November, 1997Stephen H. Cypen, Esq., Editor
ANTI-SOFT DOLLAR EFFORT GAINS STEAM: At a recent Council for Institutional Investors conference, reported by BNA, several large public pension fund-participants urged the Council to demand that Wall Street end soft dollar and other programs of rebating commissions paid to brokers. Since Section 28(e) of 1975 Amendments to the Securities Exchange Act, the issue of soft dollars has been a controversial one. Does the use of soft dollars benefit the client? Is your money manager using something that belongs to you, possibly to offset other clients' expenses? These and other questions have fueled a continuing stream of controversy. Incidentally, since deregulation, commissions have dropped from about 12¢ a share in 1986 to about 6¢ a share. The actual "cost" is about 3½¢ a share.
MEANWHILE, ADV FORM MAY BECOME EVEN MORE IMPORTANT: We have previously advised that Form ADV is a "must read" for fiduciaries (see C&C Newsletter, February, 1997). Under rule changes being contemplated by the Securities and Exchange Commission, Form ADV may provide more information on money managers' soft-dollar arrangements with brokerage houses. (Although money managers already must provide some information about soft-dollar arrangements, most disclosures are "boilerplate." Having reviewed many ADV's, we can tell you that the soft-dollar data all look the same.) New rules would require money managers to give specific details of the types of research products and services they receive from brokers, as well as non-research products and services they receive, according to a report in Pensions & Investments. Money managers would also have to disclose whether the research benefited the client that actually generated the trades and the soft-dollar credits or was used for servicing other clients.
FRS PERMITS SERVICE-CONNECTED DISABILITY FOR AGGRAVATION OF PRE-EXISTING CONDITION: Section 121.091(4), Florida Statutes, contains the provision for disability retirement benefit under the Florida Retirement System. Although that section does not explicitly so state, courts have held that the test for in-line-of-duty disability is whether an injury or illness, arising out of and in the actual performance of a duty required by a member's employment, was a substantial producing cause or an aggravating cause of a member's total and permanent disability. A member of FRS, who had pre-existing rheumatoid arthritis and epicondylitis, in the course of her employment was attacked by a student. The undisputed medical testimony established both a work-related aggravation of a pre-existing condition and a causal relationship between the work-related injuries and the total and permanent disability of the employee. Because the State Retirement Commission denied benefits based upon whether the kick to the elbow was the major cause of the total and permanent disability, it erroneously failed to analyze whether the kick was an aggravating cause. Thus, the court reversed the denial and remanded with directions to the Commission to award service-connected disability. Westbrook v. Division of Retirement, 22 Fla. L. Weekly D2283 (Fla. 1st DCA, September 25, 1997). Whether or not your plan permits service-incurred disability for in-service aggravation of a pre-existing condition depends upon its particular terms.
GAO PROVIDES INTERESTING READING: With all the criticism we heap upon our government, sometimes we forget that the government can provide us with some useful information. The following were published by the United States General Accounting Office in July:
"RETIREMENT INCOME: Implications of Democratic Trends for Social Security and Pension Reform (GAO/HEHS-97-81)." The four major sources of retirement income are Social Security, employer pensions, income from saved assets and employment earnings. While Social Security provides income to 90% of elderly households, it provides just 42% of their aggregate cash income. Pensions, savings and earnings provide income to considerably fewer households but together provide more than 50% of the elderly's aggregate income. As the elderly live longer, they will need retirement income over longer periods. This trend poses long-term financing challenges for both Social Security and the Federal budget. Currently, Social Security revenues exceed expenditures. By 2029, however, the trust funds will be depleted, and Social Security's revenues will fund only 70 to 77% of benefits. Insuring that Americans have enough retirement income in the 21st Century will require that the nation and Congress make some difficult choices. The effect of changes to the system on other retirement income sources and their effects on various groups within the elderly population should be well understood before decisions are made. Further, the interplay of budget and savings effects will have to be carefully considered before any reform proposal is adopted.
