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July, 1996

Stephen H. Cypen, Esq., Editor

SENATE PASSES HR3448: Thank you, thank you, thank you. On July 9, 1996, the United States Senate passed HR3448, which includes much-awaited amendments to Sections 415 and 457 of the Internal Revenue Code. Fortunately, amendments which might have resulted in a Presidential veto were narrowly defeated. Assuming that a conference committee can work out minor differences between the Senate and House versions of the Bill, it should be forwarded to the President for signature before the August 1 recess.

COUNTY ENACTS MSA: Well, if Congress can't agree on MSAs, go for it locally. As of July 1, 1996, employees of Ada County, Oregon can participate in a medical savings account. When an employee selects the MSA option from among several health plans, the employer saves significant premium dollars, which, in turn, the employer contributes to the employee's MSA. The employee pays health care bills out of the account. Although the deductible is higher than for a standard indemnity plan, the maximum exposure is lower. At the end of each year, employees can roll any unused funds back into the account for the following year. If the employee withdraws the funds, he would have to pay taxes and, if under the age of 59-1/2, a penalty.

PENSION LEGISLATION CONSIDERED CONTRACT: A Baltimore County's attempt retroactively to reduce pension benefits of retirees has failed because it violates the Contract Clause of the United States Constitution. A federal judge found that for purposes of Contract Clause analysis, the legislative enactments setting up pension plan were enforceable contracts. Andrews v. Anne Arundel County, Md.

NEW YORK GOVERNOR RELENTS ON SUPPLEMENTAL BENEFITS: New York Governor Pataki and the state comptroller have settled their lawsuit concerning supplemental retirement benefits for public employees (see C&C Newsletter for May 1996). Under the settlement, the supplemental benefits will be retroactive to September 1, 1995. Apparently, the governor saw the handwriting on the wall in that the state House and Senate were in the process of enacting new laws to provide the supplemental benefits anyway. Basically, the comptroller can claim complete victory -- he had already won the portion of his lawsuit to stop the state from using money from a supplemental pension fund to reduce public employer contributions.

ALASKA WORKERS FEEL THE FREEZE: more ways than one. Alaska state workers have agreed to a three year contract which limits wage increases to 1.5% per year. It seems that retirement benefits also plunged: workers need ten years of service instead of five to be eligible for medical retirement and average final compensation spans five years instead of three.

BANKS' USE OF DERIVATIVES SOARS: They're baaaaaaack. For the first quarter of 1996, commercial banks engaged in a record $17.85 trillion (no, that's not a typo) derivatives activities.

GOVERNOR ALLEGEDLY EXTORTS PENSION FUNDS: How about a loan, Guv'nuh? The Governor of Arizona has been indicted for attempting to extort labor union pension funds into releasing him from a personal guarantee of a loan made by the funds. He allegedly threatened to have the state legislature cancel a lease on a shopping mall in which substantial union pension funds were invested. What a country!

TAX-EXEMPTION FOR PENSION FUND BONDS DENIED: On May 14, 1996 the U.S. Tax Court held that a city could not issue tax-exempt bonds to pay off its pension fund liability. In addition to specific violations of tax law, the Court ruled that IRS was entitled to apply the anti-abuse rule, which allows any arbitrage-driven transaction to be characterized as abusive even if it technically meets tax law requirements.

NEW JERSEY SETTLES WITH IRS: When the State of New Jersey changed the method of asset valuation in 1992, it pocketed almost three-quarters of a billion dollars. In resolving an IRS inquiry into that matter, New Jersey has agreed that once a contribution has been made to its public employee pension systems it may not be withdrawn and returned to the state treasury.

GOOD NEWS ON NONDISCRIMINATION RULES: According to the Government Finance Officers Association, Senator Orrin Hatch has agreed to introduce legislation to secure a permanent moratorium for state and local government pension plans from pending application of federal pension nondiscrimination rules. Several members of the House Ways and Means Committee have also indicated support for such legislation. GFOA sponsors educational conferences and is an excellent source of information. The address is 1750 K Street, N.W., Suite 650, Washington, D.C. 20006.

PROPOSED UNIFORM LAW MOVES AHEAD: The National Conference of Commissioners on Uniform State Laws has released its latest version of the Management of Public Employee Pension Funds Act. The Committee, which started drafting a year ago, hopes to finish by next summer. To obtain a copy of the latest draft, call (312) 915-0195.

