December, 1999Stephen H. Cypen, Esq., Editor
1. FLORIDA SUPREME COURT AGREES THAT WORKERS' COMP OFFSET SHOULD NOT BE RECALCULATED TO INCLUDE SUPPLEMENTAL BENEFIT INCREASES: Ruling in three separate City of Clearwater cases, the Florida Supreme Court answered the following certified question in the negative: Where an employer takes a workers' compensation offset under Section 440.20(15), Florida Statutes (1985), and initially includes supplemental benefits paid under Section 440.15(1)(e)1, Florida Statutes (1985), is the employer entitled to recalculate the offset based on the yearly 5% increase in supplemental benefits? (See C&C Newsletter for October, 1998, Item 22.) The Court found that the Florida Legislature intended to provide permanently and totally disabled workers with cost-of-living increases based upon the current value of a dollar, and it would thwart the very foundation of the supplemental benefits statute if the Court were to hold that annual increases in supplemental benefits require offsets to be recalculated annually to encompass the increases. Note the decision does not change the workers' compensation offset under Section 440.15(10), Florida Statutes, which is different because of the Federal Social Security offset provisions. (See C&C Newsletter for August, 1999, Item 21.) City of Clearwater v. Acker, 24 Fla. L. Weekly S567 (Fla. December 9, 1999).
2. BEST INVESTOR OF THE CENTURY...TY COBB?: Bernard Baruch? J. P. Morgan? John D. Rockefeller? Three strikes and you're out because Money Magazine's nod for greatest investor of the 20th Century is none other than Ty Cobb. Yes, that Ty Cobb, the ornery baseball great who retired from the game in 1928. Although Cobb's annual salary never topped five digits, he became a millionaire even before he hung up his sharpened spikes. (And, of course, that was back when a million bucks was real money!) Cobb took his 1909 World Series money and bought a piece of a copper mine for $3.00 a share, which he sold just a year later for $1,000.00 a piece. His greatest triumph was purchasing stock in Coca-Cola and a small car company that was eventually bought out by General Motors. Cobb showed real vision because at the time Coke was a mere upstart and the automobile industry was hardly up and running. By the end of the Great Depression, Cobb was much wealthier than he had been at the beginning.
3. AND BUFFETT IS THE CENTURY'S BEST MANAGER: A survey by The Carson Group reported in Pensions & Investments found that Warren Buffett is the 20th Century's greatest money manager. Following Mr. Buffett, in descending order, are Peter Lynch, John Templeton, Benjamin Graham/David Dodd, George Soros, John Neff, John Bogle, Michael Price, Julian Robertson and Mark Mobius. Among the Century's top ten, value managers slightly edged out growth managers.
4. WARREN BUFFETT'S INVESTMENT STRATEGY: A money manager at Legg Mason who knows the Investor-of-the-Century very well summarizes his investment strategy: Limit your portfolio to between ten and twenty companies. Understand each company's business. Look for a long history of superior performance. Use the annual report to assess management and cash allocation. Reinvest in your most promising holdings. Don't trade often. Sell a stock if it becomes overpriced compared with the rest of the market. In a word -- focus.
5. THE FIVE GREAT MYTHS OF INTERNET STOCKS: The December 1999 Money Magazine also has an article on the five great myths of Internet stocks, which emerged and gained acceptance in large part because of the success of today's Net darlings. Myth No. 1: Profits don't matter; eyeballs do -- getting visitors to a site and keeping them coming back is important, but if you have a great idea to attract users but no way to make money off of them the traffic is worthless. Myth No. 2: If it's a public company, it must be a real business -- web companies go public with little, if any, proof that they have viable businesses; on the contrary, the IPO itself is now seen as the company's legitimizing event. Myth No. 3: In cyberspace, the early bird gets all the worms -- the advantage doesn't always go to the first mover; it goes to the company that customers find too expensive or inconvenient to leave. Myth No. 4: The Internet is a superior business model because costs are so low -- cost savings of the web are widely overrated; what savings do exist go mainly to companies that don't handle physical products and don't have high content-creation costs. Myth No. 5: Old-line companies don't get the web and never will -- brick and mortar companies already have a recognizable brand and consumer base, so they could easily build their own web presence; the Internet is just one more medium, like catalogs and stores.
