September 1996Stephen H. Cypen, Esq., Editor
CITY OF CORAL GABLES RETIREMENT SYSTEM LEARNS A LESSON: Do the words "due process" ring a bell? Without notice to the individual and without the administrative recommendation required by the Plan, the City of Coral Gables Retirement System terminated a disability pension. The Board of Trustees based its decision upon the retiree's affidavit in a worker's compensation case, allegedly "admitting that he was no longer disabled." Because the retiree subsequently was hired as a firefighter in another city, the system was only required to pay him for the disability benefits accruing between termination thereof and subsequent employment. Tozzi v. Board of Trustees of the City of Coral Gables Retirement System, 4 Fla. L. Weekly Supp. 203 (11th Cir. August 8, 1996).
BUT FORT LAUDERDALE DOES IT RIGHT: Finding that the Board of Trustees' decision was supported by substantial evidence and met all requirements of procedural due process, the Appellate Division of the Circuit Court in Broward County denied a petition for writ of certiorari. Medical reports presented to the Board stated that, while the police officer had sustained a permanent work-related injury, nonetheless, "the petitioner was capable of performing some duties within her job description, 'light-duty' non-combat police work." The Court quoted from Nuce and cited with approval Woodard, Franza and Shepard -- all familiar names to our clients. Christophers v. Police and Fire Retirement System of the City of Fort Lauderdale, 4 Fla. L. Weekly Supp. 207 (17th Cir. July 17, 1996).
AVERAGE WEEKLY WAGE EXPANSIVE: The First District Court of Appeal has affirmed a worker's compensation order determining that claimant's average weekly wage includes the value of employer contributions to an in-line-of-duty pension plan and the value of claimant's accrued but unused sick pay. The Court found that claimant was vested in the plan immediately upon employment and subsequently became vested in the sick pay. The Employer unsuccessfully argued that the pension contributions were precluded because the plan was a defined benefit plan rather than a defined contribution plan. The City of Clearwater v. Kohout, 21 Fla. L. Weekly D1923 (Fla. 1st DCA August 19, 1996).
ARTICLE ON PUBLIC SECTOR DC PLANS: There is a very interesting article entitled "Trends in the Public Sector Defined Contribution Plans," which appeared in the August 1996 Employee Benefits Digest. The piece clearly and succinctly sets out the differences between defined contribution plans and defined benefit plans, showing the benefits of each. The article also mentions "hybrid plans": defined benefit plans with defined contribution features (like cash balance plans) or defined contribution plans with defined benefit features (like target benefit plans).
DELAWARE COMES INTO LINE: As of July 1, 1996, retiring Delaware state employees will no longer have their benefit formula capped at a percentage of the final-average-salary pension plus the amount of early Social Security benefits. Also, certain state police retirees will receive pension benefit increases and will no longer suffer a Social Security offset. Interestingly, Delaware has an insurance premium tax that generates about $1.5 Million a year. Last year, Florida'sinsurance premium tax generated approximately $59 Million.
OREGON TRIES AGAIN: If at first you don't succeed... . As we previously reported (see C&C Newsletter for August, 1996), the Supreme Court of Oregon invalidated a ballot measure that would have made several public pension plan changes. Now, another initiative will be on the November 1996 ballot. It is unclear if the changes -- which are generally reductions in benefits -- apply only to new members or to existing members as well. If the latter, look for new litigation and probably the same result.
GOVERNOR NOT OFF HOOK YET: As our readers know (see C&C Newsletter for July, 1996) the Governor of Arizona was indicted for attempting to extort labor union pension funds into releasing him from a loan guarantee. Recently, according to BNA, those union pension funds have now objected to the Governor's discharge in bankruptcy of the $12 Million debt. If the union's allegations are proved to be true, the bankruptcy court could deny discharge.