S&P PREDICTS RISE IN DEFAULTS BY INTERNATIONAL BOND ISSUERS: Standard & Poor's has released a report on default rates of sovereign issuers. Sovereign issuers are national governments that issue debt backed by the full faith and credit of their countries. The number of sovereigns in default in 1995 went down to 36 from 42 in 1994 (to $82 billion from $145 billion). And because countries such as Russia, Peru and Panama are expected to begin servicing their debt, defaults are expected to decline through next year. However, S&P foresees another rise in defaults by the year 2000 due to increased issuance of foreign currency bonds by small emerging-market countries which carry low credit ratings.

APPELLATE COURT ALLOWS FEES TO SUCCESSFUL DISABILITY APPLICANT: Interpreting Section 185.40, Florida Statutes, the Third District Court of Appeal has granted attorneys' fees to a disability applicant who prevailed on certiorari review of a Circuit Court decision. The Court's interpretation, in our judgment, is at odds with the plain statutory language and with its intent: to apply to Chapter 120 (Administrative Procedure Act) proceedings only. Board of Trustees of the City of Miami Fire Fighters' & Police Officers' Retirement Trust v. Fernandez, 21 Fla. L. Weekly D1320 (Fla. 3d DCA, June 5, 1996).

FLORIDA WORKERS' COMPENSATION ACT SURVIVES ADA ATTACK: The Florida Supreme Court has held that the Florida Workers' Compensation Act is subject to the Americans With Disabilities Act. However, the Court has also determined that Section 440.15(3)(b)4.d., Florida Statutes, comports with the ADA. That section sets forth an impairment system which determines the length of wage-loss benefit payments based upon the impairment rating. Barry v. Burdines, 21 Fla. L. Weekly S247 (Fla., June 13, 1996).

ASSISTANT CITY ATTORNEY MAY SERVE AS TRUSTEE: Article II, section 5(a), of the Florida Constitution prohibits a person from simultaneously serving in more than one state, county or municipal office. The prohibition applies to both elected and appointed offices. Nevertheless, a member of a municipal board of trustees is not prohibited from simultaneously serving as an assistant city attorney in another municipality. In his opinion, the Attorney General referred to earlier opinions wherein he had held that the position of attorney for the board of county commissioners did not constitute an office. While we agree with this opinion insofar as it relates to an assistant, we wonder if the Attorney General read the charter of the subject municipality to determine if the position of municipal attorney constitutes an office. AGO 96-24.

DAVID JONES AND CO. SHINE (AS USUAL): Our thanks to David Jones and Patricia Shoemaker, who headed a Rule Development Workshop on June 21, 1996 in Tallahassee. The workshop was held as a result of the final order in St. Petersburg v. Division of Retirement, Case No. 95-5089RU. Despite varying views from participants, David and Trish handled the workshop in their usual professional manner. Other workshops will probably be held prior to proposed rules. Stay tuned.

GAO RELEASES REPORT ON 457 PLANS: The Government Accounting Office has issued a report to Congress entitled "Section 457 Plans Pose Greater Risk Than Other Supplemental Plans." GAO's review found: (1) Participants in 457 Plans are exposed to greater risk than are participants in Section 401(k) and 403(b) Plans because of inherent differences between qualified-funded and nonqualified-unfunded plans; plan deferrals are owned by the sponsoring employer and thus may be used for nonplan purposes and are subject to the claims of its creditors in the event of bankruptcy. (2) Participants in 457 Plans not only have no ownership interest in amounts deferred, but they cannot avail themselves of additional benefits provided through qualified plans, such as rollover into an IRA to avoid paying taxes on the distribution. (3) Participants in 457 Plans cannot have continuing control over the date of distribution; within a short period of time after leaving government service, participants must choose a date to begin receiving benefits, which date can seldom be changed. (4) 457 Plan participants and their employers are not allowed to contribute as much as are participants in wthe other two plan types; the disparity will continue to grow because the 457 Plan contribution limit is not indexed for inflation as are the other two plans' limits. The first copy of any GAO report is free and may be ordered from U.S. General Accounting Office, P.O. Box 6015, Gaithersburg, MD 20884-6015. Ask for GAO/HEHS-96-38, April 30, 1996.