"Efficiency is a highly developed form of laziness."
6. DESPITE ECONOMY, BOND DEFAULTS RISE: Although the U.S. economy is in its eighth year of expansion, there is one odd event popping up in the noninvestment grade (junk bond) sector of the capital markets: a rise in bond defaults. Moody's Investors Service reports that of the 1,606 issuers rated Ba1 or lower, over 93 have delayed or failed to make timely payments on their bonds this year. That circumstance increases the default rate to 5.8% as of November 1st vs. 3.4% for all of 1998. In money terms, more than $30 Billion of speculative grade bonds are in default compared to $8.8 Billion for the entire year of 1998. But Moody's is not surprised, because while its studies show the likelihood of a AAA-rated corporate bond will default in any year is zero, moving down into the speculative grade ratings shows a drastic rise in likelihood of default -- as high as 23% for a Caa3. In the last few years the volume of speculative grade financings has risen as interest rates fell and high-yield bond funds needed product. Thus, as more issue are downgraded or new issues are sold at lower credit ratings, the more likely they will eventually go into default. Sounds right to us.
7. CHILD BORN AFTER DECEDENT'S RETIREMENT NOT ENTITLED TO BENEFITS: The Retirement System for General Employees of the City of Miami Beach provides that "only children who were dependent beneficiaries of the Retirant on the date of his retirement or termination of service, whichever is first, shall be eligible for a pension... ." Decedent retired in 1990 and fathered a child four years later. Upon decedent's death, the personal representative of his estate brought suit against the Board of Trustees and the City of Miami Beach seeking benefits for the minor child. In issuing a final declaratory judgment, the Circuit Court found that under the unambiguous provisions of the retirement system, the minor child is not entitled to any benefits. A general statement in the retirement system that its purpose is "to provide retirement and other related benefits for eligible employees...of the City and their beneficiaries or dependents" does not create a conflict with the more specific provision, but if it did, the latter would govern. As general counsel, we represented the Board of Trustees in this matter. Burrows v. Board of Trustees for the Retirement System for General Employees of the City of Miami Beach, 7 Fla. L. Weekly Supp. 38 (Fla. 11th Cir., November 1, 1999).
"False hope is nicer than no hope at all."
8. FEDERAL APPELLATE COURT PARTIALLY VACATES AWARD OF RELIEF AGAINST MIAMI FOR CONSENT DECREE VIOLATION: The United States District Court for the Southern District of Florida found that the City of Miami discriminated on basis of race in its certification of several minority promotion candidates, resulting in unlawful promotion of two black employees. Thus, the trial court held the City in contempt for violation of a 1977 nondiscrimination consent decree among the City, the United States and the FOP. The court then awarded broad "make-whole" relief to all adversely affected police officers, as if each of these officers actually would have received one of the two promotions. The Eleventh U.S. Circuit Court of Appeals vacated in part and remanded, finding the remedial award excessive and holding that the monetary value of the two promotions should have been divided on a prorata basis among the class of eligible candidates. We were co-counsel for our regular client, the Board of Trustees, which was not a party below, but which intervened on appeal for the purpose of assuring that the effect of any monetary relief on the pension plan would be City's responsibility. United States of America v. City of Miami, 13 Fla. L. Weekly Fed. C172 (U.S. 11th Cir., November 17, 1999).
9. FRS WILL BOOST FOREIGN EQUITIES: Following recent legislation loosening restrictions on the Florida Retirement System's investments overseas, FRS plans to shift $4 Billion from domestic to international equities. To accomplish the new allocation, the near-$100 Billion fund will cut domestic equities from 58% to 55% and domestic fixed income from 26% to 25%. One reason for the move: so far this year EAFE has outperformed the S&P 500. So? What about the previous twenty years, in which the S&P 500 outperformed EAFE by almost 50% (29% vs. 20%)? (Also see C&C Newsletter for August, 1999, Item 16).
