January, 2000Stephen H. Cypen, Esq., Editor
1. U.S. SUPREME COURT HOLDS THAT ELEVENTH AMENDMENT IMMUNIZES STATES FROM ADEA CLAIMS: Disagreeing with six of the U.S. Courts of Appeals that have ruled on the issue and agreeing with only two (see C&C Newsletter for March, 1999, Item 16), the United States Supreme Court held that the Age Discrimination in Employment Act of 1967 (ADEA) does not validly abrogate the states' Eleventh Amendment immunity. As our readers probably know, the ADEA makes it unlawful for an employer, including a state, to fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual because of such individual's age. Although the ADEA contains a clear statement of Congress' intent to abrogate states' Eleventh Amendment immunity, the court found that the abrogation exceeded Congress' authority under Section 5 of the Fourteenth Amendment to the United States Constitution because Congress had virtually no reason to believe that state and local governments were unconstitutionally discriminating against their employees on the basis of age. However, the decision does not signal the end of the line for employees who find themselves subject to age discrimination at the hands of their state employers. State employees are protected by state age discrimination statutes, and may recover money damages from their state employers, in almost every state (listing 45 in a footnote). Kimel v. Florida Board of Regents, 13 Fla. L. Weekly Fed. S25 (U.S., January 11, 2000).
2. FLORIDA SUPREME COURT AGREES THAT "GORT ACT" IS UNCONSTITUTIONAL: Resolving a conflict among decisions of Florida District Courts of Appeal (see C&C Newsletter for April, 1998, page 1 and C&C Newsletter for December, 1998, Item 10), the Florida Supreme Court declared unconstitutional the "Officer Evelyn Gort and all Fallen Officers Career Criminal Act of 1995." The high court agreed with the Second District Court of Appeal, which held that the Act violates the single subject rule contained in Article III, Section 6, of the Florida Constitution. The court stated "we realize that our decision here will require the resentencing of a number of persons who were sentenced as violent career criminals under [the law]. ... However, ... ‘this result is mandated by the Legislature's failure to follow the single subject requirement of the Constitution.' Had the Legislature complied with the single subject rule, this case would not be before us today." State of Florida v. Thompson, 25 Fla. L. Weekly S1 (Fla., December 22, 1999).
3. FUNDAMENTAL INVESTMENT CONCEPTS: January's Employee Benefits Digest, a publication of the International Foundation of Employee Benefit Plans, contains an article by an independent investment consultant who is also a chartered financial analyst. Entitled simply "Fundamental Investment Concepts," the article deals with certain principles basic to the science (or art) of investing that have been proven over time. Reviewing these concepts, particularly when the "old" rules of investing are being called into question, may be especially timely and may provide a compass to steer portfolios through rough waters that always lie just beyond the horizon. Concept No. 1: Since the analytical work of thousands of investment professionals, and millions of individual investors, results in efficiently priced securities, it is difficult for any one investment manager, or individual, consistently to gain a competitive advantage. Concept No. 2: The markets' risk and return can be managed by trustees to produce an acceptable range of probable results. Concept No. 3: Returns of the markets eventually revert to their mean (average) and trustees can benefit from this principle by periodically balancing the portfolio. Concept No. 4: When prices in the economy rise (inflation) and traditional bond and stock prices are negatively impacted, we are most influenced by recent experiences when making decisions. In light of these time-tested concepts, trustees should examine the competitive advantages of index funds, adopt appropriate asset allocation policies leading to constructive rebalancing activities and consider the potential of U.S. Treasury inflation-protected securities (TIPS) to protect the real value of their portfolio.
4. FIVE THINGS TO KNOW ABOUT PAPER WEALTH: According to Money Magazine, if you own employee shares or options in a company that's about to go public, there are some things to remember: (1) Taxes can be tricky; in deciding when to sell, it's crucial to know the tax implications because every situation differs and will depend on income, company policy, length of employment, type of option and date of option issuance. (2) Diversify quickly; if your stake represents the majority of your net worth, plan a diversification strategy because emotional ties shouldn't get in the way of a balanced portfolio. (3) Not all debt is bad; don't be tempted to eliminate all debt, particularly where interest is tax deductible (like on a mortgage). (4) Don't plan on borrowing; you can't borrow against options because you don't own them until you've exercised them and you cannot borrow against the shares during the lockup period. (5) Higher a seasoned pro or two; options can often involve too many conflicts rules for one advisor.