"RETIREE HEALTH INSURANCE: Erosion in Employer-Based Health Benefits for Early Retirees (GAO/HEHS-97-150)." Although some Americans purchase health insurance individually for themselves or their dependents, most receive coverage as a benefit through their employer. Complementing these two types of private insurance are public programs, including Medicaid for the poor and Medicare for the elderly and disabled. With the exception of the long-term disabled, Medicare is available only to individuals 65 and older. The lack of affordable health insurance for older Americans was a key factor leading to the establishment of Medicare in 1965. Survey data show a steady decline in the number of retirees with coverage through a former employer -- both for early retirees and those who are Medicare-eligible. Losing access to employer-based coverage poses three major challenges for retirees: (1) higher cost in purchasing individual coverage on their own; (2) a related problem, the potential for less comprehensive coverage because of higher premiums; and (3) until recently, the possibility that coverage will be denied or restricted by a pre-existing medical condition. (As of July 1, 1997, implementation of the Health Insurance Portability and Accountability Act - HIPAA - provides uniform Federal standards to ensure that individuals leaving employer-based group plans can purchase insurance on their own if they can afford to do so.)
DESPITE PROPOSED IMPROVEMENTS, NEW YORK PENSION COSTS WOULD REMAIN LOW: A report from BNA indicates that the sole trustee of New York's $90 Billion common retirement fund will ask the state legislature for significant benefit improvements. State Comptroller H. Carl McCall's proposal would establish a cost-of-living increase for retirees, offer state matching contributions for deferred compensation participants, improve benefits for public employees who began working after 1976 and reduce vesting requirements from ten years to five years. Although the changes would raise the state's pension costs by $142 Million a year and local governments' by $120 Million a year, contribution rates for public employers would only increase to 3% of payroll (from the present 1.7% of payroll!). Ah, the wonders of a Bull Market.
PUBLIC PENSION GROUP FORMS: A new group was recently formed to address issues relating to public pensions. Based in Alexandria, Virginia, the Public Retirement Institute (PRI) counts the state retirement systems of Missouri and Illinois among its early members. PRI is a research organization which will be funded through membership fees and will seek to provide unbiased information about and for the pension systems of state and local governments. When BNA provides more information on PRI, we will report it here.
GASB PROVIDES GUIDANCE ON STATEMENTS 25, 26 AND 27: Statements 25, 26 and 27 issued by the Governmental Accounting Standards Board (GASB) have raised many questions for governmental plans and employers. To respond to these questions, GASB has issued an implementation guide, which contains illustrations from the three statements and a glossary of terms in the statements. Entitled "Guide to Implementation of GASB Statements 25, 26, and 27 on Pension Reporting and Disclosure by State and Local Government Plans and Employers," the publication is available for $22.50 from the GASB Order Department, 401 Merritt Seven, P. O. Box 5116, Norwalk, Connecticut 06856-5116, (203) 847-0700, Ext. 555. Issued three years ago, the statements cover financial reporting for defined benefits plans and note disclosures for defined contribution plans (No. 25); financial reporting for post-employment health care plans administered by defined benefit pension plans (No. 26); and accounting for pensions by state and local government employers (No. 27).
NO IF'S, AND'S OR BUTT'S: A police officer brought a Federal action for gender discrimination and sexual harassment in violation of Title VII of the Civil Rights Act of 1964, retaliatory discharge under Section 448.101, Florida Statutes, and defamation. Plaintiff claimed that her supervisor and others subjected her to various verbal attacks and threats. (When plaintiff complained to the Chief and the Mayor, the Mayor called her a "fat-ass bitch" and threatened to fire her if she continued to complain.) On various defensive motions, the United States District Judge held that (1) because plaintiff had named the Town as a defendant, her suit against the Police Chief and the Mayor in their individual capacities is improper, (2) Section 448.101, Florida Statutes, dealing with "retaliatory personnel action" applies only to private sector employers, (3) Title VII defines employer as "a person engaged in an industry affecting commerce who has fifteen or more employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year" and (4) as a police officer and public official, plaintiff was required to prove that the alleged defamatory statements were made with actual malice; that is, with knowledge of their falsity or reckless disregard for their truth or falsity. Stewart v. Town of Zolfo Springs, Florida, 11 Fla. L. Weekly Fed. D206 (MD Fla., August 26, 1997).