GAO ADOPTS PRACTICES AND POLICIES: The Government Finance Officers Association has recently adopted several policy statements and recommended practices. Some highlights from the recommended practice on auditor procurement: There should be multi-year agreements with the independent auditors. Such multi-year agreements could be for a period of years or in a series of single-year contracts. Multi-year agreements allow for greater continuity and help to minimize potential for disruption in connection with the independent audit. These agreements also can help to reduce audit costs by allowing auditors to recover "start up" costs over several years, rather than in a single year. The auditor procurement process should be structured so that the principal factor in selection of an independent auditor is the auditor's ability to perform a quality audit. In no case should price be allowed to serve as the sole criterion for selection of an independent auditor.

FASB ISSUES RULE ON DERIVATIVES: The Financial Accounting Standards Board has issued a new rule on accounting for derivative financial instruments. Basically, all derivatives would be required to be recorded on the balance sheet as assets or liabilities at fair, or market, value. Accounting for gains or losses would depend on how the derivative is used. The new rule is scheduled to go into effect in 1998.

TWO LARGEST PUBLIC FUNDS PERFORM WELL: According to BNA, for the year ended March 31, 1996, $100 Billion CALPERS and $76 Billion New York State Common Retirement Fund returned 20.1% and 21.8%, respectively. And although CALPERS' return on equity only was 26.8%, its real estate portfolio (almost $6 Billion) returned only 8.5%.

FICA REQUIRED ON PICKED-UP CONTRIBUTIONS: As you probably know, although employee contributions picked-up by an employer are exempt from federal income taxes, Federal Insurance Contributions Act (FICA) taxes thereon are still due. A Federal trial judge in New Mexico has ruled that the state's payment of the employee contributions pursuant to a statutorily-required "salary reduction agreement" does not avoid FICA taxes on the picked-up contributions.

E-MAIL IS PUBLIC: Use of your terminal could prove to be terminal. The Attorney General has held, logically, that e-mail messages between employees of a governmental agency are public records under Chapter 119, Florida Statutes. As such, e-mail messages must be retained and cannot be destroyed except in accordance with a schedule adopted with the consent of the Division of Library and Information Services of the Department of State. However, determination as to the format in which to maintain such records is up to the individual governmental agency. AGO 96-34.

BOARD MEMBER CAN MEMORIALIZE INTENDED RECOMMENDATION: Hmmmmm. According to the Attorney General, if a board member (in this case, school board) writes a memorandum to provide information or to make a recommendation to other members on a particular subject, there is no violation of Section 286.011, Florida Statutes, the Government in the Sunshine Law. But, the use a memorandum to solicit comment from other members or the circulation of responsive memoranda by other members would violate the statute because that would be equivalent to private meetings discussing public business through use of memoranda without allowing an opportunity for public input. It does not make sense to us that an initial memorandum is okay but a responsive one is not. We would not recommend the use of any memoranda by trustees. AGO 96-35.

KMART ALLEGEDLY OMITS STRS VOTES: See, it is important to vote those proxies. In a lawsuit filed by a union, it is alleged that Kmart omitted more than 14 million State Teachers Retirement System of Ohio votes in favor of a proposal to change board elections from a staggered to annual basis. Plaintiff claims that, if counted correctly, there were enough favorable votes to pass the union-sponsored resolution.

EMPLOYEE INVESTMENT EDUCATION INCREASES: According to a survey conducted by Mercer, 75% of corporate executives responding said that they offer employee investment education. Just three years ago, a similar survey revealed only 44% did. The most prevalent topics were the importance of saving early and performance history of the pension fund.

TAX-EXEMPT MONEY GROWS: In 1995, investment counselors' tax-exempt assets grew 55% (to $1.94 trillion), banks/trust companies 24% (to $1.41 trillion) and insurers 6% (to $807.25 billion). Meanwhile, total indexed assets rose a whopping 73% (to $674 billion).

EBRI ISSUES REPORT: Employee Benefit Research Institute has reported results of a recent survey. Interestingly, 78% of those surveyed said that benefits were very important when choosing a job. However, only 56% said that they were satisfied with their benefits.

OUR NEWSLETTER MAILING LIST CONTINUES TO EXPAND: We appreciate the interest shown in our first two newsletters. If you would like to be added to our growing list of recipients, just call or drop us a line.

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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