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October, 2000

Stephen H. Cypen, Esq., Editor

1. NYSE EXPANDS DECIMAL PRICING: Our readers know that the New York Stock Exchange began its decimal pricing pilot program on August 28, 2000 (see C&C Newsletter for August, 2000, Item 6). As of September 25, 2000, the NYSE (and the AMEX, which we did not know was part of the program) entered phase 2 of its decimalization pilot, expanding it to an additional ninety companies, including AOL and COMPAQ. The second phase will be evaluated and, if deemed successful, will result in a complete conversion on November 1, 2000.

2. CELEBRATING "FAT" TUESDAY: A new study reported on by Pensions & Investments indicates that market liquidity -- the ability to buy and sell stocks in sufficient volume -- varies by day of the week. Liquidity is strongest on Tuesdays, Wednesdays and Thursdays, with Tuesday being the most liquid day of the week. Unsurprisingly, liquidity drops most on Friday and before holidays, when investors head off for the weekend. In fact, many investors spend the weekend reading their investment models, Monday analyzing the results and then Tuesday preparing trades. The survey authors hope their research will lead to improved trading strategies and lower transaction costs. In addition, better understanding of reasons for liquidity changes may aid regulators and stock exchange officials in facilitating a shift to 24-hour trading.

"Monday is an awful way to spend 1/7 of your life."

3. LARGE PENSION FUNDS GREW BY 9% IN 1999: According to an annual survey by Pensions & Investments, assets of the world's 300 largest pension funds grew 9% last year. And although that growth rate is better than the 7.5% in 1998, it is still far below 1997's 16% growth. Assets of the top 300 total $5.7 Trillion, compared to $5.2 Trillion the year before. Assets of the 100 largest pension funds grew to $4 Trillion, 10% more than the $3.6 Trillion in 1998. United States pension fund dominance grew: eight of the top ten were based in the U.S., compared with six of the top ten in the previous survey. Overall, U.S. pension funds accounted for 64% of total assets last year, compared to 61% in 1998. Incidentally, the California Public Employees' Retirement System, at $156 Billion, regained the top spot after slipping to second place in 1998. The Florida Retirement System weighed in at number 6, with over $93 Billion.

4. FLORIDA APPELLATE COURT BOLSTERS CIVIL RIGHTS ACT/SOVEREIGN IMMUNITY DECISION: Shortly before the First District Court of Appeal released its decision holding that the Florida Legislature had unequivocally waived the defense of sovereign immunity for claims brought under the Florida Civil Rights Act of 1992 (see C&C Newsletter for September, 2000, Item 4), the Third District Court of Appeal made a similar holding. See Jones v. Brummer, 25 Fla. L. Weekly D1923 (Fla.3d DCA, August 16, 2000), a decision we apparently missed. Now the First District has added a footnote acknowledging the Third District's consistent ruling. Klonis v. State of Florida, 25 Fla. L. Weekly D2230 (Fla.1st DCA, September 15, 2000) (substituted opinion).

5. LITIGATION BY EEOC SEEKING PRIVATE RELIEF PRECLUDES SUBSEQUENT LITIGATION OF SAME CLAIM BY INDIVIDUAL: Acting upon charges of age discrimination, the Equal Employment Opportunity Commission filed suit against an employer on behalf of employees who had been terminated. A federal court entered summary judgment in favor of employer, finding no evidence to support that termination of the employees was motivated by anything other than legitimate business considerations. In the employees' subsequent state court action, a state trial court judge applied the doctrine of collateral estoppel, which requires a showing that there has been a final judgment on the merits in a prior suit involving the same claim and the same parties or their privies. The Third District Court of Appeal affirmed. Litigation by a representative party (EEOC) seeking private relief for an individual precludes subsequent litigation of the same claim by an individual for whom the representative sought relief. Poer v. Calder Race Course, Inc., 25 Fla. L. Weekly D2236 (Fla.3d DCA, September 20, 2000).