WEST VIRGINIA AMENDS CONSTITUTION TO PERMIT INVESTMENT IN EQUITIES: After an unsuccessful legislative attempt to circumvent the constitutional prohibition on investment of state pension funds in the stock market (see C&C Newsletter, December, 1996), the state legislature agreed to submit a constitutional amendment to referendum (see C&C Newsletter, June, 1997). The constitutional amendment was approved in September, allowing West Virginia to shed the stigma of being the only state in the union to prohibit stock market investment of public funds. Unfortunately, like South Carolina, which was one of the last states to prohibit investment in equities (see C&C Newsletter, November, 1996), West Virginia will phase in equities, starting with 20% in 1998. Take me home, country road. (John Denver, R.I.P.)
CHANGES IN TURKEY COULD RUFFLE FEATHERS: Apparently the Social Security System in Turkey is experiencing a similar fate to ours -- and with good reason. Currently, the minimum retirement age is 38 for women and 43 for men (we sure hope the BNA item didn't have typos). In any event, a report commissioned to help the government decide how to reform the Social Security System recommends increasing the minimum retirement ages to 58 and 60, respectively. Opponents suggest that the government try to reduce Social Security's deficit by selling off some of its real estate. Obviously, the issue is a hot potato (which goes very nicely with warm turkey).
POLES VAULT INTO PRIVATE PENSION SYSTEM: Beginning in 1999 Poland will overhaul its outdated and costly pension system. BNA reports that the new scheme is based on privately managed pension funds, resulting in some $5 Billion being available for investment in equities, bonds and other investment vehicles. (The current Social Security-type system requires employer payments of 45% of employee wages.) The new system is quite innovative: although a total of 45% of wages will still be contributed to the Social Security system, only 24% is to be contributed by the employer. The 21% contributed by the employee will be invested in a selected private pension fund. Contributions to private pension funds are mandatory for employees up to age 30 and optional for those between 30 and 50; employees over 50 will remain in the old system. Anybody may contribute voluntarily to a private fund. Meanwhile, the retirement age will decrease for men and increase for women: to 62 from 65 and 55. Please -- don't expect any jokes about this item.
OFFICER WHO ARRESTED DOMESTIC VIOLENCE INJUNCTION VIOLATOR HAD NO DISCRETION TO RELEASE HIM: On a motion for rehearing granted (a very unusual occurrence), the Third District Court of Appeal vacated its prior decision and reversed a trial court order dismissing a complaint against the City of Miami on sovereign immunity grounds. The Court held that the City of Miami police officer who arrested a domestic violence injunction violator was required to hold him in custody until brought before the court as expeditiously as possible and had no discretion to release him. The case was remanded to the trial court, which must deal with the tragic scenario that the released domestic violence injunction violator killed the woman for whose protection the injunction had been entered. Simpson v. City of Miami, 22 Fla. L. Weekly D2313 (Fla. 3d DCA, October 1, 1997) (on motion for rehearing granted).
ILLINOIS LAW PERMITS EXCESS BENEFIT PLANS BEFORE JANUARY 1, 1995: Our readers know that the Small Business Job Protection Act of 1996 amended Section 415 of the Internal Revenue Code to permit public employers to maintain excess benefit plans without regard to the usual limits set forth in Section 457. This particular provision applies as of January 1, 1995. Apparently, in 1992 an Illinois statute was enacted to provide that "an excess benefit fund shall be established by any pension fund or retirement system subject to this section that has any member eligible to receive a benefit that exceeds the applicable benefit limits set by Section 415 of the U.S. Internal Revenue Code of 1986 for tax qualified plans under Section 401(a) of that Code." In holding that the Illinois law mandated a pre-1995 excess benefit fund, the Illinois Supreme Court disregarded the pension fund's argument that the 1996 amendment to Section 415 shows that governmental plans were prohibited from establishing excess benefit plans before January 1, 1995. Rather, the Court held, the SBJPA amendment merely made it easier and less expensive for government entities to set up excess benefit plans. Curiously, nowhere in the opinion does the Court mention IRC Section 457 or its relationship to IRC Section 415. Matsuda v. The Cook County Employees' and Officers' Annuity and Benefit Fund, Case No. 80873 (Ill. September 18, 1997).
