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May, 1997

Stephen H. Cypen, Esq., Editor

NO STATE PENSION REFORM THIS YEAR: Our March, 1997 Supplement contained a review of proposed amendments to Chapters 175 and 185, Florida Statutes. Neither Senate Bill 524 nor its companion, House Bill 561, became law. The Senate Bill was referred to the Committees on Governmental Reform, Community Affairs and Ways and Means. Although the Bill was favorably acted upon (unanimously) by the first two committees, it died in Ways and Means. Meanwhile, in the House, the Bill was referred to the Committees on Governmental Operations, Law Enforcement and Finance & Taxation. For some reason, the Bill was never even considered by any of those House Committees.

DOES YOUR FUND HAVE MONEY COMING?: A class action is pending in the United States District Court for the Southern District of New York against thirty-five brokerage firms which allegedly refused to quote odd-eighth prices for certain stocks, thereby inflating the spread for each share between the years 1989 and 1994. (An odd eighth is 1/8, 3/8, 5/8 and 7/8 of a dollar.) The court recently granted a motion to clarify certification of the class to include institutional investors. The Florida Attorney General is co-lead counsel of a multi-state working group which is monitoring the litigation. If, during the years in question, your fund bought or sold any of the 1,659 stocks in question, you may be able to participate in the proceeds of settlement. If you are a client of Cypen & Cypen, we will make available a list of stocks and the specific dates applicable to each. Otherwise, you may want to contact John R. Ellis, Assistant Attorney General, Anti-Trust Section, telephone (904) 488-9105. We have spoken to Mr. Ellis, who has approved our inclusion of this item.

IT MAKES CENTS TO US: And speaking of odd-eighths, did you ever try to figure out how much 3/8 or 7/8 of a dollar is? Well, if HR1053 (the Common Cents Stock Pricing Act of 1997) ever becomes law, the Securities Exchange Act of 1934 would be amended to eliminate legal impediments to quotation in decimals for securities transactions. The Securities and Exchange Commission would be directed to require quotations in dollars and cents for transactions in equity securities. Come to think of it, why would any legislator oppose such a bill?

SOMETHING ELSE WE DIDN'T KNOW: According to a recent federal case analyzed by BNA, Internal Revenue Service can levy upon a taxpayer's Social Security benefits until his outstanding income taxes and assessed penalties are paid. In a recent case, a United States District Judge granted the government's motion to dismiss a complaint seeking reimbursement of IRS-garnished benefits, a judgment declaring future benefits exempt from IRS collection and an award of damages.

OUI, OUI MONSIEUR: As expected (see C&C Newsletter, February 1997), the French Parliament approved the final version of a law that will create the country's first private pension fund system for private sector employees. According to BNA, these plans are similar to 401(k) plans. Individual pension fund contributions of up to 5% of gross salary, with an upper limit of approximately $6,000.00 US, will be deductible from income taxes. Employers may match employee contributions at a rate of four to one.

AND YOU THINK YOU'VE GOT INVESTMENT RESTRICTIONS?: BNA also reports that Japanese employee pension funds will be rid of their severe restrictions on asset management by March 2000. Generally, an Employee Pension Fund in Japan must keep a minimum of half its assets in Japanese government securities, deposits and other principal-guaranteed assets. It cannot allocate more than 30% of assets to equities and must keep the same ratio in foreign currency-denominated assets. No wonder the country's pension plans are hurting (see C&C Newsletter, September 1996).

BABY BOOMERS PREPARED FOR RETIREMENT: The Employee Benefits Research Institute believes Baby Boomers will be more financially prepared for retirement than past generations. The Baby Boom Generation has already accumulated more savings in pension funds than any other generation and personal savings are on the rise. Nevertheless, to insure that Baby Boomers are financially prepared for an adequate retirement, they will need: good information about what Social Security might provide them; to put aside money every year in employer-provided plans; to understand what plans are available to them and how to use them; lump-sum distributions upon a job change or retirement; to factor in retiree medical expenses; and to save on a tax-effective basis.

