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April, 1997

Stephen H. Cypen, Esq., Editor


"A fool and his money are soon parted." Old English Proverb

"A fool and his money are invited everywhere." Warren Buffett, Mega-Billionaire/Investor (1996)

"The love of money is the root of all evil." I Timothy 6:7

"Show me the money!" Academy Award-Winner Cuba Gooding, Jr., in Jerry Maguire (1996)

SBJPA TAKES AWAY BENEFIT: Among all of its positive changes (see C&C Newsletter, Special Edition of August 21, 1996), the Small Business Job Protection Act of 1996 (HR3448, Public Law 104-188) has also taken away a benefit. Section 101(b) of the Internal Revenue Code was repealed by Section 1402 of the SBJPA with respect to decedents dying after August 20, 1996. The repealed section provided that the first $5,000.00 of benefits paid, when there are no other death benefits, is excluded from gross income. Of course, the IRC Section 101(b) exclusion is still available with respect to descendants who died before August 21, 1996. Private Letter Ruling 9707016.

IF WE HAD ONLY KNOWN: Although we don't remember exactly what, something possessed us to do a piece on the Dow Jones Industrial Average in our last Newsletter. Now, effective March 17, 1997, four of the original thirty stocks (dating back to October 1, 1928) have been replaced: Westinghouse by Travelers Group, Texaco by Hewlett-Packard, Bethlehem Steel by Johnson & Johnson and Woolworth by Wal-Mart. This alteration is the first one since May 1991 and the largest since June 1959 when four stocks were also changed. Despite the revision, these higher-priced stocks will not affect the Average because a mathematical adjustment is made to prevent that kind of distortion. As far as we can tell, only six of the original stocks remain a part of the Index: Allied Signal, Exxon, General Electric, General Motors, Sears and Union Carbide. Incidentally, apropos of our comment that the Dow seems rather narrow, the following quote is from The Wall Street Journal, whose editors decide which stocks are in the Average: "Though it has only 30 stocks, the Dow industrial average's tracking of market moves over the long run closely parallels indexes with hundreds and even thousands of stocks, such as Standard & Poors 500-Stock Index and the Wilshire 5000."

NOT IN FLORIDA, BUDDY: According to a Federal Court of Appeals case reported by BNA, ERISA does not require that an actuarial valuation report be released to plan participants! A retiree of a private pension plan sought actuarial valuations to prove that incorrect actuarial assumptions had lowered his pension benefit. In denying such access, the Court found that an actuarial report is not an "instrument" under which the plan is established or operated. As another Federal Circuit has ruled to the contrary, the United States Supreme Court may have to resolve the conflict (although it recently declined to review a case similar to the instant one). Of course, in Florida, any governmental agency, including a pension board, would be subject to Chapter 119, Florida Statutes, the Public Records Law.

CALPERS MAY GET BIG BOOST:As though giant California Public Employees' Retirement System (CALPERS) actually needed the money, a State Appellate Court has ruled that the State, in an attempt to meet budget demands, illegally delayed its contributions and now owes the fund more than $1 Billion. Originally, State contributions were made quarterly. In 1992, contributions were shifted to semi-annually, six months in arrears. In 1993 contributions were again switched, this time to annually, twelve months in arrears. On average, State contributions are made more than sixteen months later than on the quarterly method. The Court held that State employees have a contractual right to an actuarially sound retirement system and the State failed to offer any comparable new advantage when it went to contributions in arrears. Quoted in BNA, CALPERS' Actuary said, in words that should be equally applicable in Florida: "The importance of timing stems from the fact that a large portion of a member's benefit is funded by the investment earnings which are generated by plan contributions. When monies are contributed later than expected, reduced earnings result - thus creating a shortfall. This impairs benefit security and causes a portion of the total current employment cost of plan members to be shifted into the future. This shift of cost can accurately be characterized as a loan to cover the current employee costs - a loan that must be repaid by future generations of taxpayers." Bravo!

SENATE PROPOSAL WOULD ALLOW ROLLOVER OF §457 DISTRIBUTIONS: According to the National Conference on Public Employee Retirement Systems (NCPERS), a bipartisan group of senators is considering allowing tax-free rollovers from §457 plans to IRAs. Currently, although transfers between eligible §457 plans are nontaxable, distributions from them are taxable. If enacted, the proposal would afford a significant tax break for §457 plan participants. One caveat: a §457 distribution made before age 59-1/2 is currently not subject to a penalty. If a §457 distribution were rolled into an IRA and then distributed pre-59-1/2, that distribution could become subject to the extra early distribution tax. And something else could kill the change -- if estimates of lost revenue are sizeable.

KUDOS FOR DIVISION OF RETIREMENT (AGAIN AND AGAIN): On March 18 and 19, the Division of Retirement sponsored its Eighteenth Annual Police Officers' and Firefighters' Trustees' School in Tallahassee. As usual, Andy McMullian, David Jones, Trish Shoemaker and Charles Slavin delivered a great program. Those of you who attended should read your seminar books, particularly the update from the Division, which contains numerous statistics concerning 378 plans (340 local law, 38 chapter) in 231 cities. Those of you who did not attend, shame on you.

EEOC PROPOSES RULE ON WAIVER: The Equal Employment Opportunity Commission has proposed a rule concerning waiver of rights and claims under the Age Discrimination in Employment Act as amended by the Older Workers Benefit Protection Act of 1990. The proposed rule deals with wording of waiver agreements, consideration provided in exchange for a waiver, time periods for employees to consider whether to sign a waiver or to revoke it, information employers must provide to covered employees about those covered and not covered by the termination program, waivers that settle discrimination lawsuits or EEOC charges, the burden of proof in disputes over waiver validity and EEOC enforcement powers. BNA recently published the rule in its Pension & Benefits Reporter.