LESSON OF THE MONTH: A "crossover" bond is one which has an investment grade rating from one rating agency and a speculative grade rating from another. Believe it or not, there are even separate indices showing performance for crossovers, which generally have out performed straight-rated bonds. For your files, the following table compares investment grade credit ratings by the two main providers:
|Moody's||Standard & Poor's|
|Aa1, Aa2, Aa3||AA+, AA, AA-|
|A1, A2, A3||A+, A, A-|
|Baa1, Baa2, Baa3||BBB+, BBB, BBB-|
DISABILITY RETIREES NOT ENTITLED TO BENEFITS AVAILABLE TO SERVICE RETIREES: One cannot eat his cake and have it too. Approximately 2,000 disabled former New York City Police Officers filed suit under the Americans With Disabilities Act ("ADA") and the Rehabilitation Act ("Rehab Act"). They claimed discrimination by reason of their disabilities because police officers who retire after twenty years of service receive supplemental benefits not available to disability retirees. (There are Variable Supplements Funds funded from excess earnings of the police pension fund, which pay additional benefits to service retirees but not to disability retirees.) In dismissing the case, a federal judge held that "although it may seem undesirable and perhaps unpalatable, an individual who is totally disabled -- that is, unable to perform the essential job functions even with reasonable accommodation -- is not entitled to relief under these provisions [Title I of the ADA and Section 504 of the Rehab Act]. Also, the court quoted with approval from EEOC Guidelines stating the "ADA does not require that service retirement plans and disability retirement plans provide the same level of benefits, because they are two separate benefits which serve different purposes... . Therefore, the employer does not violate the ADA simply by providing different benefits under service and disability retirement plans." Our clients will remember our advice to this effect on August 2, 1995.
MARKET TIMING EXTREMELY DIFFICULT:So you think you can time the market? Wrong again, Rolex Breath. Being fully invested in the S & P 500 for the five year period ended December 31, 1995 yielded a 16.5% average annual total return. If a market-timer missed the twenty best days, that return falls to 7.3%. And if the sixty best days were missed (that's only twelve days per year), the return plummets to -3.4%.
CERTAIN WORKERS FACE PENSION UNCERTAINTY: According to a recent General Accounting Office report, 60% of near-retirement workers earning less than $25,000 per year have no pension coverage and will have to rely on Social Security as their primary source of income after retirement.
BIG FUNDS FLEX MUSCLES: In the wake of a federal investigation into price fixing at Archer Daniels Midland, the Florida Retirement System (FRS) and the California Public Employees' Retirement System (CALPERS) have filed a shareholder proposal to require ADM to add a majority of independent directors to its Board. ADM's attempt to have the Securities and Exchange Commission block the proposal failed.
CHICAGO EMPLOYEES REACH AGREEMENT: BNA reports that the City of Chicago and Unions representing 10,000 construction and maintenance employees have signed a four-year contract. Among other things, the employees' cost of health care coverage will rise 50%, from 1% to 1.5% of annual salary.
ESCALATION IN EMPLOYER HEALTH COSTS SLOWS: Speaking of Chicago employees paying a greater portion of health care costs, a recent Labor Department Report shows that employers' health care costs are not rising as fast as before. The news for employees is not particularly good because the reasons are as follows: employers have switched to managed care plans, employees are paying a larger share of the costs and the number of employees receiving employer-sponsored health insurance has fallen.
MANAGING RISKS ASSOCIATED WITH CREDIT DERIVATIVES:Second lesson of the month. While we don't want to spend too much time dealing with the subject of derivatives, a recent bulletin issued by the Comptroller of the Currency describes three principal types of credit derivatives. These are (1) Credit Default Swap, similar to a standby letter of credit where the institution hedging the risk pays a fee in return for the right to receive a conditional payment if a specified "reference credit" defaults; (2) Total Rate of Return Swap, which transfers the total economic performance of a reference index, including cash flow, as well as capital appreciation or depreciation; and (3) Credit-Linked Notes, which are on-balance-sheet, cash-market structured notes issued by a special-purpose trust vehicle. Now do you know why you are not invested in other-than vanilla derivatives?
AVERAGE TAX BILL RISES: The average individual federal tax bill for 1996 will rise to $5,225.00, an increase of 4.4% over 1995's $5,006.00. Connecticut residents will pay the highest average ($8,096.00) and Mississippi the lowest ($3,413.00).
NORTH CAROLINA REPAYS RETIREES: Under a law recently passed by North Carolina Legislators, over 100,000 Federal retirees will receive tax refunds or tax credits for taxes unconstitutionally levied by the State. The total outlay, estimated at $140 Million, might have been more except that not every retiree made a claim for illegally-collected taxes within thirty days of payment.
ONE WAY TO MEET ACCRUED BENEFITS: BNA reports that New York Governor George Pataki has signed into law a bill which allows local governments to establish reserve funds to pay for accrued leave benefits of retiring employees. The law is designed to eliminate the financial strain that accrued leave benefits place on municipal finances, estimated at between $10,000.00 and $18,000.00 per employee.
CALPERS ALSO TURNS ITS ATTENTION TO ROLLINS: When CALPERS speaks everyone listens (well, almost). According to BNA, CALPERS is continuing its efforts to maximize its investments through corporate governance by filing a shareholder proposal with Rollins Environmental Services calling for a majority of independent directors. Currently, six of Rollins's eight directors are affiliated with related companies. For the three-year period ending May 31, 1995, Rollins lost 60% of its market value.