WORKERS' COMP PAYMENTS EXEMPT EVEN AFTER RECEIPT: The Supreme Court of Florida recently decided an important Workers' Compensation case. Section 440.22, Florida Statutes, provides that no assignment of benefits due or payable shall be valid, and such benefits shall be exempt from all claims of creditors, and from levy, execution and attachments. Three lower courts had decided that once Workers' Compensation benefits are received and deposited into a bank account, the exemption no longer applies. In reversing, the Supreme Court held that the exemption still applies, so long as the funds are traceable to the Workers' Compensation benefits. Broward v. Jacksonville Medical Center, 22 Fla. L. Weekly S132 (Fla. March 20, 1997).

IRS INCREASES RECEIPT LEVEL: On March 25, 1997 the Internal Revenue Service issued regulations to increase to $75.00 the threshold at which receipts are required in order to deduct travel and entertainment expenses. The previous level had been $25.00. According to BNA, the new regulations are effective June 23, 1997.

NONDISCRIMINATION RULES MORATORIUM GETS BOOST: The Government Finance Officers Association reports that 35 state public pension fund administrators support legislation to make permanent the current moratorium on nondiscrimination rules for public pension plans (see C&C Newsletter, April 1997). The administrators pointed out that these nondiscrimination rules, written to curb private sector abuses, have limited use in the public sector because of broad coverage of public plans, diversity and uniqueness of covered occupations and public scrutiny such plans already receive.

FLEXIBLE BENEFITS URGED: According to BNA, attendees at the National Public Employer Labor Relations Association's recent annual training meeting heard speakers urge public employers to adopt flexible benefit plans. Traditionally, employers have faced strong opposition from union leaders, who regard flexible benefits as a subtle way to cut back benefits.

CALPERS HAS STANDARDS ABROAD: The California Public Employees Retirement System has about $5 Billion invested in England and France. CALPERS has adopted corporate governance principles on basic concepts: director accountability to shareholders, efficient voting methods, codes of best practices and long-term corporate vision that emphasizes sustained shareholder value. BNA reports that giant CALPERS, at over more than $110 Billion, has over $20 Billion invested in international equities.

EVALUATING, SELECTING AND MONITORING PROFESSIONALS: The March 1997 Employee Benefits Journal contains an excellent article on how to evaluate, select and monitor professional advisors. Although the authors deal at length with specific provisions of ERISA, much of what they say is equally applicable to public plans. Members of the typical "advisory team" include administrator, auditor, counsel, investment manager (a term of art under ERISA), actuary and investment consultant/performance monitor. A prudent selection process should include the following basic elements: preparation of specifications for the position; identification of appropriate candidates for that position; solicitation of bids or proposals from the candidates; conducting interviews with the candidates; comparison of fees and verification of references; and a reasoned decision based on information obtained and documentation of the decision.

QUESTIONS ABOUT COMMISSIONS: The March 1997 Employee Benefits Journal also contains an article about commissions on investment transactions, "an annoying fact of life." The author, Alan Biller, is a consultant who is well known for his views on the subject. He concludes that trustees should not interfere with their money managers' trading decisions. Rather, trustees should (1) ask managers what percent of trades they can direct for recapture; (2) ask them to select the recapture brokers; (3) arrange recapture rates directly with the brokers; (4) document the arrangement for all parties; and (5) instruct the custodian or administrator to bill the brokers periodically for reported rebate credits. Music to the ears of those trustees who feel directed commissions/recapture programs/soft dollars are nothing more than "legal kickbacks."

JERSEY AGE LIMITS MUST BE IMPOSED ON UNIFORMED EMPLOYEES: BNA reports that an opinion issued by the New Jersey Attorney General requires that the State's mandatory maximum hiring and retirement age limits must be imposed upon local and municipal police officers as a result of last year's amendments to the Age Discrimination in Employment Act (see C&C Newsletter for October, 1996). All such employees who are currently 65 or older must retire even if they have not served the minimum 25 years required for retirement eligibility! Again, we remind readers that in our opinion the recent amendment by Congress should have no affect in Florida. Unlike Florida, New Jersey has specifically adopted hiring and retirement age limits.