TEXAS SOCIAL INVESTING LAW TO FACE CHALLENGE: A rider to Texas's 1998-1999 budget may face a constitutional attack by the Recording Industry Association of America and others. As of September 1, 1998, all state government bodies will be barred from investing in a corporation or private business that owns 10% or more of business units that record or produce any song which advocates or describes acts of criminal violence, including murder, assault, assault on police officers, sexual assault and robbery; necrophilia, bestiality or pedophilia; legal use of a controlled substance; criminal street gang activity; degradation or denigration of females; or violence against a particular sex, race, ethnic group, sexual orientation or religion. (Editorial comment: hey, what's left?) Another issue will be whether the law, if constitutional, applies to municipal plans.
NEW JERSEY PENSION OBLIGATION BONDS ESCAPE JUDICIAL SCRUTINY: As we reported in July (pages 4-5), New Jersey issued $2.75 Billion in pension obligation bonds. Opponents challenged the bond issue on the ground that the New Jersey Constitution requires a public referendum, which was not held. Two weeks before the bonds were issued, a trial court denied the challenge. Although New Jersey court rules allow twenty days for appeals of decisions on bond issues, the bonds were issued and sold before the Supreme Court of New Jersey could act on the timely-filed appeal. The Supreme Court then rejected the challenge as moot. Even though the challengers could not obtain the relief sought -- nonissuance of the bonds -- most appellate courts will review an issue that affects important rights and is capable of recurring. Not in New Jersey, we guess. Also, no court ever reviewed propriety of the State's "ingenuity" in changing the method of pension fund asset valuation for fiscal 1998 only.
EXCELLENT ARTICLE ON EFFECTS OF MONEY MANAGER MERGERS AND ACQUISITIONS: The September 1997 issue of Plan Sponsor contains an excellent article on the wave of ownership changes hitting money management firms and knocking over many long-standing relationships. Entitled "House of Cards," the article suggests, among other things, that trustees ask their to-be-acquired money managers the following questions: How will this transaction affect the long-term compensation arrangements already in place for portfolio managers? Will our own portfolio manager benefit from this transaction, or will he or she walk? How long will key founders remain after the transaction closes? What is the exit strategy for the firm's founders and how long will this affect other executive and portfolio managers? Clearly, trustees should scrutinize these ever-increasing deals more closely than ever.
WORLD DEFICIT REDUCTION SLOWS BOND GROWTH: For the third year in a row, the growth rate of the world bond market has declined, mainly because deficit reduction around the world affects the need of central governments to finance. A study from Merrill Lynch shows the world market at almost $24 Trillion. With over 61%, government bonds make up the largest sector. Overall, at $10 Trillion, the U.S. Bond Market represents 42% of the world's bonds. Similar to the world market, the U.S. Bond Market comprises about 63% governments ($6.4 Trillion) -- followed by 25% corporates. (If you want the real nitty gritty, the U.S. Government sector itself is broken into 42.1% Federal, 26.9% Federal-related mortgage pools, 16.5% tax-exempt and 14.5% agencies.)