"You have the capacity to learn from your mistakes. You will learn a lot today."
5.FEDERAL AGENCIES FILL TREASURY'S DEBT VOID: Budget surpluses mean the Treasury Department need not issue debt (see C&C Newsletter for November, 1999, Item 18). Hence the most significant event in the Treasury sector in 1999 was evolution of the agency market. Three events in the government sponsored enterprise (GSE) sector were important: significant growth in issuance, improvement in liquidity and broadening of the investor base. The main GSE issuers were Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corp. (Freddie Mac), Federal Home Loan Bank and Tennessee Valley Authority. Last year gross issuance of term GSE debt (longer than one year) was $600 Billion, up from $490 Billion in 1998. In both years, agencies issued more debt than did the Treasury. Last year, to provide investors an alternative investment with exceptional credit quality and excellent liquidity, GSEs began issuing "bellwether" issues -- that is, $1 Billion or more in size, which, by their very nature, offer liquidity. Recently, Fannie Mae and Freddie Mac enhanced investor appeal by publishing their bellwether financing schedules for 2000. Those two agencies also announced that they are changing their discount note programs and issuing Treasury-like "bills." In short, GSEs have taken advantage of the shrinking Treasury market and have provided investors with attractive, high-quality, liquid investments, meaning their market should continue to grow as the Treasury sector shrinks. The foregoing report is from James E. Lebherz, a free-lance financial writer.
6. DB PLANS MAY BE CHEAPER THAN DC PLANS FOR COMPANIES WITH OVERFUNDED PLANS: A study by employee benefits consulting firm Towers Perrin, reported in Pensions & Investments, yields quite a surprise: a booming stock market and low interest rates have swelled some companies' defined benefit plans far beyond expectations, letting them skip making contributions for years. On the other hand, year in and year out many of these same companies contribute hundreds of millions of dollars to their 401(k) defined contribution plans. In addition, the overfunded status of some big corporate pension plans has allowed companies to book a pension credit, instead of a pension expense, in their financial statements, because pension income can be included as part of operating income. However, defined contribution plans have dragged down companies' earnings since most companies match some of their employees' contributions and must contribute money to those plans each year. Finally, in defined contribution plans, benefits of good investment returns accrue to plan participants, whereas in defined benefit plans, good investment performance can offset some of the employer contribution. IBM is cited as a notable example. In 1998, its pension "income" rose to $454 Million while in the same year it paid out $258 Million for its defined contribution plan.
7. "COST" OF CHRISTMAS RISES: According to PNC Advisors, the Christmas Price Index based on the gifts in "The Twelve Days of Christmas" outstripped inflation, rising 5.1% for 1999. The total cost, starting with a partridge in a pear tree ($113.00) and ending with twelve drummers drumming ($1,597.00), is $14,940.17, up from $14,214.90 in 1998. One problem came about with a tight labor market resulting in tough contract negotiations with the ten lords-a-leaping dance troupe. Another was bad weather conditions on the East Coast that drove up the cost of a pear tree 9% to $98.00. Oh well, just be grateful that your "true love" isn't literal, because on each successive day the prior gift is repeated, for a total of 364 presents costing about $60,000.00.
"Guilt -- the gift that keeps on giving."
