May, 2000Stephen H. Cypen, Esq., Editor
1. NRTA PREVIEWS RESULTS OF COLA STUDY: The National Retired Teachers Association, a division of AARP, has previewed a study on cost-of-living adjustments for state teacher retirement systems. Reported in BNA, the study's findings could provide a valuable resource for public plan representatives seeking to ensure that their benefits keep pace with inflation and with those of other public pension systems. Thirty-three state teacher retirement systems have automatic COLAs, meaning their benefits increase periodically according to a set formula. Eleven states have ad-hoc COLAs and the remainder take other approaches. Eighteen states fund COLAs through employer contributions; two through employee contributions; three through existing trust fund money; five through both employer and employee contributions plus surplus investment earnings; thirteen through surplus/excess investment earnings; four through direct appropriation; and three through other methods. The balance are unfunded or use more than one method of funding COLAs. Meanwhile, a separate study shows that thirty-one states have constitutional pension safeguards, the most common being: funding requirements (eighteen state constitutions), provisions stipulating that public pension assets are for retirement purposes only (fourteen states), safeguards against diverting pension assets (thirteen states), requirements for board of trustees governance (twelve states) and guaranteed right-to-benefit clauses (nine states).
2. A LITTLE BIT ABOUT SOCIAL SECURITY DISABILITY: With the whole subject of Social Security being in the news on an almost-daily basis, we thought it might be interesting to discuss the subject of Social Security Disability. Social Security will pay benefits to people who are unable to work for a year or more because of disability and who do not have many assets or a lot of income. If the applicant has enough "work credits" to qualify, Social Security Disability is available at any age. The number of credits required for disability depends upon the age at which the applicant becomes disabled. As defined by Social Security, disability means that because of a physical or mental impairment (expected to last for at least one year or result in death), one is unable to do any substantial gainful activity. Income of between $500 and $750 per month is considered substantial gainful employment. An impairment is a medical condition meeting Social Security guidelines. There is a six month waiting period before disability benefits begin. Workers' compensation and certain other government disability benefits (like unemployment insurance payments and state disability payments) may reduce the Social Security benefit. The sum of all disability payments cannot exceed 80% of earnings averaged over the period of time before disability. If initial application is denied, an applicant can request reconsideration. If reconsideration is denied, an applicant can request a hearing before an administrative law judge, who will review the medical records, testimony and other evidence, and render a decision. At this level, an applicant should seriously consider hiring an attorney knowledgeable in Social Security law. Fees are set by law and the judge must pre-approve any fee. Social Security allows an attorney to charge 25% of the retroactive benefits or $4,000.00, whichever is less. The attorney is also entitled to reimbursement of costs, for items such as copying medical records. The information in this piece was derived from an internet article by Moga & Hurley.
3. MARKET STATS: Between 1987 and 1997, institutional investors increased their investment in the largest 1,000 United States corporations from 45.6% to 59.9%. However, since then, the figure slipped to 57.6%. (Of course, individuals control the remaining 42.4%.) In addition, the largest twenty-five institutional investors controlled 22.7% of total outstanding equities in 1998, up from 19.7% in 1997 and 15.4% in 1995. The top twenty-five also managed nearly half (47.9%) of the total amount of equities under management by all types of institutional investors in 1998.