WHICH MAY BE WHY GOLDMAN SACHS SEES HEADACHES FOR THE TREASURY: Goldman, Sachs & Co. says that too much favorable economic news, good financial markets and the recent deficit reduction package may create a real problem for the Treasury. The specific problem is that the Treasury's borrowing might generate "persistent excessive cash inflows" that could require changes being made in its program. Generally, the Treasury refinances maturing debt and raises new money to cover budget deficits. The positive news is that with the need to raise new money contracting, the Treasury may be able to begin redeeming outstanding public debt for the first time since the 1950's. The applied average annual net the Treasury needs for 1998-2002 will be about $17 Billion, or .2% of gross domestic product (compared to 3.5% of GDP from 1980 through 1996). Accordingly, the Treasury has had to reduce its borrowing needs, mainly by reducing the outstanding volume of Treasury bills (3-month, 6-month and 1-year maturities). Goldman estimates that $55 Billion of the short-term bill sector will be reduced in fiscal 1997, making bills 20% of total outstanding debt (down from as high as 34% in the early 80's). With the supply of outstanding T-Bills reduced, the average maturity of outstanding debt obviously continues to be extended. Goldman suggests that the Treasury should reduce the frequency of sales and/or reduce the size of monthly 2- and 5-year note sales. This change would keep the bill sector from shrinking, curb the lengthening of debt and give better overall balance to the country's debt structure. Incidentally, 3-month and 6-month T-Bills are auctioned weekly and 1-years are offered monthly.
ECONOMIC TIDBITS: Did you know that California, obviously just one of fifty states, makes up more than 1/8 of the country's gross national product? With a gross state product of $834 Billion, California makes up 12.8% of the U.S. GNP. At $302 Billion (4.6%), Florida trails only New York ($545B/8.4%), Texas ($462B/7.1%) and Illinois ($317B/4.9%).
WHO SAYS THERE'S NO SUCH THING AS A FREE (ALMOST) LUNCH?: Our hard-working Senators surely need access to affordable and nutritious meals, since they constantly run to the Senate floor to vote on key issues (such as last year's decision to slice $2 Million from the food-stamp budget). According to Money magazine, Senate dining room prices are 42% lower than those at comparable nearby restaurants. Thus, Senate dining facilities lose $2 Million a year, or $20,000 per Senator. Now consider the following: the average annual subsidy per person for food-stamps is $876 and per child for breakfast/lunch, $406.
YOU'VE JUST GOTTA LOVE WARREN BUFFETT: The Securities and Exchange Commission is making available to public companies a handbook to help them write prospectuses that investors can understand. In the preface to said handbook, the everquotable (see C&C Newsletter, April, 1997) Warren Buffett states: "When writing Berkshire Hathaway's Annual Report, I pretend that I'm talking to my sisters. They will understand plain English, but jargon may puzzle them. No sisters to write to? Borrow mine: just begin with 'Dear Doris and Bertie .'" No wonder Buffett is the second richest man in the United States. (Aside: did you know that Buffett, one of the most astute equity investors around, recently purchased $2 Billion in zero-coupon treasuries?)
CALSTRS BUCKS INDEXING TREND: According to a headline story in Pensions & Investments, the $80 Billion California State Teachers' Retirement System will shift about $3 Billion into active equity management next year. Currently, the fund has 10.6% ($3.4 Billion) of its $32 Billion domestic equity portfolio actively managed. The active domestic equity allocation will jump to 20%, or $6.4 Billion. As we have reported here, large pension funds' passive management assets increased to 36% in 1996 from 30% in 1995. However, CalSTRS' active domestic money managers outperformed its passive money managers by 55 basis points per year for the last ten years.
BRAZIL ENACTS RETIREMENT PLAN FOR INDIVIDUALS: Pensions & Investments also reports that, for the first time ever, Brazilians will be able to take advantage of a tax-advantaged retirement plan. Dubbed FAPI, the program is designed to stimulate long-term national savings as well as to help lighten the government's burden of providing Social Security benefits. The new arrangement is a defined contribution one, which can be sponsored by an employer (similar to a 401(k) plan) or can be created individually (like an IRA). However, all plans must register with the government and invest by buying shares in an investment fund (which, itself, has limitations). Individual FAPI participants will be able to deduct up to the equivalent of $2,200.00 from their income tax and companies will be able to deduct up to 10% of pay. If this new scheme doesn't work, blame it on the Bossa Nova.
