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September, 1998

Stephen H. Cypen, Esq., Editor

1. AMERICAN YOUTH WANT TO SAVE SOCIAL SECURITY, BUT AT NO "COST" TO THEM: BNA reports on a survey of adults age 18 to 34 conducted by Peter D. Hart Research Associates. Workers were asked their opinion on Social Security, particularly on private investment accounts proposed by legislation introduced this year. Only 7% strongly supported a plan that would raise the minimum retirement age to 70 and reduce cost-of-living adjustments. On the issue of privatization, 73% said Social Security can work for young people when they retire, if only Congress would strengthen its finances.

"We are the people our parents warned us against."

2. IRC 457 MODEL AMENDMENTS PUBLISHED: The Internal Revenue Service previously issued Notice 98-8 to provide guidance on changes brought about in 1996 and 1997 (see C&C Newsletter for February, 1998, page 4). In its August 3, 1998 issue of Pension & Benefits Reporter, BNA sets forth the entire text of Revenue Procedure 98-41, which provides model amendments to be used to amend plans to reflect those changes.

3. DECEASED OFFICERS' FAMILIES TO GET SUPPORT AND COUNSELING: On June 16, 1998 the President approved PL 105-180, the "Care for Public Survivors Act of 1998" (H.R. 3565). The Public Safety Officers' Benefits Act is amended to read as follows: "The Director is authorized to use no less than $150,000 of the funds appropriated for this part to maintain and enhance national peer support and counseling programs to assist families of public safety officers who have died in the line of duty." Also, notwithstanding any other provision of law, the Bureau of Justice Assistance is authorized to use appropriated funds to conduct appeals of public safety officers' death and disability claims. A public safety officer is defined as an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, a firefighter, or rescue squad or ambulance crew. As we previously advised (see C&C Newsletter for November, 1996, page 1), PSOB primarily provides benefits in cases of death or disability of a public safety officer.

4. NEW YORK CITY STRUGGLES WITH FIREFIGHTER DISABILITY PENSIONS: According to a July 26, 1998 article in The New York Times, New York City firefighters who are disabled in the line of duty are complaining about a pension system they say is closed and subjective. By Florida standards, their claim has some validity: an applicant cannot bring his doctor to testify before the pension board and cannot cross examine the doctors who recommended rejection of a claim. However, until a decision last year of New York's highest court, a judge could reverse the pension board's decision and award a disability pension based upon the weight of the evidence. (The new standard, that a decision must be upheld if there is "any credible evidence," is similar to Florida's requirement that the board be upheld if there is "competent substantial evidence" to support it.) Two other factoids: (1) the city's fire board comprises twelve members equally divided between each "side," with seven votes being required to overrule the medical panel; (2) in the last four years, 795 firefighters won the coveted three-quarter pay disability pensions and 267 were turned down -- a 75% success rate.

5. PUTTING THINGS INTO PERSPECTIVE: The President of the United States is paid an annual salary of $200,000.00. Harrison Ford, who played the President in Air Force One, took home $20 Million for his efforts. Disney head Michael Eisner receives about $115,000.00 a day for running the entertainment giant. The average daily pay for workers in a Disney factory in Haiti is $2.64.

"Don't spend your gross salary."

6. MISSOURI SYSTEM ASKS SOFT-DOLLAR QUESTIONS IN MANAGER SEARCH: A column in Pensions & Investments reports that the Public School Retirement System of Missouri in a recent equity manager search asked important questions on soft-dollar usage. One question asked each money manager to name the consulting firms from which it obtained "investment performance reports" over the last three years and the amounts paid to the consultants in soft dollars. Their responses were interesting and different, although some were not specific. Six managers noted they paid soft dollars to consultants for performance reports; seven others replied that they do not use soft dollars or buy such reports. Pension investment industry officials say that such soft-dollar questions are unusual in an RFP. But as the system's Chief Investment Officer explained, "the commission dollars spent are client dollars. Our goal is to see if managers are using commission dollars to satisfy our investment objectives. We want to see what the managers are using our commissions for." And while the CIO said that paying soft dollars for consultants' fee reports is not necessarily a strike against the manager, he did say "I can't see why they need more than one, or any."