4. IRS RULING TAKES LIBERAL POSITION ON GOVERNMENTAL 401(K) PLANS: Prior to the Tax Reform Act of 1986, IRC Section 401(k) permitted state or local governments to maintain a cash or deferred arrangement under said section. However, the Tax Reform Act of 1986 amended Section 401(k) to prohibit governments from having 401(k) plans other than those adopted by a governmental unit before May 6, 1986. In a private letter ruling issued to the State of Idaho on April 19, 2000, the Internal Revenue Service holds that a state can extend a grandfathered pre-May 6, 1986 401(k) plan covering all state employees to employees of local school districts, political subdivisions and other statutorily-created entities that perform governmental functions. The state has a defined benefit plan that covers not only state employees, but also such employees of local school districts, political subdivisions and other statutorily-created entities. Since establishing the defined benefit plan, the state consistently treated all participating employers as a single employer for purposes of, among other things, IRC Section 415 limits and determining whether an employee has terminated employment for purposes of receiving a distribution. The state intends to treat all employers participating in the 401(k) plan as a single employer for purposes of the 401(k) plan. Due to the state's consistent treatment of all employers in the defined benefit and 401(k) plans as a single employer, IRS found that extending the pre-May 6, 1986 401(k) plan to the other participating employers in the state's defined benefit plan will not violate the Internal Revenue Code. Caveat: the ruling would seem not to apply in Florida or in any other state where local entities are not part of the state retirement system.
"Blessed are the flexible, for they can tie themselves into knots."
5. "GREENSPEAK": Plan Sponsor's "News Dash" gives us a wry rendition of Federal Reserve Board Chairman Alan Greenspan's remarks. "During a financial crisis, risk aversion rises dramatically, and deliberate trading strategies are replaced by rising fear-induced disengagement from market activity." Interpretation: When investors get scared, they panic -- and sell. "Nevertheless, if episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, the implications for risk measurement and risk management are significant." Interpretation: If those panics occur on a regular basis, things are going to get messy. Maybe it's better that the Fed Chairman does speak in code.
6. MINIMUM REQUIRED DISTRIBUTION RULES COMPLEX: BenefitsLink recently referred us to a brief article entitled "The Minimum Distribution Rules Affecting IRAs and Qualified Plans in a Nutshell." Subtitled "A Guide for the Perplexed," the paper confirms that the minimum required distribution rules are some of the most complex in the entire Internal Revenue Code. Because the government cannot tax an IRA or a Qualified Plan until a distribution is made, the minimum distribution rules exist so that participants and beneficiaries will not be able to postpone income taxation forever, accumulating income on a tax-deferred compounded basis in the meantime. Go to http://www.trustsandestates.net/Nutshell-Public/MRDNutshell/IceMRDNutshell.htm and read for yourself.
"Give me ambiguity or give me something else."
7. DISABILITY APPLICANT BEARS BURDEN OF PROOF: The State Retirement Commission affirmed denial of in-line-of-duty retirement benefits to an applicant who contended she had suffered an injury or illness during the performance of her job duties, which was a substantial producing or aggravating cause of her total and permanent disability. The Commission found that petitioner had not established the requisite causal link between any accident or injury arising out of and in the actual performance of duty required by her employment. There was no showing that any actions were the substantial, producing cause or aggravating cause of her total and permanent disability. On appeal, the applicant contended that the evidence she offered below "conclusively" showed that her disability arose out of her employment as a corrections officer. In affirming, the appellate court found that although applicant did offer evidence that her illness was job related, it was by no means conclusive, and the weight of the evidence was for the fact-finder to evaluate. Davis v. State Retirement Commission, 25 Fla. L. Weekly D698 (Fla. 5th DCA, March 17, 2000).
8. TEN THINGS YOUR ONLINE BROKER WON'T TELL YOU: Following its traditional "Top Ten List," Smart Money Magazine for May 2000 gives us the lowdown on online brokers: (1) "You'll be baffled by our commissions and fees;" look out for surcharges, "tiered" services, quarterly fees, postage and handling. (2) "Our computers are often down;" most sites suffer from significant fluctuations in their reliability. (3) "You'll never reach us on the phone;" the average time on hold at the ten largest online brokerage houses is twelve minutes. (4) "Our trades are executed slowly;" despite claims of real-time service, trade delays and slow account updates are common problems for internet brokerage companies. (5) "And sometimes we botch them completely;" in 1999 the SEC received 22% more complaints of botched trades than in 1998. (6) "Hoping to get a new account? Get in line;" Problems with transfer of assets to a new account is a leading cause of complaints against online brokers. (7) "You're on your own after hours;" despite the allure of after-hours trading, if you decide to trade after the closing bell, don't expect your online broker to have someone waiting by the phone to help you out. (8) "It's nothing personal;" like it or not, lower costs have made depersonalized service the norm. (9) "You'll never get access to an IPO;" although many online brokerages tout the claim that their clients get shares in hot new offerings, in reality, because distribution of IPO shares depends on which firm acts as the underwriter, your chances of getting in on the ground floor are slim. (10) "Our wireless trading isn't ready for prime time;" the new world of wireless trading is still loaded with bugs.