LAW ENFORCEMENT OFFICERS' BILL OF RIGHTS NOT APPLICABLE TO PART-TIME DEPUTY SHERIFF: A part-time deputy sheriff is not covered by Florida's Law Enforcement Officers' Bill of Rights, Part VI of Chapter 112, Florida Statutes. A 1993 amendment to Section 112.531(1), Florida Statutes, added to the definition of law officer "and includes any person who is appointed by the sheriff as a deputy sheriff." However, the amendment did not extend rights to part-time deputy sheriffs; rather, the amendment overrode the effect of prior judicial decisions holding that full-time deputy sheriffs were not included because they are "appointed" rather than "employed." Hinn v. Beary, 22 Fla. L. Weekly D2379 (Fla. 5th DCA, October 10, 1997). Note that the appeal was technically moot because the investigation of Hinn had been completed and his appointment revoked. However, unlike the Supreme Court of New Jersey (page 6, above), the Florida appellate court ruled on the merits because the issue is "capable of repetition but evading review." Important: the Law Enforcement Officers' Bill of Rights does not make any deputy sheriff a public employee for other purposes. (See C&C Newsletter, June, 1997)
PRESIDENT VETOES PROVISION TO RESOLVE FEDERAL PENSION SNAFU: As we previously reported (see C&C Newsletter, September, 1997), many Federal employees were erroneously enrolled in the Civil Service Retirement System (CSRS) when they should have been transferred to the Federal Employees Retirement System (FERS). CSRS is a stand-alone retirement system created in 1920 to provide benefits for long-service Federal employees. Established by Congress in 1986, FERS is a tripartite pension program using Social Security as a base and providing an additional defined benefit and a voluntary thrift savings plan. H.R. 2378, The Treasury and Government Appropriations Act (P.L. 105-61) signed by President Clinton on October 10, 1997, would have allowed Federal employees to opt out of CSRS and into FERS. BNA now reports that the President, using his line-item veto for only the second time, has struck the provision. The first use of the newly-created line-item veto power was in connection with the Taxpayer Relief Act of 1997 (see C&C Special Supplement, September, 1997). Incidentally, the provision would have given over one million employees the option to transfer from CSRS to FERS.
AND SPEAKING OF FEDERAL PENSION BENEFITS...: Under both the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS) most civil service employees are eligible to retire at age 60 with twenty years of service or at age 55 with thirty years of service. However, both also offer retirement at age 50 and completion of twenty years for law-enforcement officers. The statutory standard for law-enforcement officer eligibility under CSRS requires that the duties of the employee's position be primarily the investigation, apprehension or detention of individuals suspected or convicted of Federal offenses. The FERS standard is similar, but adds that the duties of the employee's position be sufficiently rigorous that employment opportunities are required to be limited to young and physically vigorous individuals. On appeal from the Merit Systems Protection Board, the United States Court of Appeals upheld denial of law-enforcement officer retirement benefits to customs agents who spend a major portion of their working time aboard aircraft, using on-board surveillance equipment to identify suspected drug smugglers. The Board has identified several considerations that bear on whether a particular employee is a law-enforcement officer: whether he or she (1) has frequent direct contact with criminal suspects, (2) is authorized to carry a firearm, (3) interrogates witnesses and suspects, (4) works for long periods without a break, (5) is on call 24 hours a day and (6) is required to maintain a level of physical fitness. Bingaman v. Department of the Treasury, Case No. 96-3368 (Fed. Cir. September 23, 1997) 1997 WL 583719.
NEW MEDICARE VALUES ANNOUNCED: The Omnibus Budget Reconciliation Act of 1993 removed the limit on wages subject to Medicare Part A. The Medicare Part A hospital deductible will be $764.00 in 1998 (from $760.00). The Medicare Part A premium will be #309.00 per month (from $311.00), the decrease resulting from a freeze on hospital payment rates and a cost-shit to Part B. The Medicare Part B deductible will remain at $100.00 and the monthly premium will remain at $43.80.
