October, 1997Stephen H. Cypen, Esq., Editor
1. FLORIDA APPELLATE COURT EXPANDS PENSION FORFEITURE: Newmans, the elected Sheriff of Baker County for twenty years, pled guilty to conspiracy to obstruct justice. Thereafter, the Division of Retirement gave notice of its intent to terminate Newmans's retirement benefits pursuant to Sections 121.091(5)(f) and 112.3173(2)(e)3., 4. and 6., Florida Statutes. The two provisions are similar, but the first pertains only to members of FRS while the second applies to a member of any public retirement system. Section 112.3173(3), Florida Statutes, provides that any public officer or employee who is convicted of a specified offense committed prior to retirement, or whose office or employment is terminated by reason of his or her admitted commission, aid, or abetment of a specified offense, shall forfeit all rights and benefits under any public retirement system of which he or she is a member, except for the return of his or her accumulated contributions as of the date of termination. Basically, the offenses specified are embezzlement, theft and bribery. However, Section 112.3173(2)(e)6., Florida Statutes, defines specified offense to include "the committing of any felony by a public officer or employee who, wilfully and with intent to defraud the public or the public agency for which the public officer or employee acts or in which he or she is employed of the right to receive the faithful performance of his or her duty as a public officer or employee, realizes or obtains, or attempts to realize or obtain, a profit, gain, or advantage for himself or herself or for some other person through the use or attempted use of the power, rights, privileges, duties or position of his or her public office or employment position." Newmans was not convicted of embezzlement, theft or bribery -- he was "merely" part of a massive marijuana importation business. Nevertheless, the District Court of Appeal upheld the Division's forfeiture of Newmans's rights and benefits under FRS because the acts committed by him in furtherance of the conspiracy to obstruct justice were inseparably intertwined with his position as Sheriff. By providing tip-offs to drug traffickers regarding confidential investigations, aircraft flyovers and other law enforcement efforts to investigate drug trafficking in Baker County, Newmans obtained or attempted to obtain the continuation of the unlawful enterprise or its profits, or both, and freedom from detection for himself and others through the use of the power, rights, privileges, duties or position of the office of Sheriff. Although we certainly would not defend the actions of a drug trafficker -- especially a Sheriff -- if this case stands up (and decisions of Florida District Courts of Appeal are usually the last step, failing discretionary review by the Florida Supreme Court), almost any offense can be translated into a specified offense, requiring forfeiture. Stay tuned. Newmans v. State of Florida, Division of Retirement, 22 Fla. L. Weekly D2217 (Fla. 1st DCA, September 18, 1997).
2. SOME STATUTORY LIMITS WILL RISE: Based upon the Consumer Price Index for August, 1997, some statutory limits used in employee benefit plans will rise for 1998. The Section 415 Defined Benefit Plan dollar limitation (rounded in $5,000 increments) will rise from $125,000 to $130,000. The Section 415 Defined Contribution limit (rounded in $5,000 increments) will remain at $30,000. The special floor for firefighters and police officers (rounded in $5,000 increments but probably of little significance in light of the 1997 repeal of the "early retirement" reduction) will remain at $70,000. The Section 401(a)(17) annual compensation limit (rounded in $10,000 increments) will remain at $160,000. And the Section 457 Deferred Compensation limit (rounded in $500 increments and receiving its first increase, as permitted by 1996 amendment) will rise to $8,000. Of course, these figures are as yet unofficial, but, where an increase has already been attained, logically, it will become official.
3. CANADIAN PENSION FUNDS ANNOUNCE RETURNS: A report from Pensions & Investments indicates that the median Canadian pension fund had a return of almost 23% for the year ended June 30, 1997, up from 13% the previous year. The median Canadian active equity manager returned 32.5%. The median active bond manager returned 14.2%. Equity managers beat the 30% return of the equity Index (Toronto Stock Exchange 300) but bond managers slightly underperformed the 14.3% return of their Index (Scotia Capital Markets Universe Bond Index).
4. DRAFT OF AUDIT REPORT IS A PUBLIC RECORD: Section 119.07(3)(y), Florida Statutes, provides that the report of an internal auditor prepared for or on behalf of a unit of local government (such as a pension board) becomes a public record when the audit becomes final. An audit becomes final when the audit report is presented to the unit of local government. The Hernando County Clerk of Court was conducting an internal audit of the Hernando County Legal Department. Upon delivery of an incomplete audit draft report to the County Administrator and to the County Attorney, who is solely responsible for management of the Legal Department, the audit became "final" and subject to disclosure as a public record. (The subject decision was rendered by a county court, a court of very limited jurisdiction. Frankly, we do not see how a county court had jurisdiction.) In any event, at least the county court recognized the significance of its decision in that it certified to the District Court of Appeal the question as being one of great public importance. Baldwin v. Nicolai, 5 Fla. L. Weekly Supp. 20 (Fla. Hernando Co., August 22, 1997). In our judgment, a draft report from an independent auditor should not become "public" until actually accepted as final.