6. FEDERAL COURT RULES THAT CASH BALANCE PLANS DO NOT VIOLATE ADEA: In a lengthy opinion granting partial summary judgment in favor of defendants, a United States District Judge has ruled that cash balance plans do not violate the Age Discrimination in Employment Act. For two reasons, the court found as a matter of law that the subject cash balance design does not violate the age discrimination provisions on the rate of benefit accrual in the ADEA. "First, legislative history shows that these specific provisions do not apply at all to employees who have not yet reached normal retirement age. ... Second, even assuming these pension age discrimination provisions apply at all to participants who have not reached normal retirement age, when their language is properly applied to cash balance pension plans, the undisputed facts show that the rate of benefit accrual does not depend on age." The court also found as a matter of law that the plan "does not discriminate on the basis of age by failing to provide for a lump sum payment option for all alternative formulas for calculating an annuity benefit." Eaton v. Onan Corporation, Case No. IP 97-0814-C-H/G (S.D. In., September 29, 2000). Note: Although the opinion is on the Internet, don't look for it elsewhere, because it says "not intended for publication in print." We wonder why. Really.

"Reality is merely an illusion, albeit a very persistent one."

7. IRS ISSUES PRIVATE LETTER RULING FOR DROP: As our readers know, a deferred retirement option plan is an increasingly-popular public sector retirement option. Basically, a DROP allows an employee who reaches retirement age to be treated as retired for certain purposes, while delaying actual termination of employment for a specified period. Typically, a participant no longer makes employee contributions to the plan and his retirement benefit is accumulated in a separate account, to be paid out at actual retirement. The Internal Revenue Service has issued a private letter ruling dealing with two aspects of a DROP: (1) the existence of a DROP option does not adversely affect the ability of other participants to make employee contributions on a pre-tax basis under IRC Section 414(h) and (2) the lump sum accumulation of retirement benefits is eligible for rollover treatment under IRC Section 402(c)(4). PLR 200038055. We thank ASA for alerting us to this important ruling.

8. PENSION FUND EARNINGS HELP BOTTOM LINE: In 1999, 29 of 100 companies studied by RG Associates realized returns on pension plan assets of at least 25% of operating income. Three companies had operating losses that were offset by expected pension returns and four others had operating income but also saw expected pension earnings exceed operating results. Some large companies that had a high sensitivity to pension results and the amount thereof as a percentage of income are General Motors (79%), IBM (45%) and Ford Motor (39%).

"It takes money to make money because you have to copy the design exactly."

9. HOW TO TAKE THE STING OUT OF MONEY MANAGER MERGERS: A cover story in the September 2000 issue of Plan Sponsor deals with the "brave new world of global money manager consolidation." In the last five years, many of America's leading money managers have been acquired by foreign institutions. While merger activity has certainly created windfall profits for many owners, uncertainties abound for pension fund officials. An inset advises what to do if your manager is acquired:

(1) Assess changes in your team. Are new people responsible for key functions like portfolio management, research or client service? Has your team been augmented by others from the acquiring company? Personnel shifts are a red flag, since new roles mean a steeper learning curve and more potential for service or performance disruption.

(2) Watch for distractions. Smart acquirers keep star portfolio managers, analysts and other key personnel focused on their jobs, not the acquisition. Be wary if you find that important people on your account are heavily involved in firm integration or other corporate issues.

(3) Evaluate retention strategies. Are the people you hired headed out the door? Are they hanging around for the next five years to collect deferred benefits or are they truly motivated to provide the performance and service you expect from them?

(4) Visit in person. A lot can be learned about a merger by showing up at the managers' headquarters. Talk to as many people as possible about their views of the merger. Try to pick up on issues and contentions that may not be in a press release.

(5) Step up due diligence. There is no substitute for post-merger due diligence. Keep a sharp eye on issues like performance, investment style and manager changes that would always be monitored.

