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March, 1997

Stephen H. Cypen, Esq., Editor

FLORIDA'S PROBLEMS NOT THAT BIG: A trial court order requiring the State of Florida to pay annual and sick leave for members of three public employee unions has been partially reversed (see C&C Newsletter for October, 1996). Although the Florida Supreme Court affirmed those benefits for the period from July 1, 1988 through June 30, 1989, it reversed all other relief. Also, the Supreme Court ruled that no prejudgment interest would be paid but that postjudgment interest accrues on moneys now owing from March 5, 1996, the date upon which it was finally determined that the State was obligated to pay annual and sick leave benefits for the year 1988-89. State of Florida v. Florida Police Benevolent Association, 22 Fla. L. Weekly S85 (Fla. February 20, 1997).

WISCONSIN PENSION RAID PREVENTED: According to the NAPPA Report, the Wisconsin Supreme Court has held unconstitutional 1987 legislation that required certain undisputed earnings of the Public Employee Trust Fund be immediately recognized and distributed to annuitants who had retired prior to October 1, 1974 (about 20,000 out of 75,000 total annuitants). The Supreme Court found that the legislation was an unconstitutional taking of private property without just compensation.

NAPPA REPORTS ON NOVEMBER ELECTIONS: The NAPPA Report also reported on several recent elections that impacted public funds. In Detroit, city voters rejected a charter revision that would have eliminated the board of trustees' discretion to allocate the distribution of excess earnings and required same to be retained for the employer's benefit. In Louisiana, voters banned newly-elected legislators from being members of public employee retirement plans. Nevada voters amended the state constitution to prohibit the state from raiding pension fund assets to help balance the state budget or to use pension assets for any non-pension related purpose. Voters in Virginia approved a measure to make the Virginia Retirement System an independent and separate public trust.

MICHIGAN SYSTEM BECOMES INDEPENDENT: On August 15, 1996, the Municipal Employees' Retirement System of Michigan (MERS) became an independent public corporation separate from the executive branch of state government. Previously, MERS was led by a seven member board, comprising three employee representatives, three employer representatives and the State Treasurer. The board is now composed of nine members, not including the State Treasurer. MERS has over 500 participating municipalities, about 51,000 participants and more than $2.5 Billion in assets.

NEW YORK CRF CALLS FOR COLA: As reported by BNA, the sole trustee of New York's Common Retirement Fund is calling for a bill that would provide retirees with an annual pension increase of 3% whenever the rate of return on their pension fund is over 10% per year. The Fund, which covers state and local government employees, has earned a rate of return in excess of 10% for eight of the last nine years. Currently, employers get a rebate when the Fund's performance exceeds certain actuarial assumptions. As proposed, employers would still receive rebates but some of the excess earnings would go toward retirees' cost of living.

GO WITH THE LEADER: The California Public Employees Retirement System has installed a world wide web site providing access to information on its retirement plans and pension fund investments. Eventually, CALPERS members will be able to calculate their own benefit estimates and obtain a form of application to print out on their own printers. The site also contains information on training/education classes, board meeting schedules, employer data and news. You can reach CALPERS On-Line at www.calpers.ca.gov.

CALPERS LISTS FINANCIAL LAGGARDS: And speaking of CALPERS, BNA also reports that the giant fund has listed its top ten underperforming assets. Companies on the list can expect CALPERS to be extremely active in its corporate governance demands. At one and two, Apple and Reebok may get the "boot" (pun intended). Others on the list are Bassett Furniture Industries, Novell Inc., Rollins Environmental Services and Sensormatic Electronics (a Florida company located in Boca Raton).

SO JUST WHAT IS THE DJIA, ANYWAY?: Another lesson of the month. Everybody talks about the Dow Jones Industrial Average, the Dow or sometimes just the "averages." So what exactly are we talking about? Since so many investors rely upon this number (or, more precisely, upon changes in this number), one would think that it measures a very broad market. Not so. The following thirty stocks make up the Dow: AT&T, Allied Signal, Alcoa, American Express, Bethlehem Steel, Boeing, Caterpillar, Chevron, Coca Cola, Disney, DuPont, Eastman Kodak, Exxon, General Electric, General Motors, Goodyear, IBM, International Paper, McDonalds, Merck, MMM, Morgan (J.P.), Philip Morris, Procter & Gamble, Sears, Texaco, Union Carbide, United Technologies, Westinghouse and Woolworth. So even with a market capitalization of about $1.5 Trillion, the Dow is still a rather narrow measuring device.