5. WILL TIAA-CREF REGAIN EXEMPT STATUS?: As our readers know, one provision of the Taxpayer Relief Act of 1997 repealed the tax-exempt status granted to Teachers Insurance Annuity Association-College Retirement Equities Fund (TIAA-CREF) and Mutual of America (see C&C Special Supplement, September, 1997). Now, New York's two Senators, together with Senator Bob Graham, have sponsored a bill to reinstate tax-exempt status for both insurance companies. Quoted in BNA, Senator Moynihan said that TIAA-CREF brought pension portability to higher education: "This is part of the agility of American higher education. There is no reason to tax this." Prior to the amendment, TIAA-CREF had been exempt for 75 years and Mutual of America had been exempt for 50 years. Care to guess where TIAA-CREF is headquartered?
6. RUDY SWAYS GEORGE: The Early Retirement Incentive Plan recently passed by the New York State Legislature (C&C Newsletter, September, 1997) has been vetoed by Governor Pataki. Rudolph Giuliani, Mayor-cum-Actuary, voiced objections because he did not believe the increased employee contributions would be sufficient to cover the cost. Union leaders blamed the defeat on a misunderstanding of the bill by politicians and distortions reported in the press.
7. BUT N.Y. INVESTMENT FLEXIBILITY PROVISIONS BECOME LAW: A new law will permit the New York State Common Retirement Fund to invest up to 70% of its assets in domestic equities and 15% in nonspecified assets (a "basket" clause). Previously, the limitations were 60% and 7.5%, respectively. The bill also clarifies and simplifies language covering all public pension investments, which had become confusing because the legislature kept adding new language to old language. In unrelated action, according to BNA, New York Governor Pataki also signed a bill allowing employees who leave on permanent and total disability to continue, at their own expense, life insurance coverage under their employer's group term life. Previously, continued coverage was prohibited.
8. ARIZONA GOVERNOR CONVICTED OF PENSION FUND FRAUD: Arizona Governor Fife Symington has been convicted of defrauding Arizona labor union funds that had loaned him and his associates $10 Million in 1990 (C&C Newsletter, July, 1996). The Governor had substantially overstated his net worth when submitting a financial statement to obtain the financing. According to BNA, however, the Governor was acquitted on the count which alleged an attempt by him to extort a release from his personal guarantee on the loan. What a great guy he must be.
9. JAPANESE PENSION PLANS MAY MAKE INVESTMENT CHANGES: Currently, the $1.1 Trillion in Japanese Public Pension assets are all deposited with the Ministry of Finance's Fund Management Department (C&C Newsletter, September, 1996). Government advisors are now recommending liberalization of asset management, according to BNA. Over a phase-in period of several years, money would not be deposited with the Ministry of Finance, but would be allocated for discretionary investment under new guidelines to be developed.
10. FIREMAN'S RULE PROTECTION NOT LIKE PUBLIC OFFICIAL IMMUNITY: As we have said before, the Fireman's Rule provides that once a firefighter is on the premises, he or she has the status of a licensee, so that the sole duty owed by the owner or occupant of the premises is to refrain from wanton negligence or willful conduct and to warn the firefighter of any known dangerous defect or condition which is not open to ordinary observation by the firefighter. However, protection under the Fireman's Rule is not like the qualified immunity granted to public officials because the Fireman's Rule does not preclude recovery under all circumstances and does not provide immunity from suit. Therefore, in a suit against them, landowners were not entitled to discretionary appellate review of a nonfinal order denying their motion for summary judgment based on the Fireman's Rule. (In 1990, the Florida Legislature abolished the rule, which is also known as the Firefighter Rule.) Sunrise Gift & Souvenir, Inc. v. Marcotte, 22 Fla. L. Weekly D2014 (Fla. 5th DCA, August 15, 1997).
11. PUBLIC SECTOR UNION MEMBERSHIP GROWS:A survey by the Public Service Research Foundation reveals that 60% of all union members in Florida are public employees compared to 42% across the country. Florida is one of only 18 states where public union members outnumber their private counterparts. The finding is almost incredible, considering that only 15% of all Florida jobs are in the public sector. But the arithmetic is simple: almost 3 out of 10 public employees are union members while only about 3 out of 100 private employees belong to unions. Remember that forty years ago 4-in-10 of all American private sector employees were union members; today, that figure is about 1-in-10.