SOCIAL SECURITY INCREASE SLOWS: The Social Security Administration has announced that 1998's Social Security cost-of-living percentage increase will be 2.1%, down from 2.9%. The maximum earnings subject to Social Security taxes will rise to $68,400.00 from $65,400.00. The employee tax rate will remain at 7.65% -- 6.20% for Social Security and 1.45% for Medicare Part A, the latter applicable to all earnings per OBRA '93. The annual exempt amount will rise to $14,500.00 a year (from $13,500.00) for individuals from 65 through 69 and to $9,120.00 (from $8,640.00) for those under 65. As before, individuals over 69 are not subject to the earnings test. BNA reports that the average monthly check will rise by $16.00, from $749.00 to $765.00 per month.
BNA REPORTS ON WHARTON STUDY: A recent study from The Wharton School indicates that, in order to preserve their standard of living, Americans who want to retire at age 62 will need to start saving 16.1% more a year than they now do. Anyone who delays retirement until age 65 need save only an additional 7.3%. The study found that a sample group of people between 51 and 60 had a median household current net worth of approximately $325,000.00, including pensions, Social Security and housing. Projected to ages 62 and 65, assets reach $380,000.00 and $420,000.00, respectively. By the way, the study also concluded that if Social Security remains unchanged, a male born in 1950 earning average wages will receive a benefit equal to 59% of the amount he paid into the system; a female worker born the same year can expect a benefit equal to 69% of contributions.
GFOA ISSUES RECOMMENDED PERS INVESTMENT PRACTICES: The Government Finance Officers Association has issued new recommended practices for public employee retirement system investments. On the subject of social investing, GFOA recommends that when fiduciaries invest and manage assets they may do so only in investments that provide collateral benefits if it is determined that the investment providing these collateral benefits would be prudent even without them. GFOA also recommends that the board establish a comprehensive investment program as follows:
- Adopt formal investment policies governing objectives, acceptable risks, diversification requirements and fundamental processes for regulating investments.
- Provide that procedures for selection of trustees, staff and advisers are designed to assure competent investment expertise and fiduciary behavior at each level.
- Assure systematic investment training for trustees and professional staff. Travel policies in support of participation in such events should be developed and be defensible in context of the interests of plan participants and the public.
- Establish an organizational plan for, and retain, competent investment expertise through independent advisers, consultants and portfolio managers. When possible, use a competitive selection process for these outside service providers.
- Develop and regularly review asset allocation strategy and positioning of asset classes in light of general market trends and valuations.
- Evaluate regularly the role or potential role of passive or indexed investment strategies and other strategies to minimize costs of consultants and transactions.
- Review carefully investment-related practices that could be questioned, such as soft-dollar services, brokerage-related or brokerage-compensated services and unconventional investment strategies.
- Establish high standards for impartiality and refrain from politically inspired or connected investment strategies.
- Establish formal benchmarks for portfolio and managed account performance that are specific to the portfolio manager. Regularly evaluate performance, using consistent, documented and reliable disciplines. Establish clear criteria and procedures for portfolio manager watchlists and terminations.
- Provide and facilitate regular clear and intelligible communications on investment results to participants, city officials and other interested parties.
STANDARD DEVIATION AND RISK: Basically, standard deviation measures the likelihood that prices will move significantly away from the average. (Volatility is the tendency of prices to swing up and down.) We were surprised to learn that the standard deviation for about the last fifty years (1950-1996) is down from the last seventy years for equities and up for fixed income: S&P 500 (from 20.3% to 16.8%) and domestic small cap stocks (from 34.1% to 25.6%) versus domestic long-term corporate bonds (from 8.7% to 10.3%) and long-term U.S. government bonds (from 9.2% to 10.8%). One caveat: while new inflation rates may have reduced risk in equity markets as a whole, trading practices have increased the risk measures for individual securities.