DOL RULE CANNOT EXTEND FMLA: A Federal District Judge has held a Department of Labor regulation invalid. The rule purported to extend Family and Medical Leave Act coverage to new employees whose employers failed to advise them of their FMLA-eligibility before they took family leave or medical leave. The rule directly contradicted the law's clear requirement that employees must work for twelve months and 1250 hours to achieve eligibility under FMLA. Under a literal interpretation of the regulation, an employee could work for one day and then inform the employer that the employee was sick and was leaving. If the employer had failed to tell the employee that the employee was ineligible for FMLA leave, the regulation would have deemed the employee eligible, even though the employee worked for only a single day.

MASSACHUSETTS MAY ABOLISH COUNTIES: There is a move afoot in Massachusetts to abolish county government. If successful, the State's twelve county-level retirement systems, holding about $2 Billion in pension assets, would be dissolved and perhaps transferred to the $18 Billion Massachusetts Pension Reserves Investment and Management Board (PRIM). Most county treasurers see such transfer as a nightmare in terms of how assets and liabilities will be divided and how to resolve differences between county-level and state-level retirement contributions and benefits.

FRS TAKES ON COMPUSERVE: According to the Associated Press, the Florida State Board of Administration, which manages FRS's assets, filed suit against CompuServe for an undisclosed amount of compensatory damages. When H & R Block spun off 20% of CompuServe in April 1996, SBA purchased over 130,000 shares at the $30 offering price. SBA alleges that CompuServe's prospectus and presentation to potential investors omitted any reference to design flaws and other problems with a then-proposed online service designed to compete with America Online. Recently, CompuServe was trading at about $9 a share.

PUBLIC FUNDS OFFICER COMPENSATION LAGS: According to Greenwich Associates' recent survey, in 1996 the average public official's compensation package was about 36% less than the average corporate plan executive's. The average corporate plan official's total compensation rose 2.9% to $116,300.00. Meanwhile, public plan officials saw their average compensation drop from $75,100.00 to $74,000.00. No wonder FRS's Ash Williams left for the private sector.

THANK YOU FOR SHARING THAT WITH US: The Moet Luxury Index, named for James Bond's favorite champagne, claims to gauge the inflation rate for the "cost of really living." For the first time in five years, the index showed a slowdown in the increase, from 6.75% to 4.8%. Good news is items such as Rolex watches, Teuscher chocolate truffles and Hennessey cognac showed no cost increase. Bad news is price of a round-trip ticket on the Concorde rose almost 30% to over $8,000.00. Remember that the nation's overall inflation rate for 1996 was about 3.3%.

WILL CONGRESS "REMEDY" FLSA?: On the heels of the United States Supreme Court's decision regarding the Fair Labor Standards Act's "salary basis" test (see C&C Newsletter, March 1997), a bill (S.4) has been introduced in the Senate to clarify the FLSA. If enacted, the bill would provide that professional, executive and administrative employees in both the public and private sectors would not be eligible for overtime simply because there is a theoretical possibility of their salary being docked.

NEW JERSEY MAY REFINANCE PENSION DEBT: Pension & Benefits Update reports that the State of New Jersey may issue almost $3 Billion in bonds to refinance its $4.2 Billion pension obligation. (Allocation of almost $1.3 Billion in surplus pension assets would make up the difference.) Because the interest payments schedule is expected to "mirror" payments the state would have made to the pension fund to retire the unfunded liability, we wonder what real advantage will be realized.

VERMONT TO CONSIDER PRIVATIZATION: Pension & Benefits Update also reports that proposed legislation introduced in the Vermont Legislature would privatize the Vermont Municipal Employees Retirement System (MERS) by creating a new intermunicipal system operating as a nonprofit corporation. The state contributes to the Teachers' Retirement System and the State Retirement System but not to MERS, which at under $100 Million makes up only about 5% of the total. Because the new system would be controlled by local governments and members of the system, advocates allege that privatization would prevent the state from raiding MERS.

NONDISCRIMINATION EXEMPTION REINTRODUCED: Picking up where Senator Orrin Hatch (R-UT) left off (see C&C Newsletter, July 1996), Senator Tom Daschle (D-SD) has introduced the Retirement Security Act of 1997 (S.14). Among other things, the bill contains a permanent moratorium on nondiscrimination tests for governmental plans. A similar move is expected in the House. Keep your fingers crossed.

CALPERS TO REORGANIZE EQUITIES: The California Public Employees' Retirement System, according to BNA, will reorganize management of its domestic equity portfolio to enhance returns to the fund. The new system will rely on internal active management for a portion of the fund's domestic equity in-house. In addition, CALPERS will seek to attract external managers who are capable of adding value and who will be measured by specialized bench marks. Currently, about $40 Billion (85%) of domestic equity assets are internally passively managed. Under the new structure, active management of domestic equities could increase to 20% from its current 15%.

MISSOURI MAY MAKE PENSION CHANGES: BNA also reports that the Missouri House of Representatives has agreed to extend "free" survivor benefits to all members of the Missouri State Employees Retirement System. Under pressure of a lawsuit challenging the current system which awards free survivor benefits only to judges and legislators, the State House has overwhelmingly passed a bill to provide surviving spouses with 50% of the deceased pensioner's benefit at time of death, retroactive to 1984. Another provision, which appears troublesome to us, would delete a 4% guaranteed annual cost-of-living increase and replace it with a formula equal to 80% of Consumer Price Index increase (not to exceed 5%).

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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