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August, 1998

Stephen H. Cypen, Esq., Editor

1. IRS SAYS IT WILL BE READY FOR YEAR 2000: The Internal Revenue Services says it is making satisfactory progress toward resolving Y2K problems with its computer systems and is likely to meet the federal government's March 31, 1999 deadline for testing. In the meantime, BNA reports that IRS will receive about $7.85 Billion in funding for 1999, of which $3.25 Billion is to prepare for the Year 2000.

"An elephant is a mouse built to government specifications."

2. DELAWARE STATE RETIREES GET PENSION INCREASES: A brief report in BNA advises that the Governor of Delaware has signed legislation raising pensions for state employees who retired prior to July 2, 1997. The increases apply to service, disability and survivor benefits for retired state workers, judges and local police and firefighters, effective July 1, 1998. Those who retired between January 1, 1986 and July 2, 1997 will receive increases of 2%. For pensions granted prior to 1986, the increase is 3% or $20.00 a month, whichever is greater.

3. OKLAHOMA PENSION FORFEITURE STATUTE CONSTITUTIONAL: A United States Court of Appeals has declared constitutional Oklahoma's statute providing for forfeiture of retirement benefits when a public employee is convicted of a felony. The appellate court affirmed a lower court ruling that, under Oklahoma law, the employee had no property right in his pension benefits because any such right is contingent on his maintaining honorable service during public employment. Since its enactment in 1984, Florida's pension forfeiture statute (F.S. 112.3173) has been held constitutional on several occasions. One point of interest: Florida's law is based upon Article II, Section 8(d), of the Florida Constitution, which provides that "any public officer or employee who is convicted of a felony involving a breach of public trust shall be subject to forfeiture of rights and privileges under a public retirement system or pension plan in such manner as may be provided by law."

4. ST. LOUIS FACES CHALLENGE TO SICK-LEAVE ORDINANCE: A new St. Louis city ordinance providing city employees with lump sum payments for accumulated sick-leave upon retirement is being challenged as being unconstitutional under several sections of the Missouri Constitution. Previously, unused sick days were added to a retiring employee's credited service and then calculated for pension benefit purposes. Now, an employee receives cash equal to accrued sick-leave hours multiplied by final average hourly wage, a city official told BNA. So what's the big deal? Most cities pay for sick leave at final hourly wage and the federal government pays based upon what the employee would have received if he had remained employed until the sick-leave was exhausted! (See C&C Newsletter for July, 1997.)

5. EX POST FACTO PROHIBITION NOT APPLICABLE TO REGULATORY LAWS: Article I, Section 10, of the Florida Constitution prohibits, inter alia, passage of any ex post facto law; that is, a law which makes illegal an act that was legal when performed. The prohibition against such laws applies only to penal legislation and not laws which are regulatory in nature, enacted solely for the purpose of protecting the public. Thus, a 1996 law barring a felon from participating in the Medicaid program was not invalid as against a dentist who was convicted of money laundering in 1995. Interestingly, the dentist handled the appeal himself, from the penitentiary at Eglin Air Force Base. Rowe v. Agency for Health Care Administration, 23 Fla. L. Weekly D1646 (Fla. 5th DCA, July 10, 1998).

"Honesty is the best policy -- there's less competition."

6. EMPLOYMENT DISCRIMINATION CLAIMANT NOT BARRED BY RECEIPT OF SSD: Plaintiff appealed an order summarily dismissing his claim for employment discrimination based on a handicap under the Florida Civil Rights Act of 1992, Sections 760.01-760.11, Florida Statutes, in favor of his former employer. Although plaintiff sought damages under FCRA alleging his ability to work with accommodation, he also applied for and received Social Security Disability benefits because "I am unable to work." The trial court entered final summary judgment in favor of the ex-employer, invoking the doctrine of judicial estoppel, which is designed to prevent litigants from taking totally inconsistent positions in separate judicial (including quasi-judicial) proceedings. In reversing, the District Court of Appeal held that to present a prima facie case of employment discrimination based on disability under FCRA, a plaintiff must show (1) that he or she is a person with a disability; (2) that he or she is "qualified" for the position apart from his or her disability; and (3) that he or she was denied the position solely because of his or her disability. Because plaintiff's claim that he was disabled under the liberal standards of the Social Security Act may be consistent with his claim under FCRA, there exists a genuine issue of material fact as to whether he could have worked for his employer with a reasonable accommodation. The court did recognize a split of authority over the issue of whether application for or receipt of Social Security Disability benefits should preclude discharged employees from asserting protection under the Americans With Disabilities Act, the federal equivalent of FCRA. Smith v. Avatar Properties, Inc., 23 Fla. L. Weekly D1642 (Fla. 5th DCA, July 10, 1998).

