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September, 1999

Stephen H. Cypen, Esq., Editor

1. FRS MEMBERS GET EXCESS BENEFIT PLAN: Effective July 1, 1999, Chapter 99-389 amends the Florida Retirement System to provide that a payee whose retirement benefits are reduced by application of maximum benefit limits under IRC §415(b) shall have the portion of his or her benefit in FRS that exceeds such federal limitation paid through the Florida Retirement System Preservation of Benefits Plan. The law also establishes the Florida Retirement System Preservation of Benefits Plan as a qualified governmental excess benefit arrangement pursuant to IRC §415(m). Benefits under the Preservation of Benefits Plan are computed and made payable under the same terms and conditions and to the same person as would have applied under FRS's Defined Benefit Plan were it not for the federal limitation. As required by federal law, the Preservation of Benefits Plan is unfunded and no payee contributions or deferrals, direct or indirect, by election or otherwise, shall be made or allowed. Benefits under the excess plan shall not be subject to execution, garnishment, attachment or any other process except for income deduction orders, federal income tax levies and qualified domestic relations orders. (This last provision formalizes FRS's policy to honor QDROs, which we believe is contrary to law. See Special Supplement to C&C Newsletter dated February, 1997.) Also effective July 1, 1999, Chapter 99-314 creates the Florida Retirement System Preservation of Benefits Plan Trust Fund, separate and apart from the FRS Trust Fund, which is credited with FRS monthly retirement contributions to meet requirements for payment of restored benefits under the Preservation of Benefits Plan. We now ask the following question: Is there any justification for a city not to adopt an excess benefit plan for members of its retirement systems?

"Talk is cheap because supply exceeds demand."

2. FLORIDA LEGISLATURE MAKES OTHER PENSION-RELATED CHANGES: Chapter 99-392 amends Section 112.63, Florida Statutes, to mandate that the Division of Retirement review and comment on each retirement system's or plan's actuarial valuation "on at least a triennial basis." Thus, the Division will now be reviewing and commenting on previously-filed actuarial valuations at least once every three years, irrespective of the plan's frequency of actuarial valuation submissions. The amendment also removes (subtly, in our judgment) the requirement that the Division review and comment on actuarial impact statements, except in conjunction with review of the actuarial valuation of the plan. Section 112.65, Florida Statutes, is also amended to clarify that an employee who participates in a public pension plan may now simultaneously participate in more than one retirement plan sponsored by his or her employer even though such multiple retirement plans cover the same period of time. The new prohibition is against receiving retirement benefits from "different employers" for the same period of service. Chapters 175.071 and 185.06, Florida Statutes, are amended to permit investments in corporations listed on the National Market System of the Nasdaq Stock Market -- a seemingly-superfluous change. Finally, the presumptions in Section 112.18, Florida Statutes, (for tuberculosis, heart disease or hypertension) have been extended to state law enforcement officers.

3. YEAR 2000 WILL PROBABLY SEE SOME INCREASED IRS PENSION LIMITS: Using the June, 1999 Consumer Price Index, Buck Consultants, Inc. predicts that some IRS pension limits will change for 2000. (There was no change between 1998 and 1999.) The Section 415 Defined Benefit Plan Dollar limitation, rounded in $5,000.00 increments, will increase to $135,000.00. The Section 415 Defined Contribution limit, also rounded in $5,000.00 increments, will remain, for the third year, at $30,000.00. The Section 401(a)(17) annual compensation limit, rounded in $10,000 increments, will increase to $170,000. And the Section 457 Deferred Compensation Limit, rounded in $500.00 increments, will probably remain at $8,000.00. These estimates assume that the CPI remains constant through September, 1999. A decrease in the CPI could affect the higher limits; an increase could boost the Section 415 Defined Contribution Limit or the Section 457 Deferred Compensation Limit, respectively, to $35,000.00 and $8,500.00.

"Two can live as cheaply as one ... for half as long."

4. BEING PRESIDENT MAY HELP THE BOTTOM LINE: Our four living former Presidents seem to have done quite well since leaving office. Upon taking office, these ex-leaders had estimated net worths as follows: Gerald Ford, $250,000.00; Jimmy Carter, $800,000.00; Ronald Reagan, $3.5 Million; and George Bush, $4 Million. By current estimates, all four are now multi-millionaires, with Bush worth as much as $20 Million. Incidentally, President Clinton was worth just-under $700,000.00 upon taking office. And being in debt upon leaving doesn't seem to portend a bleak future -- President Carter left office with more than $1 Million in debt.

