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February, 1998

Stephen H. Cypen, Esq., Editor

PUBLIC WORKERS TRAIL PRIVATE WORKERS: The Bureau of Labor Statistics has recently released information on employment costs for the civilian workforce. Employment costs include wages, salaries and benefits. The data show continuation of a trend from the past few years: total compensation costs of state and local government workers continue to increase at a slower rate than those of their private counterparts. For the quarter ended September 30, 1997, state and local government compensation for workers increased .5% compared to a private-sector increase of .8%. For the year then ended, public-sector workers experienced a 2.4% rise in compensation, while private employees gained 3.2%.

WORKING GROUP ISSUES REPORT ON DB VS. DC PLANS: The Department of Labor's Advisory Council on Employee Welfare and Pension Benefit Plans has submitted a final Working Group Report on the merits of defined benefit plans versus defined contribution plans. In order to make defined benefit plans more attractive, the group suggests increasing the maximum dollar limit for benefits, permitting pre-tax contributions and increasing maximum compensation limits.

PUBLIC OFFICERS AND EMPLOYEES ENTITLED TO FULL PAY WHEN ON AUTHORIZED MILITARY LEAVE: Sections 115.07 and 250.48, Florida Statutes, basically provide that a public officer or employee on authorized military leave of absence shall suffer no loss of pay, time or efficiency rating during the leave of absence. The legislative direction is mandatory, requiring that the public employer pay its officers and employees their full salaries regardless of any other compensation from the military or elsewhere. Thus, public officers and employees on authorized military leave are entitled to receive their full government salary and not merely the difference between their government salary and their military pay. AGO 97-77 (November 5, 1997).

"WOUNDED ASIAN TIGERS" STABLE BUT STILL SHAKY: Problems in Asia resulted from a decade of reckless borrowing, especially by the private sector. Massive amounts of overseas money flowed into the region, much of which was invested in speculative and wasteful projects and programs. In July 1997, Thailand fell, and Malaysia, Indonesia, the Philippines, Hong Kong and South Korea followed like dominos. Between July 1997 and January 1998 the currencies of these countries were devalued anywhere from 50% to 70%. Their stock exchanges declined as follows: Malaysia, 47%; Hong Kong, 46%; Indonesia, 43%; Thailand, 42%; Singapore, 37%; and South Korea, 32%. (Japan's stock exchange declined 21%.) All currencies and exchanges are off their lows, reached last month. Bring on those foreign investments??

PPCC RELEASES 1997 SURVEY: The Public Pension Coordinating Council has issued its 1997 Survey of State and Local Government Employee Retirement Systems. The survey covers 261 public employee retirement systems, representing 379 retirement plans. These plans cover 81% of the 13.6 Million active plan members and hold 81% of the $1.6 Trillion in state and local retirement system assets. The survey contains a wealth of information on system administration; retirement benefits; actuarial valuations; obligations, liabilities and plan funding; employer and employee contributions; and investments. Its conclusion: "Generally, the results of PPCC's 1997 Survey strongly suggest that state and local government employee retirement systems are well funded and in sound financial health. While pension liabilities grew during the period, pension assets did as well, resulting in a decline in the unfunded actuarial accrued liabilities. In addition, benefit formulas have remained stable, and there have been slight declines in assumed total salary increases due to declines in inflation. Finally, the systems experienced strong investment returns over the past two years, keeping their average five-year rates of investment return above the assumed rates used in the actuarial valuations." For your information, the PPCC comprises Government Finance Officers Association (GFOA), National Association of State Retirement Administrators (NASRA), National Conference on Public Employee Retirement Systems (NCPERS) and National Council on Teacher Retirement (NCTR).

ADMINISTRATION BACKS OFF OF LINE-ITEM VETO: We previously reported that President Clinton used his line-item veto power to strike a provision from the Treasury and Government Appropriations Act which would have created an "open season" between July 1 and December 31, 1998 for eligible federal employees to choose to switch from the Civil Service Retirement System (CSRS) to the newer Federal Employees Retirement System (FERS) (see C&C Newsletter for February, 1997). In a stunning reversal -- and victory for the National Treasury Employees Union -- the Justice Department has agreed that the President exceeded his authority in this particular case. Another incidental benefit reported by BNA: apparently the Social Security reduction (see C&C Newsletter for October, 1997) applies to CSRS but not FERS; thus, spouses who switch will no longer suffer the two-thirds reduction in their benefits.

BUT IS ADMINISTRATION TRYING AN END RUN?: President Clinton's proposed fiscal 1999 Budget would repeal previously-enacted legislation allowing certain federal employees to switch from the Civil Service Retirement System to the Federal Employees Retirement System from July 1, 1998 through December 31, 1998. National Treasury Employees Union leaders expressed anger at the move, believing that the matter had been resolved in favor of retaining the "open season." Incidentally, we read that a United States District Judge declared the President's new line-item veto power to be unconstitutional -- more when we get the details.