7. PROMISSORY ESTOPPEL NOT APPLICABLE TO OFFER OF AT-WILL EMPLOYMENT: Plaintiff sued the City of Hollywood for terminating his prospective employment with the City. In reliance upon an offer of a position as assistant to the city manager, plaintiff quit his then-current employment. On the same day, he gave written confirmation of his acceptance of the City's offer, but was thereupon told that the job offer had been withdrawn. The trial court found that plaintiff had been damaged in the amount of $90,400.00 representing lost wages from his former job. However, because the City-offered employment was "at-will" -- meaning that he could have been discharged at any time -- the court awarded $10.00 as nominal damages. On appeals by both parties, the appellate court ruled for the City, finding that reliance on a promise consisting solely of at-will employment is unreasonable as a matter of law since such a promise creates no enforceable rights in favor of an employee other than the right to collect wages for work actually performed. In other words, a basic element of promissory estoppel was missing. Leonardi v. City of Hollywood, 23 Fla. L. Weekly D1653 (Fla. 4th DCA, July 15, 1998).

"A little lie sometimes saves a ton of explanations."

8. INSURANCE BROKER IS A FIDUCIARY: An insurance agent is one who represents an insurance company under an employment by it. On the other hand, an insurance broker is one who acts as a middleman between the insured and the insurance company, and who solicits insurance from the public under no employment from any special company, and who, upon securing an order, places it with a company selected by the insured, or in the absence of such a selection, with a company selected by himself. An insurance broker is in a fiduciary relationship with an insured. Incidentally, damages are the same for breach of fiduciary duty as they are for negligence. Moss v. Appel, 23 Fla. L. Weekly D1660 (Fla. 4th DCA, July 15, 1998).

9. MINNESOTA TRUSTEES NOT WAITING TO EXHALE: Trustees of the $43 Billion Minnesota State Board of Investment voted not to make any future investments in companies that derive 15% or more of their revenue from the sale of tobacco products. Like Florida, Minnesota had sued tobacco companies for consumer fraud. Pensions & Investments reports that the decision will not affect current tobacco securities positions.

10. BUT NYCERS LETS SMOKE GET IN ITS EYES: After four years and $150,000.00 spent on tobacco investing studies, the $38 Billion New York City Employees' Retirement System decided to freeze tobacco holdings in passive portfolios but permit active managers to continue to exercise discretion. All four studies concluded that the investment outlook for tobacco stocks was bleak. But when trustees met to consider the tobacco issue, they were given an information packet that included a memorandum containing the following general comments: Philip Morris Cos. Inc. is one of New York City's largest taxpayers; Philip Morris also pays significant real estate taxes to the City; taxes on cigarettes contribute to City coffers; tobacco creates jobs, not only at the company level, but also through advertising, distribution and other ancillary businesses. (At least the City didn't put any pressure on the trustees.) Pensions & Investments thought the story deserved front page treatment and an editorial, which stated that "trustees should not consider a business's contribution to the local economy in their decision on whether to invest in a particular industry or company. Investments should be considered on their merits alone, in keeping with the appropriate risk of the pension fund. Trustees cannot satisfy fiduciary objectives while catering to political interests."

"I used to be indecisive, but now I'm not so sure."