JAPANESE PUBLIC PLANS SKID: For the two fiscal-year period ended March 1996, Japanses public pension systems lost a total of almost $8.5 Billion. Despite those losses, public pension fund assets, all of which are entrusted to the Ministry of Finance's fund management department, still totalled $1.1 Trillion.
MASSACHUSETTS MAKES CHANGES IN PUBLIC EMPLOYEE PROVISIONS: The State of Massachusetts has taken two steps affecting public employees, but we're not sure they are both completely forward. One statute provides that all state and municipal employees are entitled to the same health care benefits provided to private sector employees covered by the same insurers. (Previously, abortions for public workers were covered only if a physician deemed it necessary to save the mother's life.) The second law was designed to correct alleged fraud and abuse highlighted in a newspaper series. (Sound familiar? See C&C Newsletter for June 1996.) Now, any retiree deemed fit within two years of an injury is automatically reinstated; after two years, there is a preference for reemployment. In either case, a department head may not veto the retiree's return to work. Apparently Massachusetts permits retirement for partial disability, because the new law requires such retirees to undergo medical examination in each of the first two years following injury and once every three years thereafter. Also, there is a mandatory rehabilitation program for partially-disabled retirees and benefits are reduced based on potential earnings.
A GOOD REASON TO VERIFY YOUR PENSION PAYROLL: Physician, heal thyself. According to a report by BNA, the former payroll manager of a national employee benefit consulting firm has pleaded guilty to embezzling over $500,000.00 from the firm's own retirement plan. Although the period in question spanned over five years, apparently there was no system in place to confirm that checks had actually been sent and received by the persons to whom they were issued. Once this step was taken, the auditors received word that the information sought to be verified was not accurate, and the whole scheme quickly unravelled.
ANOTHER CALL FOR EQUITY INDEXING: In an article which appeared in the July/August 1996 Financial Analysts Journal, the Chief Investment Officer of the $24 Billion Washington State Pension Fund concluded that "no persistence of returns can be found among U.S. Equity Managers. ... [F]ew managers consistently outperform the S&P 500. Thus, in the eyes of the plan's sponsor, its plan is paying an excessive amount of the upside to the manager while still bearing substantial risk that its investments will achieve sub-par returns." He also found that there is some persistence among U.S. fixed-income managers, but not enough to justify payment of active-manager fees. The Washington State Pension Fund has a 35% allocation to U.S. Equities.
COURT REPORTERS LOSE ON COMPENSATION ISSUE: The Supreme Court of Florida has held that transcription fees collected by court reporters in criminal cases do not constitute compensation for purpose of calculating retirement benefits pursuant to the Florida Retirement System. Official court reporters are paid a salary and also receive separate payment for transcribing hearings when requested by a party to the proceedings. FRS defines compensation as "the monthly salary paid a member ... as reported by the employer on the wage and tax statement (Internal Revenue Service Form W-2) or any similar form. When a member's compensation is derived from fees set by statute, compensation shall be the total cash remuneration received from such fees. Under no circumstances shall compensation include fees paid professional persons for special or particular services." The Court held that for retirement purposes it is a mere fortuity that the County, rather than a private party, picks up the tab for an indigent defendant, and in no way transforms the court reporter's work from "piecework" into something else. "Piecework," no matter who pays for it, falls outside FRS. However, the Court reiterated a doctrine, which should be relied upon by your counsel whenever appropriate: "This Court has held that a reviewing court will defer to an agency's interpretation of an operable statute as long as the agency's interpretation is consistent with legislative intent and supported by competent substantial evidence. In other words, an agency's interpretation will prevail unless clearly erroneous." Williams v. Department of Management Services, Division of Retirement, 21 Fla. L. Weekly S344 (Fla., August 29, 1996).
WHAT WOULD BARUCH DO TODAY?: The late Bernard Baruch advised U.S. Presidents during the 1920's, 1930's and 1940's. When the market crashed in 1929, he lost $17 Million on stocks. However, he still had $8 Million left because falling interest rates caused his bond portfolio to rise. He said "I can tell you that the drop in my securities has been severe, but I can still live in comfort and peace as I have done before. When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich, it is time to remind yourself that there are no more dangerous illusions than the belief that one can get something for nothing." Translation: Cut investment losses but do not get emotional about it, keep an eye on the direction of the economy and don't be afraid to take a stand.