7. WEST VIRGINIA "FORCED" TO INVEST IN PRISONS: After years of legislation and litigation, West Virginia finally allowed its state pension fund to invest in equities. Now, according to an editorial in Pensions & Investments, the Legislature passed a law which forces the state pension fund to make a 25-year, $150 Million loan to the state's Regional Jail and Correctional Facility Authority. Even the rate-of-return formula on the loan is strange: it is based on a formula derived from the 5-year annual return on the fund's fixed-income portfolio. Obviously, the value of such a loan is difficult or impossible to compute and the loan is no doubt completely unsalable. The Governor, who is a fiduciary of the fund, took an interesting position. As a member of the board, he opposed the prison financing. But as governor, he worked with the legislature to create the financing scheme. The state attorney general called the prison maneuver illegal, because, inter alia, it circumvented state laws limiting the legislature's ability to borrow money or raise taxes without voter approval.

8. NYCERS RESPONDS TO P&I: Responding to a Pensions & Investments front page story and subsequent editorial (see C&C Newsletter for August, 1998, item 10) the Executive Director of New York City Employees' Retirement System writes that the trustees have carefully reviewed the financial, legal, regulatory and legislative issues associated with tobacco investment. His letter to the editor states that the trustees were not guided by parochial, political or economic considerations. Rather, throughout the process, the trustees adhered to their fiduciary obligation to act in the best interest of the plan's participants and beneficiaries. It was this careful and deliberative process, he says, that has led NYCERS to achieve investment results that have been in the top decile of large public plans over the last three, five and ten-year periods.

9. ILLINOIS TRS FACES PROBE: As many as 70 firms that have worked as financial advisors to the $15 Billion Illinois Teachers' Retirement System have been subpoenaed by a federal grand jury to provide documents detailing how they were selected and managed. Pensions & Investments reports that a series of controversies has racked TRS, including huge trading losses, the departure of key executives and changes of favoritism and other misconduct. The subpoenas do not necessarily mean any of the investment management firms engaged in wrongdoing. In fact, the subpoenas appear to seek cases where the money managers might have been subject to coercive behavior by retirement system employees. For the five years ended June 30, 1997, TRS's had a net annual return of 12.5%, perhaps sound but below the 13.5% median for similar public-sector funds followed by the Trust Universe Comparisons Service. TRS recently hired an independent consulting firm and an accounting firm to review investment management policies. But is it too little, too late?

"There are no real secrets -- only obfuscations."

10. CITY AVOIDS SECTION 457 CONTRIBUTION LIMITATIONS: Tax Management Compensation Planning Journal recently summarized a private letter ruling dealing with IRC 457. The Small Business Job Protection Act amended IRC 457 to require that deferred compensation plans of governmental entities maintain plan assets and income in trust for the exclusive benefit of participants and their beneficiaries. PLR 9823014 involved a city that wanted to establish a deferred comp plan for its management employees but wanted to exceed the dollar limitation on the amount that could be contributed. To accomplish this goal, the city had to avoid having the IRC 457 plan be designated as an "eligible deferred compensation plan" under IRC 457(b). The solution was quite simple: the city failed to establish a trust, thus making it an "ineligible plan" under IRC 457(f). However, the deferred compensation will not be included in the gross income of participants since deferred amounts remain assets of the city and are subject to the city's general creditors. Participants are at risk because they have no right to any payment under the plan until a date which is at least two calendar years from the effective date of the deferral arrangement. Furthermore, benefits are forfeited if a participant ceases full-time employment with the city before the date on which the deferred amounts vest. IRS also ruled that the arrangement was not an excess benefit plan for governmental employees as described in IRC 415(m). One caveat: in addition to not establishing a trust, an employer must avoid using custodial accounts, which are treated as trusts under IRC 457(g)(3).

11. PORTLAND, OREGON MAY DROP ANTIQUATED METHOD OF FUNDING F&P PLAN: The Portland Fire and Police Disability and Retirement System is funded solely by a dedicated tax levy on property taxes. Not surprisingly, this pay-as-you-go method has resulted in an unfunded liability of $828 Million. At last, reports BNA, the Portland City Council will place an amendment on the November, 1998 ballot that would scrap the old system and move toward a fully funded pension plan. City officials finally realized that in the long run the city's cost will go down under the new method.