11. CALSTRS GIVES STAFF MAJOR RESPONSIBILITY: California State Teachers' Retirement System has given its staff authority to commit up to $400 Million to alternative investments without Trustee approval. Although this amount is only about 1/2 of 1% of the $88 Billion giant, $400 Million still sounds like a lot of money to us. (Officials of the Florida State Board of Administration, which invests assets of the Florida Retirement System, told Pensions & Investments that its staff already has similar authority.)

12. GET CPI INSTANTLY, BY FAX: The United States Department of Labor, Bureau of Labor Statistics, has a fax-on-demand service available twenty-four hours a day. Call (415) 975-4567, follow the instructions and enter four digit code 2110. Almost instantly you will receive a fax showing the latest CPI numbers. Other codes allow you to receive unemployment figures, producer price indexes and the like. Incidentally, on April 16, 1998 the Bureau of Labor Statistics announced its decision to use a new formula for calculating the basic components of the Consumer Price Index for all Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The change will become effective with data for January, 1999. Of course BLS data are available on the Internet, at http:\\

13. BUCK RELEASES EMPLOYEE WELFARE BENEFIT SURVEY: Buck Consultants, Inc., a human resources consulting firm, has released a new survey on employee welfare benefit plans. The following are some key findings: 98% of responding employers provide basic term life insurance, usually on a multiple-of-salary basis. Employers give paid time off for an average of nine national/state holidays and two floating holidays per year. Employees most frequently receive two weeks vacation prior to five years of service, three weeks for five to fifteen years and four weeks after fifteen years. Sick pay plans are offered by 84% of employers. More than two-thirds of survey respondents offer short-term disability plans and 93% offer long-term disability plans. Finally, 87% offer employees tuition reimbursement for work-related courses.

14. PHILADELPHIA FUND GETS RIGHT TO ISSUE PENSION OBLIGATION BONDS: Under a new state law, the Philadelphia Municipal Employees Retirement System would be allowed to issue pension obligation bonds. If Pension & Investments' interpretation of the legislation is correct, the separate municipal entity that oversees the fund will have authority to issue the bonds. In most cases we are aware of, it is the employer/sponsor that issues the bonds, in order to reduce or eliminate its unfunded liability. Apparently the City of Pittsburgh Comprehensive Municipal Pension Trust Fund previously issued pension obligation bonds under an earlier state law.

15. CALPERS FINALLY GETS "ALL" THE STATE OWES: Our readers know that the State of California was ordered to pay CalPERS the almost $1.5 Billion it had shorted the fund (see C&C Newsletters for April, 1997; July, 1997; and September, 1997). The state has now appropriated almost $350 Million to pay back-interest on the contribution. Interest was paid at the rate of 8.75% per annum, which we presume is either the fund's earnings assumption rate or the state's statutory interest rate on judgments. Because the fund has been realizing almost 20% annually, one CalPERS official, quoted in Pension & Investments, said the differential means the plan "got screwed" by the state.

16. BUT ANNUAL CALIFORNIA BUDGET CRISIS AFFECTS EMPLOYEES: Under the California Constitution, the state legislature must adopt a budget by June 15 of each year, giving the Governor 15 days to review it before the July 1 deadline. This year, as in the last 12, California lawmakers have missed the deadline. Unlike previous years, however, a state superior court judge has enjoined the state from making payments to its employees, vendors, counties, bondholders, schools and social service recipients. Fortunately, pension recipients will not be affected because their payments come from CalPERS and not the state treasury. In addition, the injunction contains five specific exceptions, two of which apply to CalPERS: its already-approved funding for 1998-1999 and the interest payment referred to in the preceding item. A spokesman for the state employees union told BNA that an immediate appeal will be filed.

"Nothing is so simple that it can't get screwed up."

17. SAGINAW DANGLES DC PLAN: In what may be continuation of a rather disturbing trend (at least to us), Saginaw County, Michigan will offer all new employees a defined contribution plan rather the existing defined benefit plan. In addition, the county's six hundred current employees will be offered the chance to convert defined benefit plan account values to the new plan, according to a report in Pension & Investments.