LOSS OF OVERTIME OR OFF-DUTY WORK IS NOT REDUCTION IN PAY: Based upon medical conditions, a police officer was placed on "limited duty." Police department rules and regulations prohibit off-duty work for officers on limited duty. The rules also prohibit overtime for limited duty officers. In seeking to overturn a pension board's denial of his application for service incurred disability, the officer alleged that he had suffered a reduction in pay because he was no longer eligible for off-duty work and overtime. Thus, he argued, that he was entitled to disability retirement under Nuce v. Board of Trustees for the City Pension Fund for Firemen and Policemen in the City of Miami Beach, 246 So.2d 610 (Fla. 3d DCA 1971). Significantly, the appellate division of the circuit court reviewed the petition for writ of certiorari and determined that it failed to state a prima facie basis for relief, and denied same without even requiring a response from the board! As counsel for the board of trustees, we appreciate that the court actually read the petition and did not issue an order to show cause, which usually happens as a matter of course. Gorordo v. Board of Trustees of the City of Miami Fire Fighters' and Police Officers' Retirement Trust, Case No. 96-227 AP (Fla. 11th Cir. December 6, 1996).

U.S. SUPREME COURT HOLDS "SALARY BASIS" TEST FOR DETERMINING EXEMPT STATUS OF PUBLIC-SECTOR EMPLOYEES UNDER FLSA PERMISSIBLE: As you probably know, the Fair Labor Standards Act of 1938 (FLSA) exempts "bona fide executive, administrative or professional" employees from overtime pay requirements. The Secretary of Labor has promulgated a regulation requiring for exempt status that the employee earn a specified minimum amount on a "salary basis." The Secretary interprets this salary-basis test to deny an employee salaried status (and thus make available overtime pay) only when his compensation may "as a practical matter" be adjusted in ways inconsistent with the test, which requires that compensation not be subject to reduction because of variations in the quality or quantity of the work performed. Thus, the fact that compensation could "theoretically" be reduced (though this was not the police department's general practice) for a variety of disciplinary infractions related to the "quality or quantity" of their work did not mean the employees were nonexempt. Interestingly, the salary-basis test was adopted in 1940, when the FLSA did not apply to state and local employees. Although Congress extended FLSA coverage to virtually all public-sector employees in 1974, it was not until the United States Supreme Court's decision in Garcia eleven years later that the extended coverage was upheld. The salary-basis test was expressly made applicable to public-sector employees in 1996. Auer v. Robbins, 10 Fla. L. Weekly Fed. S284 (U.S., December 10, 1996).

POLICE OFFICER MAY ORDER PASSENGER TO EXIT VEHICLE: In 1977, the United States Supreme Court ruled that a police officer may as a matter of course order the driver of a lawfully stopped car to exit his vehicle. In extending the rule to passengers as well, the High Court found that the motivation of a passenger to employ violence to prevent apprehension for a crime more serious than a traffic violation is every bit as great as that of the driver. While there is not the same basis for ordering the passenger out of the car as there is for ordering the driver out, the additional intrusion on the passenger is minimal. Incidentally, statistics showed that in 1994 alone there were almost 6,000 officer assaults and 11 officer deaths during traffic pursuits and stops. Maryland v. Wilson, 10 Fla. L. Weekly Fed. S292 (U.S., December 11, 1996).

CALPERS ANNOUNCES RETURNS: For the 1996 calendar year, the California Public Employees Retirement System earned 12.9% return. The $111 Billion fund had about 63% of total assets allocated to equities, which returned about 19% (versus the benchmark of almost 18%). Although CALPERS handily beat its 8.5% interest rate assumption, we fail to see that CALPERS has much to brag about.

RESIGNATION DOES NOT INSULATE FIDUCIARY: BNA reports on an important Federal Appellate decision involving a bank which resigned as trustee of a pension plan. Prior to resignation, the bank knew that the employer had failed to make required contributions for two years. The court ruled that a trustee has the fiduciary duty to disclose its reasons for resignation if the resignation and subsequent appointment of a successor trustee could result in potential harm to beneficiaries. Even though this case arose under the Employee Retirement Income Security Act (ERISA), the rationale seems equally applicable to public plans and their fiduciaries.

SAN ANTONIO P & F GET BackDROP: The San Antonio Police and Fire Pension Plan has been amended to provide a "BackDROP." The BackDROP is a version of a Deferred Retirement Option Program (DROP) that allows a member, upon retirement, to receive a lump sum payment and a monthly pension at a reduced amount. However, this benefit differs from a "BacDROP," which means "benefit actuarially calculated." Apparently, the San Antonio benefit allows employees to make the DROP election retroactively. Presumably, an employee is able to see if he would get better benefits in the DROP as opposed to his normal pension formula because of an increase in final average pay during the DROP period. We would like to meet the guy who sits around and comes up with all these new twists.

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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