12. MANAGEMENT'S TEN COMMANDMENTS OF NEGOTIATIONS: Although this Newsletter does not deal directly with labor/management issues, we recently came across the Ten Commandments of Negotiations. Developed by The Training Tree, Inc., a company representing municipal management, the guidelines are reproduced for the edification of our readers:
- Thou shalt always bargain in good faith.
- Thou shalt remember thy goal and keep it ever present in mind.
- Thou shalt never assume or adopt absolute positions.
- Thou shalt possess the power to negotiate and compromise.
- Thou shalt remember that one who plans shall control the process and have serenity of mind.
- Thou shalt curb any emotional responses and remember thy own ego.
- Thou shalt define problems and seek solutions.
- Thou shalt listen and mind the idle clattering of thy teeth.
- Thou shalt not bear false information but thou shalt stay well informed.
- Thou shalt remember thy management rights and keep them holy.
13. FOOTNOTE TO TRA '97: In our September, 1997 Special Supplement reviewing the Taxpayer Relief Act of 1997, we stated with reference to Section 1529: "What makes you think this amendment was designed to benefit only a very specific, identifiable group?" Well, we have since learned that this "identifiable group" is Connecticut (or, more accurately, cities in Connecticut). Internal Revenue Service is gearing up for an onslaught of amended tax returns and claims for refund, which must be filed with IRS by August 5, 1998.
14. NEW HAMPSHIRE NOT "PRO-CHOICE!": In a move that could save $14 Million next year, the State of New Hampshire has signed on with one insurance company to provide a single health care plan for all 11,000 state employees. In prior years, state employees had the choice of two other insurers in addition to an HM0 (which will still be a choice). In case you are interested, BNA also reports the State's monthly premium costs: individual, indemnity $184 and HMO $175; husband-wife, indemnity $367 and HMO $350; family, indemnity $595 and HMO $472.
15. BANKRUPTCIES WIPE OUT CONSUMER DEBT: Last year more than 1.2 Million Americans filed for personal bankruptcy. This year the total will increase by one-third, to 1.6 Million. More than 70% of bankruptcy petitions came under Chapter 7, which erases virtually all of a debtor's obligations. Of the $40 Billion in debt that was discharged in 1996 bankruptcies, over $11 Billion was owed to banks and credit card issuers. Somehow, we can't muster up too much sympathy for these companies, which regularly and continuously send unsolicited "pre-approved" cards in the mail. (Not too long ago, our deceased poodle received one!)
16. HOW WE HANDLE A "COLD CALL": How many times have you just settled down to dinner when the phone rings with a "cold call" -- a donation solicitor, a stockbroker, an insurance agent or someone who just happens to have a ton of extra office supplies sitting on a truck around the corner? We use the following method: "We can't talk right now, but if you give us your home number we will call you back." ... "I really can't give you my number. I'll call you again because you can't call me at home." ... "Why not? You just did it to us." .... Dialtone.
17. SOUTH AFRICAN FUNDS MOVE TOWARD FOREIGN INVESTMENT CAP: In anticipation that the South African Reserve Bank will loosen the 10% limit on overseas investment, many South African pension funds are pushing toward that limit. One strange rule: for every dollar invested overseas, South African pension plans must invest an equal amount of money within South Africa. This means, according to Pensions & Investments, that South African institutions have to find counterparties to engage in asset swaps -- not an easy task.
18. ARE INDEXERS GETTING PAID FOR RISK?: As domestic equities surge, bringing increased business to Indexers, fees are plummeting. The Chief Operating Officer of Mellon Global Asset Management, quoted in Pensions & Investments, says pension funds are typically paying 2 basis points on accounts up to $100 Million and sometimes nothing after that. Indexers expect to make up the difference on securities lending - like custodians, which price their services at zero (Where are these institutions?) and survive on securities lending income. Obviously, negotiation plays a great part in this business, as "published fees" on passively managed accounts of $100 Million are about 6 to 10 basis points. One other thing, non-bank indexers have a difficult time competing on fees because they cannot give up the management fee in exchange for securities and lending income.
19. PENSIONS & INVESTMENTS SETS FORTH PROS AND CONS OF DIRECTED BROKERAGE: The September 15, 1997 issue of P&I carries an article on the arguments for and against directed brokerage. The article concludes that the positives outweigh the negatives: (a) both commission cost savings and "best execution" can be achieved with directed brokerage, (b) commission dollars are an asset of the plan and should provide needed investment services for the plan and (c) the small effort needed to manage directed trading is well worth the resulting cost savings. The author, who is president of what appears to be a company involved in the field of directed brokerage, warns that some managers initially will resist directed brokerage because of their natural tendency to keep excess commissions to pay for research and services that benefit their firm rather than the individual client.