18. U.S. GRABS BIGGER SHARE OF INTERNATIONAL MARKET: According to the P&I/Watson Wyatt World 500, United States-based money managers tightened their grip on the global investment community in 1997, grabbing a 44% market share of the $25 Trillion industry. That piece, up sharply from 1996's 37% market share, contrasts with Japan's slump to 15% from 22%. However, Japan's Kampo is still the world's number one manager with $758 Billion in assets, although number 2, the U.S.'s Fidelity Investments, has narrowed the gap to only $123 Billion (compared to the previous $280 Billion gap).

19. KENTUCKY INDEX FUND HAS HIGH TRACKING ERROR?: The Kentucky Retirement System had a net tracking error of -30 basis points in its internally-managed index portfolio for the year ended June 30, 1997. Dubbed an "S&P 500" index, the $3 Billion portfolio only contains 325 stocks. Investment guidelines preclude foreign investments but allow stocks with a Value-Line Investment Services ranking of four for safety! Maybe they should talk to someone like Wayne Owen, but a tracking error of 30 basis points on a portfolio with only 65% of the stocks in the S&P 500 doesn't sound too bad. According to Pension & Investments, KRS's auditors had an absolutely brilliant solution: include the other 175 securities represented in the S&P 500 index, stop using portfolio optimizers and stick with a purely non-active investment strategy. what is the definition of an index?

"Consistency is the hobgoblin of a small mind."

20. MEDIUM-SIZED PUBLIC FUNDS PAY LOWEST MANAGEMENT FEES: Speaking of Kentucky, the state auditor conducted a fee survey to see how the state's funds' fees stack up against others. Medium-sized public funds (between $5.5 Billion and $15 Billion) average external management fees of 17.7 basis points. "Large" funds and "small" funds paid an average of 21.8 and 23.5 basis points, respectively. State funds in this survey had 81% of their assets managed externally. Another, from Cost Effectiveness Measurement Inc. and reported in Pension & Investments, showed the mean management cost for U.S. public pension funds at about 30 basis points. The firm's data base includes 53 public plans, with median assets of $4 Billion.

21. FRS DISABILITY PROVISIONS AMENDED: Chapter 98-138 amends the Florida Retirement System disability retirement provisions effective July 1, 1998. Section 121.091(4)(a), Florida Statutes, has been amended to add a subparagraph that reads "for a member who is receiving Workers' Compensation payments, the effective disability retirement date may not precede the date the member reaches Maximum Medical Improvement (MMI), unless the member terminates employment prior to reaching MMI." This amendment is rather curious in that the State Retirement Commission was recently slapped down for denying a disability pension to an applicant who had not reached MMI. The Fifth District Court of Appeal warned the Commission 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 (see C&C Newsletter for October, 1997). Also, Section 121.091(4)(c), Florida Statutes, dealing with proof of disability, has been amended by adding the following: "The unavailability of an employment position that the member is physically and mentally capable of performing will not be considered as proof of total and permanent disability." We believe the new sentence is an accurate statement of existing case law applicable to FRS and local retirement systems.

22. ROTH IRA GETS FLORIDA EXEMPTION: Section 222.21(2)(a), Florida Statutes, provides that any money or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement or profit-sharing plan qualified under certain sections of the Internal Revenue Code (including an IRA), is exempt from all claims of creditors of the beneficiary or participant. Effective January 1, 1999, Chapter 98-159 adds the new Roth IRA to the exemption list.

"Do unto others and do it fast."

23. ANTI-NEPOTISM LAW AMENDED TO EXCLUDE VOLUNTEERS: Section 112.3135(2)(a), Florida Statutes, generally prohibits a public official to appoint, employ, promote or advance, or advocate for appointment, employment, promotion or advancement, in or to a position in the agency in which the official is serving or over which the official exercises jurisdiction or control, any individual who is a relative of the public official. Further, an individual may not be appointed, employed, promoted or advanced in or to a position in an agency if such appointment, employment, promotion or advancement has been advocated by a public official, serving in or exercising jurisdiction or control over the agency, who is a relative of the individual or if such appointment, employment, promotion or advancement is made a collegial body of which a relative of the individual is a member. (The subsection does not apply to appointments to boards, other than those with land-planning or zoning responsibilities, in municipalities with less than 35,000 population.) Now, Chapter 98-160 makes the subsection inapplicable to persons serving in a volunteer capacity who provide emergency medical, firefighting or police services. Those persons may receive, without losing their volunteer status, reimbursement for the cost of any training they get relating to the provision of such volunteer services and payment for any incidental expenses relating to the services that they provide.

