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May, 1996

Stephen H. Cypen, Esq., Editor

Welcome to the first issue of the Cypen & Cypen Newsletter, dealing with subjects of direct and indirect interest to public pension trustees. This Newsletter will be issued from time to time or when special events so dictate. We hope all of our clients and friends will enjoy its contents. If you have any comments, suggestions or criticisms, please do not hesitate to let us know. If you know of others who might be interested in receiving this Newsletter, please have them contact us and we will be pleased to add them to our mailing list. Happy reading!

A little known statute was the subject of controversy in a recent case. First adopted in 1939, Section 112.048, Florida Statutes, provides that any elective officer of a city or town who has held elective office of such city or town for a period of twenty or more consecutive years shall be entitled to a life annuity equal to one-half of the full amount of his annual salary at time of retirement. However, the statute only applies "when no other plan is available for elected local officials." Here, the city had a pension plan which was established by its charter. Forshee argued that the other plan was required to be established by ordinance in order to avoid operation of the statute. He also argued that an unnamed person inaccurately advised him that he was not eligible to join the pension plan. In any event, the District Court of Appeal reversed the judgment in favor of Forshee because the city's plan was available for elected local officials and thus was an "other plan" for the purposes of Section 112.048, Florida Statutes. City of Jacksonville v. Forshee, 21 Fla.L.Weekly D756 (Fla. 1st DCA, March 25, 1996).

A survey released by Buck Consultants Inc. indicates some employers are experiencing an increase in the amount of leave their employees are taking as a result of the Family and Medical Leave Act of 1993. Thirty-three per cent of respondents have seen an increase in the amount of leave workers are taking since FMLA was enacted. In addition, many responding employers have modified existing policies to accommodate work and family needs of their employees: for example, sixteen per cent provide compressed work weeks and nine per cent offer telecommuting options.

According to a Wall Street Journal article, the $97 billion California Public Employees' Retirement System (CALPERS) plans to increase its holdings of foreign stocks and bonds from 14% to 20%. Already, almost 30% of its total equity portfolio is invested overseas. Japan, Great Britain, Germany and France account for holdings equal to almost $8 billion.

But did the folks from CALPERS read the Institute of Management and Administration (IOMA) report on Investment Manager Performance? Everyone probably knows by now that the Standard & Poors 500 gained over 37% for the year 1995. Even the average domestic equity manager gained more than 33%. International money managers, however, reported average returns of just under 10%.

And then there's indexing. According to the Wall Street Journal (again), many states are turning from outside money managers to in-house managers. New Jersey's annual administrative expenses, for example, amount to .01% of assets; Connecticut's investment costs are about the same. Nevertheless, according to the article, the number one rule is to "get out of bonds and into stocks." Wilshire Associates forecasts the Massachusetts Pension Fund, invested 70% in equities, will top all other states with an average annualized return of 9.4% for the next decade. Predictably, the West Virginia Teachers Retirement System - constitutionally barred from buying equities - will probably be last.

The State of New York has established an early retirement incentive for public employees. Eligible employees (those age 50 and over who have at least 10 years of service) would receive one month's additional service credit for each year of service, up to a maximum of 36 months. The program may be offered at different periods throughout the next year. A similar program last year saw over 5,000 people take advantage of the early retirement package.

The State of Maryland has also passed an early retirement incentive program, estimated to save the state fifteen million dollars in 1997 and thirty four million dollars each year thereafter.

Some worthwhile things can still be purchased for less than a buck (with a slight catch). BNA Books has published its new edition of "Your New Social Security and Medicare Fact Sheet," which provides information on Social Security and Medicare. This Fact Sheet may be purchased for 95 cents from BNA Books, P. O. Box 7814, Edison, New Jersey 08818-7814 (800) 960-1220, Order No. 1018. The minimum order is 50 copies.

Why didn't we think of that? State employees and their dependents in Washington will be allowed to purchase long-term-care insurance through a state agency, which must offer one or more of such plans by January 1, 1998. The coverage is optional and would be paid entirely by employees through payroll deductions.

New York's latest attempt to use supplemental pension reserve fund money to reduce its contributions has failed. However, a conditional provision of the same law which delayed supplemental pension benefits from September 1995 to September 1996 was upheld. State Comptroller McCall, the sole trustee of the State's pension plans, said he will appeal the latter ruling; the State will probably appeal the primary ruling. McCall v. New York.

The National Conference on Public Employee Retirement Systems has presented its Model Ethics Code, a fifty page document dated April 15, 1996. The address for NCPERS is 1620 Eye Street, N.W., Suite 220, Washington, D.C. 20006-4005.

It all depends on how you look at something. The General Accounting Office read the recent survey conducted by the Public Pension Coordinating Counsel and concluded that some government employees may not receive expected retirement benefits if their employers do not work toward full funding. Most readers came away with a much more positive conclusion: funding of state and local plans has improved substantially so that the dollar amount of unfunded liability has decreased by half. Because of constitutional and statutory protections, Florida public employees should be able to rest comfortably, no matter what GAO says.

Be careful what you wish for. A Secret Service Officer recently retired from the District of Columbia's Police and Firefighters Retirement and Disability Act on a disability retirement. In arguing against "sharing" these benefits with his ex-wife, he convinced the court that the benefits are not in the nature of worker's compensation and are directly tied to the retiree's years of service. (Fortunately, the court did acknowledge that in some circumstances these benefits may be classified as worker's compensation benefits, leading to favorable tax consequences which most tax professionals assume are available.)

Another investment goes up in smoke. The New York State Teachers' Retirement System intends to sell some of its tobacco stocks because of concern with their long-term viability. Note that the fund will still hold over a quarter of a billion dollars in such stocks after the reduction.

A statute of limitations generally bars a claim after a period of time, regardless of a subsequent change in the law. Thus, an appellate court recently ruled that a taxpayer who erroneously paid taxes on his Army disability severance pay could not claim a refund just because he subsequently learned that a recent case supported his position.

Excuse me? The Comptroller of the Currency says that certain derivative investments -- for example, collateralized mortgage obligations which derive their value from an underlying asset such as a pool of mortgage loans -- may not be acceptable fiduciary investments for national banks. As with any other fiduciary investments, banks must use the prudent person standard and have a full appreciation of the risks involved (including difficulty in determining accurate market values).

The Los Angeles County Employees Retirement Association has decided to drop its assumed rate of 6% salary increases to 5.5%. The old rate, in use since 1983, was made up of 5% for inflation and 1% for real wage increases; the new rate lowers the inflation component to 4% but increases the real wage number to 1.5%.

In Stanley v. United States of America, a district court judge has found that certain service-incurred disabilities were subject to federal tax. The Court reasoned that because the retired police officers and fire fighters were entitled to service pensions at time of disability application, the amounts of the two types of pensions were equal and there was a gap of many years between injury and application, the pensions were not in the nature of workers' compensation. The Court also ruled that the standard to be used by pension boards to determine disability is not whether an applicant has a disability precluding him from passing the entry level test for admission to the police or fire department.

We have just added a new book to our pension library: The Pension Answer Book, Special Supplement - Pension Investment. In four parts, the book deals with investment policy (how to set investment objectives and make asset allocation decisions), investment vehicles (extensive range and variety of asset classes and investment vehicles), implementation (distinguishing and choosing from an array of structures, types and fees) and fiduciary responsibility (obligations and requirements imposed on plan fiduciaries). The book costs approximately $100.00 and is available from Panel Publishers, 7201 McKinney Circle, Frederick, Maryland 21701.

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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