5. A DIFFERENT VIEW OF INDEXING: A piece from Westwood Group questions whether the S&P 500 is really a passive index. One could argue that the S&P 500 is actively managed: there were a total of 256 changes to the index between 1988 and 1998, with 20 more through July of this year. (The 48 last year was an all time high.) Companies are removed from the index in one of four ways. First, and by far the most prevalent, is as the result of a merger or acquisition, whereafter the acquired company is removed. Second, a company can be removed as a result of internal restructuring -- as when RJR Nabisco Holdings separated its tobacco business, resulting in retention of Nabisco Group Holdings and dropping of RJ Reynolds Tobacco Holdings. A third reason for removal is "lack of representation," seemingly a judgment call by the S&P "Portfolio Managers," who are responsible for all changes. The final way, quite obviously, is when a company goes bankrupt -- although there have been only ten since 1988 and none since 1993. The following table shows how makeup of the index has changed in just the last ten years:

 

% of Index
 
Sector 1988 1998 % of Change
Capital Goods 9.0% 7.9% -1.1%
Basic Materials 8.1% 3.2% -4.9%
Consumer Staples 14.4% 14.9% 0.5%
Consumer Cyclicals 16.2% 9.2% -7.0%
Energy 12.2% 6.2% -6.0%
Financials 8.0% 15.4% 7.4%
Health Care 8.2% 12.1% 3.9%
Technology 8.4% 18.7% 10.3%
Transportation 2.3% 0.9% -1.4%
Utilities 13.2% 11.5% -1.7%

Another problem with the S&P 500 is its non-correlation with the actual economy, 25% of which is not even represented! For example, neither real estate (11% of GDP) nor the government itself (13%) is in the index. And while the service sector is significantly underweighted in the index, technology and financials are grossly over-represented. Conclusion: the S&P is more a measure of investors' perception than of true economic strength.

6. GAO ISSUES REPORT ON SOCIAL SECURITY/INDIVIDUAL ACCOUNTS: Obviously, Social Security is one of the nation's most important and visible programs. Although individual accounts offer the possibility of a better rate of return on individual contributions, a poorly-designed system of accounts could have devastating effects on retirees and undermine public confidence in government. In a 56 page report entitled "Social Security Reform: Implementation Issues for Individual Accounts," the United States General Accounting Office finds that the following three critical questions need to be addressed in designing and implementing a system of individual accounts: Who would assume new administrative and record-keeping responsibilities? How much choice would individuals have in selecting and controlling their investment options? How much flexibility would workers have when they retire and begin to draw on their accounts? The report discusses the fundamental choices associated with each question and several options that could be considered. GAO/HEHS-99-122 (June 18, 1999). One copy of each GAO report is available free by mail (P.O. Box 37050, Washington, D.C. 20013), or, on the internet (www.gao.gov).

7. NEW FLORIDA STATUTE REFINES THE TERM "DEADLY FORCE:" Chapter 99-272, effective July 1, 1999, amends Section 776.06, Florida Statutes, to provide that the term "deadly force" does not include the discharge of a firearm by a law enforcement officer during and within the scope of his or her official duties which is loaded with less-lethal munition. The term "less-lethal munition" means a projectile that is designed to stun, temporarily incapacitate or cause temporary discomfort to a person without penetrating the person's body. Specifically, a law enforcement officer is not liable in any civil or criminal action arising out of use of any less-lethal munition in good faith during and within the scope of his or her official duties.

8. SEPTEMBER'S BEEN VERY, VERY BAD TO ME: Most people probably realize that stocks do not perform the same in each month of the year. But a chart we saw recently really highlights the so-called "September effect." If one had invested a dollar in the Dow Jones Industrial Average stocks in 1890, in 1996 that dollar would be worth $180.00. But if that same dollar had been invested in the DJIA excluding September, the dollar grows to $682.00. And what's even more unbelievable, if that buck had been put only in DJIA stocks in September, it would only be worth a quarter.

9. HOW DOES THE CPI WORK?: We often hear about the Consumer Price Index, the Government's attempt to measure changes in prices for goods and services purchased by urban consumers. Most people look at the CPI of about 2% per year and say "not where I live" or "not where I shop." The reason: actual costs depend upon what specific goods and services you tend to purchase. The United States Bureau of Labor Statistics, which compiles the CPI each month, weights the Index, so for some people inflation may seem far higher than the CPI. For example, housing represents a whopping 42.8%. Food and beverages (17.8%), transportation (17.2%), apparel and upkeep (6.3%), miscellaneous (5.8%), medical care (5.7%) and entertainment (4.4%) make up the balance. Thus, although the overall CPI has risen 34% in the last ten years, medical care has risen almost 68% while apparel has risen just over 10%.

"Despite the cost of living, have you noticed how popular it remains?"