24. PRIVATE CORPORATION PROVIDING SHERIFF WITH SERVICES IS SUBJECT TO PUBLIC RECORDS ACT: The Sheriff of Polk County contracted with a private corporation to "provide total health care services for the inmates/detainees (including federal and state prisoners) housed within the county correctional system facilities." In the contract the corporation acknowledged familiarity with Florida public records law and agreed to comply with same unless records were specifically exempted. The District Court of Appeal affirmed a trial court order requiring the corporation to produce records pertaining to a settlement agreement resulting from treatment of an inmate. Because the corporation undertook to act on behalf of the sheriff by providing these services, all records that would normally be subject to the Public Records Act if in the possession of a public agency are likewise covered by that law even though in the possession of a private corporation. Prison Health Services, Inc. v. The Lakeland Ledger Publishing Company, 23 Fla. L. Weekly D1715 (Fla. 2d DCA, July 22, 1998).

25. NEW YORK GOVERNOR SIGNS PENSION BILLS: As expected, New York Governor Pataki has signed into law four bills that increase benefits to public retirees and improve benefits for current employees of state and local governments. BNA now reports that the legislation will cost public employers $410 Million per year (rather than $370 Million), but the state will not incur additional costs because of stellar investment earnings. Inasmuch as public employees annually must approach the state legislature hats-in-hands, next year labor leaders and Comptroller/sole Trustee McCall will ask lawmakers to establish a permanent cost-of-living adjustment for retirees.

"Every once in a while an innocent man is sent to the legislature."

26. GRAHAM PENSION BILL SEEKS TO EXPAND COVERAGE: Florida Senator Bob Graham and others have introduced S. 2339, which would expand pension coverage by lessening burdens for sponsoring employers. Entitled the Pension Coverage and Portability Act, the proposed legislation appears to have broad bipartisan support. Among other things, the bill would (1) create a simplified defined benefit pension plan for small businesses, (2) entice small businesses to start pension plans by providing a tax credit equal to $500.00 annually for each of the first three years of a plan's existence, (3) establish a second tax credit for companies with up to 50 employees who make matching contributions to defined contribution accounts, (4) eliminate IRS new plan fees for small businesses that establish pension plans, (5) repeal the full-funding limit on employer contributions to defined benefit pension plans, (6) ease rollover rules that govern defined contribution plans to facilitate movement of retirement assets among defined contribution plans in different job sectors, (7) relieve employers who start defined benefit pension plans from insurance premiums assessed by PBGC, (8) encourage employers to provide retirement planning and investment education by deeming that same would not be a taxable fringe benefit and (9) repeal the IRC's 25% limitation on contributions to defined contribution plans. BNA has an excellent piece on the bill, which includes several provisions from the Retirement Security for the 21st Century Act that were not included in the 1997 Taxpayer Relief Act (see C&C Newsletter for May, 1998).

27. NEWSLETTER NEWS: As we said in our June, 1998 Newsletter, all of our Newsletters -- from the first issue in May, 1996 -- will be archived on our Website. But, you ask perceptively, what good is a research source without an index? Answer: absolutely no good. Thus, we have installed on our Newsletter webpage a search engine, which allows you to use key words to locate items in the Newsletters. However, because the search engine will not "recognize" a number, you must use phrases that do not contain numbers. In addition, you no doubt have noticed that the items in this Newsletter are numbered. There is a reason: in its electronic format, the Newsletter does not have page numbers. So, when we make reference to a prior issue and cite the page number, it may not make sense to those reading the Newsletter on the Internet. Henceforth, all Newsletters will have numbered items, and references to prior issues with numbered items will be to those numbered items.

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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