AFSCME CONCLUDES RHODE ISLAND NEGOTIATIONS: Rhode Island state employees will receive a 3% wage increase this year and a 3.5% one next year, reports BNA. In exchange, the employees, who are represented by AFSCME, must accept a new health care program which moves them away from traditional indemnity coverage into managed care arrangements.

INCREASED TRADE DEFICIT HAS BRIGHT SIDE: Because the dollar is strong, foreign manufacturers can ship cheaper products to the United States, thus widening the trade deficit. However, those dollars eventually come home to help finance the federal budget deficit. According to data published by the Public Securities Association (PSA), in 1996 foreigners purchased a record $371 Billion of U.S. fixed income securities (a 60% increase over 1995). The bulk of foreign investment, $244 Billion, went for Treasuries, $87 Billion being purchased by central banks and monetary authorities. Foreign investors put $77.4 Billion into corporate bonds and $49.3 Billion into agency debt and mortgage-related securities.

SURVEY OF TAX FORMS REVEALING: IRS data compiled by Syracuse University show that South Florida is not only "retiree-rich" but also "rich-retiree." Five counties -- Collier, Palm Beach, Martin, Indian River and Sarasota -- rank among the top ten nationally in terms of average interest income and dividends reported on 1995 tax returns. Interestingly, none of the counties were among the top fifty in adjusted gross income, meaning the households have a lot of assets but little in the way of salaries. The records also show that in Miami there were sixty-six convictions for tax cheating, with a medium prison sentence of twelve months (three times longer than the national average). Nevertheless, only 41% of IRS criminal referrals resulted in conviction in the Southern District of Florida, compared to 84% in Savannah, Georgia! Finally, South Florida taxpayers are audited at the same rate as the rest of the country: .7% of total returns filed.

GURU SAYS TO FORGET ABOUT PREDICTIONS: Peter Lynch, former superstar portfolio manager at Fidelity Investments, says it is futile to try to predict the short-term direction of U. S. stocks. Echoing what J.P. Morgan said over 90 years ago (see C&C Newsletter for November, 1996), Lynch says "the only thing we do know is the stock market goes up more than it goes down and there will be another recession at some point in the future." This century, the DOW has lost at least 10% of its value fifty-two times, meaning that the stock market falls this much about once every two years. During the same period, stocks have declined 25% or more fifteen times, meaning investors should expect a decline of this magnitude about once every seven years. Mr. Lynch says that if you can't explain to a 10-year-old in three minutes why you are buying a stock, don't buy it.

VETERAN'S PREFERENCE FOR FIRST PROMOTION ONLY: As you probably know, Section 295.09, Florida Statutes, provides veterans with a preference in promotion. That section also states that the promotion "shall apply only to a veteran's first promotion after reinstatement or reemployment, without exception." After serving in Operation Desert Shield/Desert Storm, a veteran returned to the Volusia County Sheriff's Department. He then applied for promotion to Sergeant and was promoted, but without receiving the veteran's preference he had requested. When he later unsuccessfully applied for promotion to Lieutenant, he again requested a veteran's preference, which was denied. The Court affirmed such denial because the preference expired when the veteran was promoted to Sergeant, and he was not entitled to "bank" the preference for future consideration. Keller v. Public Employees Relations Commission, 22 Fla. L. Weekly D877 (Fla. 5th DCA, April 4, 1997).

WE CELEBRATE OUR ANNIVERSARY: Time sure flies when you're having a good time. In May of last year, we started our Newsletter. We said then that it would be issued from time to time or when special circumstances so warranted. Little did we know that there would be enough material -- and demand -- for an issue every single month and for four special supplements! We thank all of you for your kind words and encouragement, and we hope our second year will be as successful as the first. As always, we welcome your suggestions, comments and criticisms.

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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