9. ESSENTIALS OF MARGIN TRADING: From Money Magazine comes a list of things you need to know before you trade on margin. First, learn all your broker's rules before you take a loan; even if you have traded on margin before, each firm has its own maintenance requirements, restricted-margin stocks and margin call rules. Second, be prepared for the consequences of a margin call; if you can't come up with the extra cash fast enough, your broker has the right to sell your stocks to cover its loan. Third, only borrow amounts you can afford to lose; or at least are able to cover easily with cash from other sources. Fourth, keep your holdings diversified; if you concentrate all your margin stocks in one sector stocks are likely to rise or fall in tandem. Fifth, never buy an IPO on margin; the IPO environment is too risky even to contemplate.
10. IS MICROSOFT BURYING ITS HEAD IN THE SAND?: A great one liner from the April 2000 Money Magazine: "Spell-checking@HotMail, Microsoft's Web E-Mail service, does not recognize the words breakup, antitrust or Linux." Perhaps with a little pressure Bill Gates can have those words actually removed from the English language.
11. APPELLATE COURT DENIES REHEARING IN MIAMI BEACH/PENSION ESTOPPEL CASE: Ordinarily when an appellate court denies rehearing it merely does so by a simple one-sentence order and does not issue an opinion. Apparently the dissenting judge in Thomas v. City of Miami Beach, 25 Fla. L. Weekly D159 (Fla. 3d DCA, January 12, 2000), (see C&C Newsletter for February, 2000, Item 1), wanted to add a citation to his opinion. Thus, the Third District Court of Appeal has issued a corrected opinion, adhering to its prior ruling, but including the citation in the dissenting opinion. Thomas v. City of Miami Beach, 25 Fla. L. Weekly D1013 (Fla. 3d DCA, January 12, 2000).
12. PSYCHOLOGY AND THE INVESTOR: The April 2000 issue of the AAII Journal contains an article entitled "The Psychology Behind Common Investor Mistakes." Standard finance models assume that investors behave like Star Trek's Mr. Spock, taking in information and making logically "correct" decisions. Behavioral finance introduces the possibility of less-than-perfectly-rational behavior caused by common psychological traits and mental mistakes. And here is a list of the most common psychological effects and how you can reduce their impact and incorporate them into your own investment decisions: (1) Overconfidence: trade less, especially in taxable accounts. (2) Fear of regret/pain of regret: don't let the prospect of regret at making a decision that turns out poorly have disproportionate weight in your decisions. (3) Cognitive dissonance: seek out contrary opinion because research doesn't stop when a purchase is made. (4) Anchoring: be aware of how recent prices, earnings and growth rates can serve as psychological anchors in thought processes. (5) Representativeness: step back and look at the whole picture on a stock. (6) Myopic risk aversion: long-term investors should make asset allocation decisions based on possible multi-year outcomes and not focus on single-period return possibilities. Gee, that was real clear!
"I honor my personality flaws, for without them I would have no personality at all."
13. ADEA SETTLEMENT PROCEEDS TAXABLE: BNA reports on a case involving a former employee who settled an Age Discrimination in Employment Act action against her former employer. Her action claimed damages for pension benefits, fringe benefits, front pay, back pay, pain and suffering. The eventual settlement stated that all funds paid to the former employee were for pain and suffering arising from physical injury to her. The former employee argued in the Tax Court that the parties intended the settlement proceeds to be for personal injury, excludable from income tax under IRC §104(a)(2). In rejecting such contention, the Tax Court ruled that the settlement terms were not realistic because the agreement between the employer and its insurance carrier allocated a significant portion of the proceeds for loss of compensation and only a small portion to personal injuries. Peaco v. Commissioner, Case No. 8273-99, TC Memo 2000-122, April 6, 2000.