20. NEW INDEX WILL TRACK REITS: Standard & Poor's will launch a new Index designed to track the performance of Real Estate Investment Trusts. The new Index comprises 100 REITs covering more than 80% of the securitized real estate market. Pensions & Investments reports that to qualify, issues must be traded on a major United States Stock Exchange and must have a market value of at least $100 Million.
21. COALITION TARGETS SOCIAL SECURITY OFFSET: A coalition of organizations comprising federal, state and local employees and retirees is supporting legislation to modify government pension offset provisions that sharply reduce retiree benefits, reports BNA. Since 1982, spouses of government retirees have suffered a Social Security reduction of 2/3 of their pension. (For example, a widow eligible for a pension of $300 per month and an equal amount of Social Security receives Social Security reduced by 2/3, to $100 per month.) HR2273 would permit an offset only when the combined pension benefits and Social Security exceed $1,200. Incidentally, there is no corresponding Social Security offset provision for private sector retirees.
22. "MAXIMUM MEDICAL IMPROVEMENT" NOT A PENSION CONCEPT: The State Retirement Commission rejected an application for disability retirement under the Florida Retirement System because it determined that the applicant had not reached "Maximum Medical Improvement" (MMI). In reversing the Commission and remanding for a determination as to whether or not applicant was totally and permanently disabled, the District Court of Appeal held that it was not appropriate to try to transplant concepts and definitions such as MMI from Workers' Compensation Law into the law governing a retirement system. Further, the Court agreed with applicant that the Commission should not assume that she has the ability to lose enough weight to alleviate her conditions, but, rather should determine whether there is a reasonable probability that applicant, through a good faith effort, could lose enough weight to alleviate her disabilities and provide useful and efficient service. Incidentally, applicant (1) weighed between 300 pounds and 400 pounds, (2) could not walk or stand for more than five minutes, (3) had suffered from heart disease, diabetes, asthma, morbid obesity, degenerative arthritis and allergies, and (4) had had a myocardial infarction, six heart by-passes and partial removal of her sternum. Hassler v. State Retirement Commission, 22 Fla. L. Weekly D2048 (Fla. 5th DCA, August 29, 1997). (It seems to us that the State Retirement Commission was the hassler in this instance.)
23. STATE COURTS MAY NOT ENFORCE AWARDS OF VETERANS' DISABILITY BENEFITS: The Uniformed Services Former Spouses' Protection Act (USFSPA), enacted by Congress in 1982, granted State courts authority to distribute "disposable retired or retainer pay" in dissolution proceedings according to State law. However, military personnel are prohibited from assigning military disability benefits by settlement agreement, and State courts are prohibited from enforcing such agreements. Here, the former husband guaranteed his former wife a steady monthly payment by agreeing not to merge his retirement pay with disability benefits or pursue any course of action which would defeat the right to receive her portion of his full net disposable retired or retainer pay. And, the former husband agreed to indemnify the former wife if he breached this provision (without requiring that the indemnification funds come from disability benefits). Thus, in Abernethy v. Fishkin, 22 Fla. L. Weekly S533 (Fla., September 4, 1997), the Supreme Court of Florida held that the agreement did not violate USFSPA. The lawyer who represented the former wife in this case really knew what she was doing.
24. WHAT IS THE EAFE INDEX?: EAFE -- which stands for Europe Australasia Far East -- is an Index which many investors use to measure the performance of "international" equities. As of June 30, 1997, the following countries made up the EAFE Index in the following proportions: Australia (2.8%), Austria (.4%), Belgium (1.2%), Denmark (.9%), Finland (.7%), France (6.7%), Germany (8.5%), Hong Kong (3.8%), Ireland (.3%), Italy (3.0%), Japan (33.2%), Malaysia (2.1%), Netherlands (5.0%), New Zealand (.4%), Norway (.5%), Singapore (1.1%), Spain (2.4%), Sweden (2.5%), Switzerland (6.5%) and United Kingdom (18.2%). Obviously, Japan with one-third of the allocation, has the greatest influence on EAFE Index Performance. (The official name now is MSCI EAFE: Morgan Stanley Capital International Europe Australasia Far East Index.)
25. NEW JERSEY MAY LOOSEN DERIVATIVES POLICY: Pensions & Investments reports that the New Jersey Division of Investment may loosen its derivatives policy for investment of state pension funds. Currently, funds can be invested in Treasury Security Futures, covered call options and currency futures. New Jersey officials are looking into allowing use of equity futures contracts for equitization types of strategies, without leverage.
26. BUT INDIANA ALREADY HAS: A recent change in the Indiana State Constitution will open the door for the Indiana state pension fund to use derivatives in the fund's externally managed investment portfolios. According to Pensions & Investments, new guidelines allow futures contracts to be used for equitizing cash and for management of portfolio cash flows. Incredibly, the $7.5 Billion fund only began investing in the stock market for the first time this year!
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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.