GAO REPORT ON RELATIONSHIP BETWEEN FEDERAL PENSIONS AND FINAL SALARIES: In September we summarized the results of a United States General Accounting Office report showing differences in COLA calculations for Federal retirees (page 5). A further reading of the same report shows additional interesting findings. About 460,000 (27%) of the 1.7 million Federal retirees were receiving pensions that had come to exceed their final salaries. However, when salary was adjusted for inflation and expressed in constant dollars, no retiree was receiving a pension larger than final salary. Using constant dollars provides a more meaningful way to compare monetary values across time, because it corrects for the effects of inflation or deflation. Three factors explain why some pensions exceed retirees' unadjusted final salaries: the number and size of cost-of-living adjustments, the number of years since retirement and the number of years of Federal service. Clearly, COLAs have played an important role in maintaining the purchasing power of retiree pensions. GAO/GGD-97-156, August 11, 1997.
RAY AND TRISH COME THROUGH AGAIN: We may sound like a broken record, but we cannot help giving credit where credit is due. Once again Ray Edmonson and Patricia Shoemaker have sponsored fantastic conferences. Ray's FPPTA Trustees School was held September 29 through October 1 at the Tradewinds Resort, St. Petersburg Beach. Trish's 29th Annual Police Officers' and Firefighters' Pension Trustees' Conference was held October 15 and 16 at the Sheraton Orlando North Hotel in Orlando. Shame on anyone who did not catch at least one of these programs.
LARGEST DOW POINT-DROPS RECENT: The ten worst drops in the Dow Jones Industrial Average did not occur in the 1920s or 1930s. Because the Dow has exploded in recent years (see C&C Newsletter, August, 1997), large point drops are more common, even though as a percentage of the Dow they may not be that great. In any event, as of press time, the following are the ten worst point drops in the Dow (rounded):
October 27, 1997 - 554, to 7161 (7.2%)
October 19, 1987 - 508, to 1739 (22.6%)
August 15, 1997 - 247, to 7695 (3.1%)
June 23, 1997 - 192, to 7604 (2.5%)
October 13, 1989 - 191, to 2569 (6.9%)
October 23, 1997 - 187, to 7848 (2.3%)
March 8, 1996 - 171, to 5470 (3.0%)
July 15, 1996 - 161, to 5350 (2.9%)
March 13, 1997 - 160, to 6879 (2.3%)
March 31, 1997 - 157, to 6583 (2.3%)
Rules adopted by the New York Stock Exchange after the 1987 stock market crash, often called circuit breakers, closed the Big Board early on the 27th, for the first time.
1998 STATUTORY LIMITS ARE OFFICIAL: In accordance with our previous advice (see C&C Newsletter for October, 1997) the Internal Revenue Service has announced the following increased statutory limits to be used in employee benefit plans for 1998: Section 415 Basic defined benefit dollar maximum - $130,000.00 and Section 457(b) deferred compensation limit - $8,000.00. The Section 415 early retirement benefit floor for qualified firefighters and police officers ($70,000.00 for 1997) was retroactively eliminated by the Taxpayer Relief Act of 1997, for years after December 31, 1996. Incidentally, IRS also made an initial announcement that the limit for pre-January 1, 1996 employees, under governmental plans in effect on July 1, 1993 that used the Section 401(a)(17) limit, is $265,000.00. Of course, a governmental plan that did not have any compensation limit in effect on July 1, 1993 is not required to impose one on grandfathered employees.
PRELIMINARY DENIAL OF IMMUNITY DEFENSE REVIEWABLE: Unlike the Fireman's/Firefighter Rule (see C&C Newsletter for October, 1997), public official immunity precludes recovery under all circumstances. When a public official moves for summary judgment on the ground that he or she enjoys immunity from suit arising under either state or federal law, and the record conclusively demonstrates that the public official is entitled to immunity, it is a departure from the essential requirements of law to deny it. Thus, on discretionary review, the District Court of Appeal reversed the lower court's denial of summary judgment on immunity grounds because there was a departure from the essential requirements of law, resulting in material injury for the remainder of the case that cannot be corrected on postjudgment appeal. Stephens v. Geoghegan, 22 Fla. L. Weekly D2428 (Fla. 2d DCA, October 17, 1997). The Court emphasized that its holding is applicable only to cases where the public official is seeking immunity from suit as opposed to immunity from liability (like sovereign immunity).
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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.