14. U.S. SUPREME COURT SAYS PUBLIC EMPLOYERS CAN DICTATE COMP TIME USE: The Fair Labor Standards Act of 1938 (FLSA), 29 U.S.C. §201 et seq., as amended, provides that states and their political subdivisions may compensate employees for overtime by granting them compensatory time ("comp time"), which entitles them to take time off work with full pay. If employees do not use their accumulated comp time, the employer must pay cash compensation under certain circumstances. Fearing the consequences of having to pay for accrued comp time, Harris County, Texas adopted a policy requiring its employees to schedule time off in order to reduce the amount of accrued time. County deputy sheriffs sued, claiming that FLSA does not permit an employer to compel an employee to use compensatory time in the absence of an agreement permitting the employer to do so. The United States District Court granted summary judgment for the deputies and entered a declaratory judgment that the policy violated FLSA. The Fifth U.S. Circuit Court of Appeals reversed, holding that FLSA did not speak to the issue and thus did not prohibit the County from implementing its policy. On certiorari, the U.S. Supreme Court affirmed: FLSA ensures liquidation of compensatory time, but says nothing about restricting an employer's efforts to require employees to use the time. Because the statute is silent on this issue the County's policy is entirely compatible with FLSA. Two other features of FLSA support this interpretation. First, employers are permitted to decrease the number of hours that employees work. Second, employers may also cash out accumulated compensatory time by paying the employee his regular hourly wage for each hour accrued. The County's policy merely involves taking both steps at once. Christensen v. Harris County, 13 Fla. L. Weekly Fed. S281 (U.S., May 1, 2000).
15. NO PUNITIVES IN FLSA RETALIATION ACTION: Speaking of the Fair Labor Standards Act of 1938, the Act also contains an anti-retaliation provision, prohibiting employers from discharging or in any other manner discriminating against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to the law, or has testified or is about to testify in any such proceeding, or has served or is about to serve on an industry committee. The Act also authorizes private causes of action against employers for violations of the Act, including its anti-retaliation provision. In a case of first impression in the circuit (and disagreeing with another U.S. Circuit Court of Appeals), the Eleventh U.S. Circuit Court of Appeals held that the private right of action does not include recovery of punitive damages as part of legal relief. "Inferring remedies that Congress never contemplated both disturbs the constitutional balance by arrogating law-making power to the judiciary, and also allows legislators to escape their responsibility by enlisting judges as supplemental draftsmen." Snapp v. Unlimited Concepts, Inc., 13 Fla. L. Weekly Fed. C564 (11th Cir., April 5, 2000).
"The first myth of management is that it exists."
16. WE'RE GOING TO CRAWL BEFORE WE WALK: Last month, for the first time, we sent our newsletter by e-mail to those of you who so requested it and gave us an address. Inasmuch as we did not hear from anyone, we assume either that everyone received it in order or nobody received it at all! In any event, this month we will again mail the newsletter, even to those who may also receive it by e-mail. One more time: if you gave us an e-mail address -- but did not receive last month's or this month's issue electronically, please let us know, as your e-mail address may have been illegible.
17. AND MORE DEFINITIONS:
Limited Partnership An entity composed of one or more general partners (who manage a project) and one or more limited partners (who invest money but have limited liability, are not involved in day-to-day management and usually cannot lose more than their capital contribution).
Local Currency The currency of the same country as a security or index.
Long-term bond A bond with a maturity of ten years or more.
In Item 3 of our April, 2000 Newsletter, about the PBGC budget request, we said Fiscal Year 2000 when we meant 2001.
"We are willing to make the mistakes if someone else is willing to learn from them."
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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.