12. BOARD SHOULD ADVISE ABOUT Y2K ACTIVITIES: Since a board of trustees is responsible for insuring that the plan and its participants and beneficiaries are protected from problems relating to the Year 2000, we believe that boards should disclose how they are addressing the issue. Participants and beneficiaries should be informed about the plan's current level of readiness; the strategy for bringing the plan's systems into Y2K compliance; a timetable for when critical systems will become Y2K compliant; the level of compliance for service provider companies; possible effect on participants and beneficiaries should the plan become impaired due to Y2K problems; and any contingency plans that have been devised in the event the plan is not Y2K compliant in time.

"There's no substitute for genuine lack of preparation."


(a) The Securities and Exchange Commission has issued its second report on the "Readiness of the United States Securities Industry and Public Companies To Meet the Information-Processing Challenges of the Year 2000." The report presents SEC staff's current findings on the Securities Industry's state of readiness for the year 2000. The report also includes staff's position on issuer disclosure obligations, provides a survey of the year 2000 disclosure by public companies to date and discusses the actions that the SEC and its staff are taking to address the problem. The SEC views the Year 2000 problem as an extremely serious one. Failure to assess properly the extent of the problem, remediate systems that are not Year 2000 compliant and then test those systems could endanger the nation's capital markets and place at risk the assets of millions of investors. The SEC's approach has four primary components: industry oversight, issuer disclosure, internal commission systems and investor education. The entire 45 page report can be viewed at

(b) Provided it takes reasonable steps to protect its systems, a company's liability for damages attributable to Year 2000 failures would be limited, if a bill introduced into the House becomes law. The legislation, entitled the "Y2K Liability and Anti-Trust Reform Act" (HR 4240), would apply to computer/software designers, developers and manufacturers, as well as computer system users, according to BNA.

(c) A small survey from William M. Mercer, Inc. and reported in BNA indicates that those working on the Y2K problem are being offered higher pay and other incentives to get the job done. The data, which are from a very few of the nation's largest consultants, show that they are offering certain programmers, analysts and project leaders inducements such as signing bonuses and retention pay. Hmmmmm.......we wonder if there is such thing as a "Franchise Employee."

"My job is so secret, even I don't know what it is!"

14. CALPERS GAINS $23 BILLION IN ONE YEAR!: Earning a 19.5% return for the twelve months ended June 1998, CalPERS' assets jumped by $23 Billion to $143 Billion. Almost 73% of its portfolio is invested in equities and real estate. Domestic equities earned about 30%, matching the Wilshire 2500. Foreign stocks slightly outperformed their 6.6% benchmark. Fixed income returned 13% as against its benchmark of 11.8%. You can read a summary of the report in BNA or check out the whole thing at

15. ARE NYC MTA OPERATORS GETTING BENEFITS ON QT?: A random audit of time sheets conducted by New York City's Comptroller shows that Metropolitan Transit Authority train operators are working excessive overtime right before they retire. In fact, the average overtime earnings for a group of retiring train operators in 1996 was equal to 62% of regular salary, twice the average for all operators. According to BNA, train operators can choose to have retirement benefits calculated either by using their salary over the last twelve months of employment or an average of the past three years. Duh, real tough choice.

16. JAPANESE CORPORATE FUNDS HURTING: For the fiscal year ended March 31, 1997, Japan's corporate pension funds suffered a shortage of $4.7 Billion in required reserves. When unrealized losses are counted, the shortfall jumps to $8 Billion, according to BNA. The problem is widespread, in that almost two-thirds of the funds failed to maintain legal reserves, compared to 50% the year before. Just seven years before that, in 1988, less than 10% of the funds were in violation of reserve requirements. Reserves were hit hard because, although they are legally required to project a return of 5.5%, funds averaged just over 2.5%.

"If all else fails, lower your standards."