GSA HOLDS THE LINE (ALMOST) ON PER DIEM RATES: The General Services Administration (GSA) has published new rates for federal travelers on official business effective January 1, 1998. While the standard per diem rate of $30.00 per day for meals and incidental expenses will not change, some of the individual rates for about 450 "higher-cost" cities will increase as much as $45.00, reports BNA. Again...Florida, where are you?

JAPANESE MAY PICK ONE FROM COLUMN A AND ONE FROM COLUMN B: In order to continue Japan's Universal Retirement System, the Ministry of Health and Welfare has devised a pension reform plan made up of five "menus." The first menu would lower the monthly pension from $1,800.00 to $1,300.00. The second menu calls for abolition of cost-of-living adjustments based on annual growth of wages, but continuing an annual COLA based on the Consumer Price Index. In the third menu, retirement age would be raised to age 65 from 60, over a period of years. The fourth menu would reduce pensions for those between 65 and 69 according to their wages. The final menu calls for collecting premiums from annual gross salary rather than monthly salary. (Currently, premiums are 17.35% of monthly salary, but only 1% of "bonuses.") According to BNA, if no other changes were made, monthly premiums would double to 34% -- a politically unacceptable solution.

OREGON SEES LARGE INCREASE IN RETIREMENTS: Record earnings for Oregon's Public Employee Retirement System have resulted in a large increase in the number of state and local government workers seeking retirement. A provision in the plan allows retiring members the option of computing benefits through a formula using their salary and years of service or by amortizing the value of their accounts, which are matched by their employer. According to BNA, most members have selected the latter method because it has resulted in greater monthly benefits. Another reason for the onslaught of retirements: those who retire between March of one year and the next get to apply the most recent interest rate to their account for the previous year and the year in which they retire. Thus, those who retire prior to March 1, 1998 can apply 1996 earnings (21%) for 1996 and 1997. Pension officials hope that technological advances will enable them to put an end to the glitch.

FORMER SOVIET STATE TO LAUNCH NEW PENSION SYSTEM: The oil-rich republic of Kazakstan will implement a new pension system this year. The new system, according to BNA, will start with $100 Million, will end mandatory employers' contributions of 25.5% and will require employee contributions.

IRS ISSUES GUIDANCE ON SECTION 457 TRUST REQUIREMENT: The Internal Revenue Service has issued Notice 98-8 to provide guidance on changes brought about in 1996 by the Small Business Job Protection Act. Generally, IRC §457(b) plans maintained by a state or local government must hold all plan assets and income in a trust for the exclusive benefit of plan participants and their beneficiaries. The change is effective for plans established on or after August 20, 1996. Plans in existence on that date are not required to establish a trust until January 1, 1999. (Remember that Florida, in a rather farsighted move, amended Section 112.215, Florida Statutes, to require that assets of state employees be held in trust as of July 1, 1997; see C&C Newsletter for August, 1997). To satisfy the trust requirements, Section 457(b) plans must transfer deferred amounts to the trust "within a period that is not longer than is reasonable for the proper administration of the accounts of participants." For example, a governmental Section 457(b) plan could provide for amounts deferred under the plan to be contributed to the trust within fifteen business days following the month in which these amounts would otherwise have been paid to the participant.

NEW MEXICO DB PLAN UNDER ATTACK: The Governor of New Mexico is proposing a sweeping reform measure to replace the state's current defined benefit plan with a voluntary defined contribution program. The Governor, says BNA, describes New Mexico's current retirement system as one of the most generous in the nation -- retirement is available at 80% of three-year final average salary after 26-2/3 years. So? However, the Governor says that current employees would not be affected. What a guy. Incidentally, the Minority Leader of the New Mexico House is named "Nicely" -- a name you may vaguely remember from "Guys and Dolls."

CALIFORNIA APPELLATE COURT RULES AGAINST MARIN COUNTY PENSION PLAN: In 1980 Marin County amended its pension system to create a second tier in which employees hired after June 1, 1980 contribute less to their retirement and receive fewer benefits. The plan has always permitted returning employees to purchase service credit for prior employment upon redeposit of withdrawn contributions. According to a report in BNA, the California Court of Appeals ruled that employees who left the County in the 1970's, withdrew their pension contributions and returned to work in 1994, were entitled to the more favorable tier of the plan. The Court found significant that the buy-back section provided that once a returning employee completes the redeposit of withdrawn contributions, the employee's "membership is the same as if unbroken by such termination." Thus, a redepositing employee reclaims the same membership status as a similarly-situated member who had never left employment.