"ALU-O'HARA" MAY GO NATIONAL: Senator Bob Graham has introduced the Alu-O'Hara Public Safety Officers' Health Benefits Act (S. 1984). The Bill would require state and local governments which receive community-oriented policing services funding to continue health insurance benefits for any public safety officer who retires as a result of injuries sustained in the line of duty. The failure to do so would result in a 10% reduction in federal assistance to any state or local government. However, only the minimum level of health insurance necessary to maintain coverage the officer had prior to the disabling injury would be required.
PENALTY-FREE WITHDRAWALS ON THE HORIZON?: A Bill has been introduced in the House of Representatives to allow penalty-free withdrawals of funds from certain retirement plans during long periods of unemployment (HR 3807). Specifically, penalty-free withdrawals would be allowed from individual retirement accounts, 401(k) plans and 403(b) plans, as long as the former employee had received unemployment compensation for twelve weeks. Distribution of funds would have to be made within one year from date of unemployment.
BILL WOULD EXPAND FMLA: Senator Christopher Dodd (D-CT) has introduced a Bill in the Senate to revise the Family and Medical Leave Act of 1993 (S. 1896). In particular, the Bill would lower, from fifty or more to twenty-five or more employees, the threshold coverage of FMLA. The Bill would also require employers to grant eligible parents twenty-four hours of unpaid leave per year to participate in their children's school or community group activities.
SCOPE OF PROHIBITED TRANSACTION RULES MAY BE EXTENDED: Senator Barbara Boxer (D-CA) has proposed a Bill to require that 401(k)-type pension plans be subject to the same prohibited transaction rules applicable to traditional defined benefit pension plans (S. 1837). Among other things, the Bill would prohibit investment of more than 10% of the plan's assets in securities and real property of the employer.
TREASURY REGULATIONS AMENDED: We really have no idea what the following means, but it sounded like something that should be in our Newsletter. In addition, you might want to "pop quiz" your money manager. Earlier this year, the Bureau of Public Debt amended its regulations governing book-entry treasury securities, applicable to TREASURY DIRECT investors, to require prenotification messages when an investor requests Automated Clearing House payments (ACH). Supposedly, the new procedures bring TREASURY DIRECT ACH payments into conformity with procedures for National Automated Clearing House Association (NACHA). Gesundheit.
SENATOR HATCH MAKES GOOD ON HIS WORD: As we previously mentioned (See C&C Newsletter for July, 1996), Senator Orrin Hatch has now introduced a bill to exclude governmental plans from the operation of Federal Nondiscrimination Rules. Although there is little hope for enactment this late in the legislative year, the bill, which has bipartisan support in the Senate and will probably have it in the House of Representatives, should receive attention early next year.
PROPOSED POLICE AND FIREFIGHTER PENSION RULES WITHDRAWN: After the Rule Development Workshop on June 21, 1996 (See C&C Newsletter for July, 1996), the Division of Retirement proposed rules addressing minimum benefits and standards for pension plans operating under Chapter 175 and Chapter 185, Florida Statutes. Notice of the proposed rules was published in Volume 22, Number 28, Florida Administrative Weekly, July 12, 1996. The Division has now published a notice of withdrawal in Volume 22, Number 36, Florida Administrative Weekly, September 6, 1996. We "suspect" that the Hearing Officer's order dated August 6, 1996 in DOAH Case No's. 96-2724 RX, 96-2725 RX, 96-2871 RU and 96-2874 RU had something to do with the withdrawal.
THE RUSSIANS ARE COMING, THE RUSSIANS ARE COMING: According to the September 9, 1996 Wall Street Journal, the Russian market is coming to the United States in the form of American Depository Receipts (ADRs), that represent shares in a foreign company traded like other U.S. stocks. In fact, State Street Global Advisers has invested 1% of its municipal-fund portfolio in Russian issues. For now, Russian ADRs represent only $2.5 Billion of the $250 Billion depository receipt market. First launched late last year, shares in only six Russian companies now trade through ADRs. So far, no Russian company has gone beyond the Level-1 ADR, which only allows trading over the counter. However, at least one company is seeking a listing on the New York Stock Exchange and the chance to raise new capital through a Level-3 ADR. One thing is for sure -- we will not soon be buying any certificates of deposit in a Chernobyl Savings & Loan!
The caption on page 4 of our July, 1996 Newsletter should have read "GFOA [not GAO] Adopts Practices and Policies." The rest of the item is correct.
On page 1 of our August 21, 1996 Special Edition we wrote about Section 1434 of the Small Business Job Protection Act of 1996 (HR 3448). That section will allow certain elective deferrals to be considered compensation for IRC §415 limits. We concluded that "this amendment would seem to affect only private plans." The statement is not completely accurate because we failed to consider the impact on public defined contribution plans (although there are relatively few in Florida).
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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.