17. CAPITOL POLICE MAY GET RIGHT TO WORK LONGER: Under a bill introduced into the House, mandatory retirement age for U.S. Capitol Police Officers would be extended from 57 to 60. The sponsor, interviewed in Pension & Benefits Reporter, said that every year a number of talented officers are forced to leave because of the mandatory retirement rule. Many of these officers are in excellent physical condition and, more important, possess a wealth of experience that is difficult if not impossible to replace. Last year, the same congressman introduced legislation to raise the salary and benefits of Capitol Police to the level equal with other federal law enforcement agencies. That bill has garnered over 40 co-sponsors. Although there is no indication of any connection, the bill was introduced just days after the tragic double murder of two Capitol Police Officers.

18. ST. LOUIS SICK-LEAVE ORDINANCE SURVIVES CHALLENGE: Justice in Missouri is sure swift, because a judge has already ruled constitutional a new ordinance which grants to retiring city employees lump sum payments for accumulated sick-leave (see C&C Newsletter for August, 1998, item 4). In ruling for the city, the court held that there was no showing that the ordinance was arbitrary, capricious or patently unreasonable -- it actually only raised political questions, which courts are not authorized to decide. Judgment was rendered on August 4, 1998 in a suit that BNA reports was just filed on June 29, 1998.

19. DENIAL OF MIAMI BEACH POLICE OFFICER'S DISABILITY APPLICATION FINALLY UPHELD: After denial of a disability application was remanded to a pension board for specific findings of fact, the board reconsidered the application upon the existing record (see C&C Newsletter for January, 1997, page 4). The board again denied the disability application, and upon petition for writ of certiorari, the appellate division of the circuit court upheld the denial. The applicant sought further review, in the Third District Court of Appeal, which also denied review. Mendelson v. City Supplemental Pension Fund for Firefighters and Police Officers in the City of Miami Beach, Case No. 98-00870 (Fla. 3d DCA, June 23, 1998). Both the circuit court and the district court of appeal awarded attorneys' fees to our firm as counsel for the board.

20. PUBLIC FUNDS OPPOSE MANDATORY SOCIAL SECURITY: Over 20 public pension plans in 13 states have joined to fight legislative proposals that would require newly-hired state and local government employees to join the Social Security System. In an attempt to defeat proposed laws that would cost $77.5 Billion over the next ten years (see C&C Newsletter for April, 1998, page 3), these plans have formed the Coalition to Preserve Retirement Security. According to an article in Pensions & Investments, pension funds could suffer if employers scale back contributions because they will have to start contributing to Social Security. In California alone, cities would have to pay the federal government an aggregate of about $2.7 Billion over the next ten years. No wonder CalPERS is a member of the Coalition.

"Government always plays both ends against the taxpayer."

21. PENSIONS & INVESTMENTS CALLS FOR REVIEW OF STATE PENSION SALARIES: A recent editorial in the Pensions & Investments indicates that while states may be getting a bargain in what they pay top pension executives, compensation may be too low to keep or attract them -- considering the immense responsibilities of the position and the lucrative opportunities available in the private sector. Thus, state legislatures should conduct a thorough review of the compensation of their top pension executives, including application of suitable performance benchmarks. Conclusion: the price of an appropriate pay increase for a quality professional is relatively cheap, compared to the risk of having less skilled executive management.

22. WORLD PENSION FUNDS SWELL; U.S. STILL DOMINATES: Pensions & Investments' annual survey shows that the world's 300 largest pension funds increased by 16% in 1997, compared with increases of 8.65% and 9.4%, respectively, in 1996 and 1995. Assets of these funds totalled over $4.8 Trillion. The number of domestic funds on the list increased to 178 (from 166 last year), with total assets of over $3 Trillion, representing a whopping 63% of the universe. (With a 10% share, Japan is a distant second.) Incidentally, there is a new leader atop the list -- California Public Employees' Retirement System, which passed the Netherlands' Stichting Pensioenfonds ABP. FRS moved up one notch, to ninth place.

23. WE "SHORTEN" OUR E-MAIL ADDRESS: As indicated above, we have shortened our e-mail address to "" We were always taught that less is more -- more or less. We guess. God bless.

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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