; in effect, the deal shifted the liability risk from the retirees to the taxpayers, and that debt contributes toward the city’s inability to provide services to its residents. Regardless, the pension plans played no role in the city’s decision to make a sucker bet on pension obligation bonds.
3. HEADING FOR THE DOOR: Public employees are reaching retirement age in huge numbers.  Pretty soon, a wave of departures will be inevitable.  For a long time, there have been warnings of a “silver tsunami” among public employees -- a sudden wave of baby boomer retirements that could potentially cripple the workforce. So far, the wave has not hit with full force in most jurisdictions. Governing compiled retirement figures from a sample of 10 larger state pension systems with available data. Retirements for six systems were on pace to exceed last year’s totals, but only the Employees’ Retirement System of Georgia had registered more than a 10% year-over-year increase from 2012. Most others had recorded roughly the same tally of retirements as last year.  With large number of employees becoming retirement-eligible, however, the current situation will not last long. Many state and local governments expect retirement paperwork to begin piling up, and some report signs that the tide is already rising. Public administration experts express concern that governments are ill prepared. If they are not ready, agencies risk permanently losing decades of expertise, eroding their ability to serve the public for years to come.  In Connecticut, retirements are already escalating in some agencies. Of particular worry of state human resources officials is the potential brain drain set to occur when longtime employees in leadership positions depart. More than a third of employees classified as managers in Connecticut state government are already eligible to retire. As a whole, public employees tend to be older than those in the private sector. A review of data compiled for the Labor Department’s 2012 Current Population Survey shows seven of the 20 industry classifications with the oldest workers consist primarily of public employees. Postal service workers stand out with the oldest median age of 52 years, matched only by those working in funeral homes, crematories and cemeteries. Other public employment categories with the oldest median ages include libraries (49.4 years), public finance (48.9 years), and public administration executive offices and legislative bodies (48.7 years). The national median age last year among all industries, public and private, was 42.3 years.    
4. SEVEN TIPS FOR INFLUENCING LISTENERS IN PRESENTATIONS: Employee Benefit Advisor says that, after all, we are what we present.  Here are some important pointers to ensure a successful presentation, and make sure your story puts you at the top of the presenters:

  • Start by asking, “What do I want someone to say, do or think after hearing my presentation?”  If you don’t have clear picture of how you want your audience to react after, they will be confused and dissatisfied. Write down how you want your message to be perceived, and then build your presentation from there. 
  • Use examples of good presentations you have liked.  Think about what was good and bad in recent presentations that you walked away from generally liking. Also, write down why you liked them. 
  • Remember that a presentation is a “joint venture” between the presenter and audience.  The presentation belongs as much to you as it does to the listeners. Thoroughly understand the audience so you can critique yourself from their perspective. 
  • Connect with stories.  Tell stories to keep the focus on your listeners. Keep in mind that the presentation is about them, so think of stories that will be relevant to them. 
  • Write your presentation out word-for-word.  People do not follow this advice a lot, because they think they want to keep the talk informal. If you do not write it out, you are sure to forget something or mess up at a major point.
  • Turn on your presentation GPS.  The general rule of thumb for getting through a presentation is to start out with something that will really capture your listeners’ attention, make a few easy-to-remember points and then finish up by summarizing what you told them. Never end with a question or quotation.
  • Get coached.  Even if you have to turn to the next cubicle or a friend or significant other, find a person who knows you want to do well and practice with him. Ask him to take notes and discuss honest, constructive feedback on his points.

Presenters beware – all trustees will be reading this piece.

5. COST OF HOLIDAY GIFTS WILL RISE: The PNC Christmas Price Index shows the current cost for one set of each of the gifts given in the song “The Twelve Days of Christmas.” It began 30 years ago when PNC Bank decided to figure out how much it would cost to buy each of the gifts.  Thus, a holiday tradition was started that continues to this day.  The PNC Christmas Price Index is similar to the Consumer Price Index, which measures changes in price of goods and services like housing, food, clothing, transportation and more. It reflects spending habits of the average American.  The goods and services in the PNC Christmas Price Index are far more whimsical.  In most years, the price changes closely mirror those in the Consumer Price Index. It is a fun way to measure consumer spending and trends in the economy. Here is the 2013 line-up, showing current cost for one set of each of the gifts in the song:

          12 Drummers Drumming…$2,854.50 (up 2.9%)

          11 Pipers Piping…$2,635.20 (up.2.9%)

          10 Lords-a-Leaping…$5,243.37 (up 10%)

          9 Ladies Dancing…$7,552.84 (up 20%)

          8 Maids-a-Milking…$58.00 (same as 2011)

          7 Swans-a-Swimming…$7,000.00 (same as 2012)

          6 Geese-a-Laying…$210.00 (same as 2012)

          5 Gold Rings…$750.00 (same as 2012)

          4 Calling Birds…$599.96 (up 15.4%)

          3 French Hens…$165.00 (same as 2012)

          2 Turtle Doves…$125.00 (same as 2011)

          And a Partridge in a Pear Tree…$199.99 (down 2.4%)

The overall increase is 7.7%. 

6. JEWISH WISDOMS: I do not want any yes-men around me. I want everybody to tell me the truth, even if it costs them their jobs.  Sam Goldwyn


8. TODAY IN HISTORY: In 1933, Prohibition (18th Amendment) appealed; 21st Amendment ratified at 5:32 p.m. We will drink to that.

9. 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.
10. 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


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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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