10. SURVEY OF PUBLIC RETIREMENT SYSTEMS' SALARIES MAY BE MISUSED: In October Pensions & Investments published its survey of salaries in the public sector. The survey found that base salaries for pension managers and chief investment officers were, respectively, about $68,000.00 and $79,000.00. In somewhat of a twist, the results may cause legislators and other policy makers to view those pay levels as the standard, regarding the higher pay their own public pension fund officials receive as generous. Hence, they may be lulled into a false sense of security and see no need to be concerned about competition for talent. Gary Findlay (no epithet), Executive Director of the Missouri State Employees' Retirement System, did his own survey and found a far different -- and higher -- level of compensation, at least for state systems. Note that Findlay is not saying that salaries in the public sector are competitive with the private sector. His point is that, by understating the already relatively low pay levels in the public sector, the survey may be an inadvertent impediment to truly-competitive salaries. One very revealing fact of Findlay's survey: Where administrative expenses are paid from the retirement fund, salaries are about a third higher than in cases where final budget approval rests with the state legislature. Findlay's conclusion is that legislators are more removed from the market place and tend to seek comparisons with equivalent state government positions, of which there really are none. P&I published Findlay's survey results and accompanying letter in its November 29, 1999 issue.
"Aim low, reach your goals, avoid disappointment."
11. APPELLATE COURT DENIES REVIEW IN MIAMI BEACH CASE: The Third District Court of Appeal has denied the Board of Trustees' petition for writ of certiorari to review the lower court decision in DeHainaut v. Board of Trustees of the City of Miami Beach Pension Fund for Firemen and Policemen , 6 Fla. L. Weekly Supp. 387 (6 Fla. 11th Cir., February 26, 1999) (see C&C Newsletter for June, 1999, Item 11). Our readers will remember that the circuit court, sitting in its appellate capacity, quashed the Board's denial of disability pension to a police officer who could perform light duty but who was never actually offered a light duty position by the City. In our judgment, this case is an example of the adage that "hard facts make bad law." Board of Trustees of the City of Miami Beach Pension Fund for Firemen and Policemen v. DeHainaut, Case No. 99-1452 (6 Fla. 3d DCA, December 10, 1999).
Debt-to-Equity The ratio of long-term debt to total equity.
Diversification The reduction in risk sought by investing assets that are not perfectly positively correlated. It is the spreading of risk among a number of different investment opportunities. Since the assets are not perfectly correlated, losses on any one asset tend to be offset by gains on others.
Dividend A payment to owners of common or preferred stock. Dividends are usually paid out of current earnings of a corporation. On common stock shares, dividends will vary with the fortunes of the corporation. On preferred stock shares, dividends are generally a fixed amount. As a rule, dividends are declared and paid quarterly.
Dividend Yield The current dividend per share of a stock divided by its current price per share. For example, a stock at $100.00 per share with a dividend of $5.00 per share has a dividend yield of 5% ($5.00÷$100.00).
Down Market A quarter in which the market return is negative.
Duration A measure of a bond's price volatility relative to a change in the general level of interest rates. It is a measure of the number of years until the average dollar, in present value terms, is received from coupon and principal payments. In general, bonds with longer durations have greater sensitivity to interest rates than those with shorter durations.
Duration-Active Average portfolio duration is allowed to vary outside of a 20% range around the benchmark's duration.
Duration-Controlled Average portfolio duration is maintained within a 20% range around the benchmark's duration.
Duration-Neutral Average portfolio duration is maintained close to the benchmark's duration.
Duration-Tightly Controlled Average portfolio duration is maintained within a 10% range around the benchmark's duration.
13. CHECK OUT OUR NEW RESOURCE LINKS: In addition to our Newsletter, which is always available on our website, we have just added some new resource links that can be reached directly from our site. Among the new links are Bureau of Labor Statistics (http://stats.bls.gov/), Census Bureau (http://www.census.gov/), Department of Labor (http://www.dol.gov/), Institute of Management & Administration (http://www.ioma.com/), National Center for Employee Ownership (http://www.nceo.org/) and Pension Research Council (http://prc.wharton.upenn.edu/prc/prc.html).
"Everything should be made as simple as possible, but not simpler."
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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.