FMLA CELEBRATES FIFTH ANNIVERSARY: Five years ago, the Family Medical Leave Act was the first bill signed into law by President Clinton. Now, according to BNA, Connecticut's Senator Dodd is calling for an expansion of the law to cover businesses with more than twenty-five workers (compared to the current fifty), which would increase percentage of covered employees from 57% of the work force to 71%. Meanwhile, the Administration is working on its own expansion of FMLA, which would cover only about 65% of the work force.

UNION MEMBERSHIP DECLINES: As surprising as it may seem, the number of U.S. workers belonging to unions in 1997 fell about 160,000, to 16.1 million. The Labor Department's Bureau of Labor Statistics reported by BNA showed that union members make up about 14% of the work force. Since 1983 (the first year for which numbers are available), when union membership exceeded 20%, the rate has fallen every year.

RELEASE OF DRUNK NOT STATE-CREATED DANGER: Appellant, who was intoxicated at the time, was arrested for disorderly conduct and released with a notice to appear at a future court date. After his release, while crossing the highway near the police station, appellant was struck by a vehicle and severely injured. He sued the city and the arresting officers pursuant to 42 U.S.C. §1983. To state a cause of action for a violation of said section, one must allege that a person, acting under color of state law, deprived him of rights protected under the federal constitution or federal laws. Appellant did not sue for false arrest or false imprisonment. Rather, he claimed the opposite: that he should have been kept in custody for his own protection or that the police officers should have driven him home! On appeal, dismissal of those counts against the individual police officers was affirmed. Since appellant was not injured while in police custody, there was no special relationship between the parties. And, there was no liability under the "state-created danger" theory because the police officers did not use their authority to create a dangerous situation or to make appellant more vulnerable to the danger than had they not intervened. Lindquist v. Woronka, 32 Fla. L. Weekly D337 (Fla. 4th DCA, January 28, 1998).

U.S. PENSION FUNDS SPARKLE: Pensions & Investments has reported the results of a Callan Associates Inc. survey of 1997 global pension fund returns. U.S. pension funds, with $5.6 Trillion in assets, topped the list, returning 19.5%. Next came Swiss funds, 17%; UK funds, 16%; Canadian funds, 15.3%; Australian funds, 11.5%; and Japanese funds, 3.6%. (The return for U.S. funds compares with 13.7% in 1996 and 25.1% in 1995 -- a three-year annualized return of 19.5%.) Although domestic stocks returned over 30%, U.S. funds had an 11% average exposure to international equities, which returned just over 2%.

FRS EYES PRIVATE EQUITY: The Florida State Board of Administration, which is responsible for investing assets of FRS, has formed a captive private equity co-investment partnership through which the fund will invest with private equity general partners. The initial commitment is $250 Million that can grow to more than $1 Billion.

PUBLIC FUNDS DOMINATE TOP TEN: Pensions & Investments has listed its annual largest employee benefit funds as of September 30, 1997 -- the "smallest," number 1,000, at $431 Million! Of the top ten, eight funds are public: Number One - CALPERS at $128 Billion, Number Two - New York State Common at $96 Billion, Number Four - CALSTRS at $79 Billion, Number Five - FRS at $72 Billion, Number Six - New York State Teachers at $69 Billion, Number Seven - Texas Teachers at $64 Billion, Number Eight - New Jersey at $60 Billion and Number Ten - Federal Retirement Thrift at $55 Billion.

MILWAUKEE, RETIREMENT SYSTEM DUKE IT OUT: Apparently contrary to city ordinances governing the $3.5 Billion Milwaukee Employees' Retirement System, the City of Milwaukee has refused to pay the fund's investment management fees and duty disability claims. In its unsuccessful defense of lawsuits brought by the board of trustees, the city contended that the systems were overfunded and payments should come out of system assets. The city has appealed the lower court ruling. Another consequence of litigation: the police union supports the pension board and the firefighter's union supports the city.

SECURITIES INDUSTRY ASSOCIATION ON SOFT-DOLLARS: On November 7, 1997 the Board of the Securities Industry Association (SIA) adopted a "Best Practices" guide on soft-dollar and other commission arrangements. The guide is a recommendation for SIA members and adherence is voluntary. In addition to defining key terms, the publication makes recommendations for establishing a soft-dollar or other commission arrangement; understanding the services to be provided in a soft-dollar arrangement; maintaining a commission arrangement; and firm procedures, supervision and employee education. SIA comprises 800 investment bankers, broker-dealers, specialists and mutual fund companies, accounting for about 90% -- $100 Billion -- securities firms' revenues. Copies of the 20-page pamphlet are available free from SIA at (212) 608-1500.

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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.

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