8. ALTERNATE BOARD MEMBER MAY BE SUBJECT TO FLORIDA SUNSHINE LAW: A member, and an alternate member of the City of Miami's Code Enforcement Board were charged with violating the Florida Sunshine Law. In addition to that Board's regular sitting members, there are two alternates, who are not designated as alternates for specific board members but who sit for any board member not present. A Miami-Dade County Court Judge has denied a sworn motion to dismiss the criminal information filed by the alternate, finding that there were material issues of fact that a jury must decide. Unlike most criminal laws that are interpreted narrowly and in favor of the accused, the Sunshine Law is an exception and is intended to be interpreted broadly to achieve its salutary purpose of assuring public participation in all aspects of government's decision-making process. The Florida Attorney General has previously opined that a meeting between a member of a board and his own alternate did not have to comply with the Sunshine Law since, by definition, only one of the two individuals could exercise decision-making authority at a subsequent board meeting. Here, the State alleged that when the alternate met with the member the alternate knew that he would later be taking action on these matters at a board meeting. The State of Florida v. Armesto-Garcia, 7 Fla. L. Weekly Supp. 133 (Fla. Miami-Dade Co. Ct., November 18, 1999).
9. POLICE CHIEF "AT WILL" EMPLOYEE: Florida law is clear that in the absence of a specific statute granting a property interest, a contract of employment (express or implied) that is indefinite as to duration is terminable at the will of either party without cause, and an action for wrongful discharge will not lie. When the City of Cocoa employed is Chief of Police, he signed a letter, consistent with the City's Charter, that as a department head he "shall serve at the will of the city manager." The City's personnel policy handbook contained the same provision. However, after the chief was hired he received a letter from the city manager, sent without approval of the city council, stating that he was entitled to all the rights of a police officer. The letter was intended to "supplement, not replace" the original letter of employment. After he was terminated, the chief sued the City, alleging breach of an employment contract, breach of statutory duty with regard to the City's collective bargaining agreement with its police officers and violation of his due process rights guaranteed by the Florida Constitution. In affirming summary judgment in favor of the City, the District Court of Appeal found that the supplemental letter specifically provided that it would not replace the original employment agreement, itself did not contain an express reference to a definite period of employment and therefore was not enforceable as an employment contract. Liff v. City of Cocoa, Florida, 24 Fla. L. Weekly D2523 (Fla. 5th DCA, November 5, 1999).
10. P&I'S PERSONS OF THE CENTURY: Andrew Carnegie, who created the world's first advance-funded pension funds and Harry Markowitz, who founded portfolio diversification, have been named by Pensions & Investments as persons of the century. Among other things, Mr. Carnegie established an investment fund to pay pensions, which became the prototype used by every defined benefit plan. His initial funding became US Steel & Carnegie Pension Fund and the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), today with respectively $12 Billion and $280 Billion. For his part, Mr. Markowitz was the first to apply mathematics to portfolio management related risk/return. Known as the "father of modern portfolio theory," Mr. Markowitz drew the world's first "efficient frontier." Notable runners-up are Benjamin Graham (father of fundamental investing), Warren Buffett (enough said) and William F. Sharpe (who gave us "beta" and shared the 1990 Nobel prize in economic sciences with Mr. Markowitz).
"Great minds forget great things."
11. UNION FUND NAMED LEAD PLAINTIFF: In a move that might result in availability of more lead plaintiffs under the Private Securities Law Reform Act of 1995 (see C&C Newsletter for June, 1999, Item 3), a federal judge for the first time has certified a Taft-Hartley Pension Fund to serve as class representative in a securities fraud case. According to a blurb in Pensions & Investments, the Pointers, Cleaners & Caulkers Local 1 Pension Fund has been appointed as one of three lead plaintiffs in a lawsuit pending against Vesta Insurance Group. The suit was filed last summer after the company announced "possible accounting irregularities ," which ultimately resulted in significantly restated financial results.