10. FLORIDA CIRCUIT JUDGE FOLLOWS PERC, COMPLETELY IGNORING ATTORNEY GENERAL: Following a decision of the Florida Public Employees Relations Commission involving the same parties (see C&C Newsletter for July, 1999, Item 8), a circuit judge in Daytona Beach, Florida has ruled in a declaratory judgment that the referendum requirement of Section 166.021(4), Florida Statutes, with respect to a collectively-bargained pension agreement, is violative of Article I, Section 6, Florida Constitution, and that in accordance with Section 447.309(3), Florida Statutes, no referendum is necessary to ratify a pension agreement. We respectfully adhere to our prior contrary opinion (see C&C Newsletter for August, 1997, Page 11) for at least the following reasons: (1) A circuit court ruling is binding only upon the parties and has no precedential value and (2) the parties (inexplicably?) failed to comply with Section 86.091, Florida Statutes. That section says that in a declaratory judgment action if a statute is alleged to be unconstitutional, the Attorney General or the state attorney of the judicial circuit in which the action is pending shall be served with a copy of the complaint and be entitled to be heard. In that the same parties had previously obtained a contrary opinion from the Attorney General (see C&C Newsletter for October, 1998, Item 1), noncompliance with the statute is particularly disturbing. International Brotherhood of Teamsters, Local 385 v. City of Daytona Beach, Case No. 99-31470 (Fla. 7th Cir., August 10, 1999).

11. PRIVATE-SECTOR EMPLOYEES HAVE RIGHT TO KNOW ABOUT PROPOSED PENSION CHANGES: The U.S. 9th Circuit Court of Appeals has handed down a pair of 2-1 rulings involving a private employer's duty to keep employees informed of their retirement options. In the first case, involving a retired Exxon employee, the Court concluded that once the employer began serious consideration of a proposal to offer more advantageous severance benefits, information about that proposal is material to the retirement decisions of employees, like plaintiff, who would be eligible for such benefits if the proposal were approved. Further, the employer had an affirmative duty to disclose information about the proposal to plaintiff as soon as it knew or should have known that such information was material to the decision about when to retire. Because the trial court had granted summary judgment in favor of the employer, the appellate court reversed and remanded for trial. Bins v. Exxon Company U.S.A., Case No. 98-55662 (U.S. 9th Cir., August 30, 1999). The second case, involving six former Pacific Bell employees, followed the Bins case, but went one step further: On the facts, finding no issue that the employer had an affirmative duty to disclose in this case, the court reversed summary judgment in favor of the employer and directed that summary judgment be entered in favor of the employees. Wayne v. Pacific Bell, Case No. 97-56456 (U.S. 9th Cir., August 30, 1999). These situations seem less likely in the public pension arena -- at least in Florida -- where such benefits are bargained and there is some lead time prior to adoption.

"Management reserves the right to serve refuse to anyone."

12. SOME HELPFUL DEFINITIONS: We recently picked up a William M. Mercer Investment Consulting, Inc. report that contained a glossary of terms. Sometimes we assume that everyone understands all the various terms used in the investment world. In any event, starting this month, we will regularly provide definitions of terms we think might be of interest to our readers:

Agency Bonds  Debt obligations issued by government-sponsored organizations such as the Federal Home Loan Bank and the Federal Land Bank. After Treasuries, agency bonds are considered to be the next highest quality securities in the domestic fixed income market.

Alpha   A measure of value-added provided by a manager. Specifically, alpha is the excess portfolio return compared to the risk-adjusted benchmark.

Asset Allocation   The combination of assets in a portfolio to different asset types such as common stocks, bonds, cash, real estate, venture capital, etc. Different approaches (such as strategic, dynamic or tactical) to the asset allocation decision may be employed.

Asset-Backed Security   A collateralized fixed-income security supported by installment loans (on autos, for example) or by revolving lines of credit (credit cards). Generally an ABS is highly rated because of recourse (liability of issuer) provisions or third-party credit enhancements. And although collateral behind an ABS is subject to being prepaid, unlike with a mortgage-backed security, prepayments are usually unaffected by changing market interest rate levels.

Balanced (asset class)   Investments in common stock, preferred stock and bonds which are combined in an effort to obtain the highest return consistent with a low-risk strategy. A balanced portfolio typically offers a higher yield than a pure stock fund and performs better than such a fund when stocks are falling. In a rising market, however, a balanced portfolio usually will not keep pace with an all-equity portfolio.

Base Currency   The currency of an investor's home country.

Basic Industry   A sector classification for securities of firms that convert raw materials into unfinished products.

Basis Point   1/100th of 1.0%, or 0.01%.

Bottom-up   A money-management style that begins with security selection.

"Experience is something you don't get until just after you need it."

Erratum

In Item 24 of our August newsletter, concerning recent amendment to the Law Enforcement Officers' Bill of Rights, we said the "assistance" of a complaint may be acknowledged when we meant to say the "existence" of a complaint may be acknowledged.

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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