12. HOW MUCH INTERNATIONAL EXPOSURE DO YOU REALLY HAVE?: Most people know that the S&P 500 Index is now dominated by technology and finance stocks (see C&C Newsletter for September, 1999, Item 5). But an editorial in Pensions & Investments discusses more subtle differences, including the trend toward globalization. Most investors probably still think that S&P 500 Index Funds present a conservative, relatively low-risk domestic investment. However, an analysis by Quantec America shows that more than 50% of the S&P 500's total risk is attributable to its stocks being a subset of the global equity market! How can this be? S&P 500 Index companies are increasingly exposed to global risks and opportunities because most have foreign manufacturing operations and foreign sales. These operations, and thus earnings, are affected by economic and political developments in foreign countries. Further, the companies are exposed to currency risk: more than 30% of the S&P 500's total risk comes from currency exposure. So, if you have committed 10% of your portfolio to international equities because that is how much you are "comfortable with," you might want to reevaluate whether your S&P 500 Index commitment is really a domestic anchor.
13. ADR'S SOAR; LENDABLE SECURITIES AT 14% LEVEL: Two unrelated short reports in Pensions & Investments indicate that (1) capital raised by overseas firms issuing American depositary receipts last year reached a record level of more than $21 Billion up from the year before's $9.6 Billion and eclipsing the previous record of $19.5 Billion set in 1996 and (2) about 14% of the estimated $2.7 Trillion in lendable securities were on loan during the third quarter of 1999, of which over one-half were U.S. equities; the highest weighted average return on loans was for non-U.S. equities at 74 basis points.
14. POLICE DEATHS DROP...THANK GOD: Not since 1965 has the number of U.S. police officers dying in the line of duty been lower than last year. The National Law Enforcement Officers Memorial Fund says 130 officers were killed in 1999, down from 156 in 1998. The fund attributes the decline to better training , increased use of bullet-resistant vests and overall drop in crime. Forty-five officers were shot to death. Another 47 died in automobile accidents, 15 from job-related illnesses, eight struck by vehicles, seven in motorcycle accidents, two stabbed, one died in a fall and one was hit by a train. Our last report on this grim subject (see C&C Newsletter for January, 1997, Page 6) contained data from another source, which are not entirely consistent with the foregoing numbers.
15. DOCTORS' REPORTS CAN BE REJECTED IF NOT BASED ON TRUTHFUL HISTORY: The Florida State Retirement Commission sustained denial of in-line-of-duty retirement benefits for an applicant who had sought to prove that a 1990 accident she suffered while working caused her severe limitation of functional capacity and permanent injury. Although there was sufficient proof that applicant was permanently and totally disabled based on spina bifida and degenerative disc disease, proof of causation was the issue. The only medical doctor who testified had seen applicant shortly after her work-related accident and concluded that she did not have a disabling injury as a result. She subsequently experienced several non-work-related accidents. Two other doctors who treated applicant three months after the work-related accident submitted office notes including applicant's complaints and their opinions that she had suffered disability as a result of the 1990 accident. On appeal to the district court, the Commission's denial was affirmed in that the Commission had the prerogative and duty to determine disputed issues of fact. Here, the Commission expressly found that applicant was not a credible witness concerning her claimed chronic pain following the 1990 job-related accident. Thus the Commission could have rejected reports of the two doctors who saw her months after the accident on the ground that applicant did not truthfully relate her symptoms to them. Morris v. Division of Retirement, 25 Fla. L. Weekly D53 (Fla. 5th DCA, December 23, 1999).
"Amnesia patients are required to pay in advance."
16. AND MORE DEFINITIONS:
Earnings Per Share (EPS) That portion of a company's profits allocated to each outstanding share of common stock.
Earnings Per Share Growth Rate The rate at which earnings per share grow over various time periods.
Economic Risk The probability that economic conditions will deteriorate, thereby affecting safety of a company.
Effective Asset Allocation A tool to discern style orientation of a portfolio, introduced by Professor William F. Sharpe in 1988.
Effective Duration A measure of how sensitive a bond's price is to interest rate changes, with the option and structural characteristics of the bond taken into account. Also known as option-adjusted duration.
Energy A sector classification that includes securities of firms producing and/or selling oil, oil service, gas, solar energy, coal and energy saving devices.
Equity Investment or ownership interest possessed by shareholders in a corporation; that is, stock as opposed to bonds.
Eurodollar Bond A U.S. dollar-denominated bond issued and traded outside the United States.
"What if there were no hypothetical questions?"
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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.