10. CHICAGO SETS MANDATORY RETIREMENT FOR FIREFIGHTERS AND POLICE OFFICERS: The Chicago City Council recently adopted an ordinance reinstating a mandatory retirement age of sixty-three for Chicago firefighters and police officers (see C&C Newsletter for November, 1996, Page 3). The ordinance also sets a maximum hiring age of thirty-five for firefighters and forty for police officers. Chicago firefighters and police officers were required to retire at sixty-three from 1935 to 1983, when the age was raised to seventy after the United States Supreme Court applied the Federal Age Discrimination in Employment Act to municipalities. After Congress exempted firefighters and police officers from the ADEA, age sixty-three was reinstated in 1986. But that exemption was automatically repealed as of December 31, 1993, at which point mandatory retirement ages were completely dropped. Now that Congress has allowed retirement ages of no less than fifty-five for firefighters and police officers, Chicago has reinstated its prior mandatory retirement age. Incidentally, only 45 of 3,200 firefighters and 100 of 14,000 police officers are immediately affected. The Chicago action was reported by Pensions & Benefits. Our readers know that a mandatory retirement age in Florida is prohibited by Section 760.10, Florida Statutes (see C&C Newsletter for October, 1996, Pages 2-3). Also, a maximum hiring age may be suspect, even under Federal law.

11. SOUTH CAROLINA WILL REFUND MILLIONS TO RETIREES: According to a report in Pension & Benefits, South Carolina must refund at least $250 Million to about 20,000 retirees who have been underpaid since 1986, when the state changed the way it calculated retirement benefits. Prior to 1986, South Carolina calculated retirement benefits based on the average salary of an employee's three highest paid years, adding credit for up to 45 days of unused vacation time and dividing it by three. When the law changed in 1986, instead of adding unused annual leave to the last paycheck preceding retirement, it was added to the average final compensation. In 1986, the retirement fund also changed the way contributions were computed on unused annual leave. Employees were assessed at 6.5% and their agencies paid an additional 6% for unused annual leave as the employer contribution. In other words, funds for the benefit were paid into the fund but the benefit never was added to pension checks. The issue came to light when the state's unfunded liability period precipitously dropped from thirty years to two years. The May 22, 2000 South Carolina Supreme Court ruling requires refunds going back to 1992, averaging between $9,600.00 and $19,200.00. In addition, most retirees will see an additional $100.00 to $200.00 more in their monthly checks.

12. FLORIDA GETS CLOSER TO NEW BENEFIT PLAN: Following legislation that adds a 401k-type pension plan to the Florida Retirement System (see C&C Newsletter for July, 2000, Item 5), the Florida State Board of Administration tentatively approved an investment policy statement and expects to issue an RFI for a third-party administrator. The statement calls for hiring a "bundled" provider to offer a maximum of nine funds for the new plan plus a limited amount of administrative and educational services, according to a report in Pensions & Investments. The plan, which could quickly reach $18 Billion, will also have a set of twelve options from investment-only providers. The bundled provider will offer money market, three U.S. fixed income funds, four U.S. stock funds and one foreign stock fund. The investment managers will provide three tiers: Core (four funds), Balanced (three funds) and Specialty (five funds).

"When in trouble, delegate."

13. GAO FINDS THAT MANY LACK PENSION PLAN: An August 23, 2000 General Accounting Office report found that 53% of the employed labor force of 69 million people were without a pension plan in 1998. Entitled "Pension Plans: Characteristics of Persons in the Labor Force Without Pension Coverage," the report addresses the proportion of the labor force without pension coverage and how that proportion has changed over the last decade; characteristics of workers in the labor force; and the proportion and characteristics of retired people who lack pension income or pension assets. Believe it or not, the 53% figure is a decrease from 58% ten years earlier. About 85% of employees not in a pension plan had one or more of the following characteristics: relatively low income, employed part time or part of the year, work for a relatively small firm or were relatively young. Other characteristics associated with lack of pension coverage include a relatively low education level, high turnover industries where vesting requirements are not met and private sector employment. Public sector employees have higher coverage rates (73%) than private sector employees (42%) because many public sector employees have traditionally been excluded from Social Security coverage and more public sector employees are unionized. The GAO report, No. HEHS-00-131, was analyzed in Pension & Benefits.

14. CATO INSTITUTE CITES "ANOMALOUS" SOCIAL SECURITY DISABILITY BENEFITS: A CATO Institute report, summarized in Pension & Benefits, cites examples of individuals collecting Social Security disability insurance because of disabilities allegedly precluding them from "substantial gainful employment" while simultaneously filing suits under the Americans With Disabilities Act charging they are being discriminated against for jobs they are clearly capable of performing. The Social Security Disability test is whether the individual has a medically severe impairment that precludes substantial gainful employment. (See C&C Newsletter for May, 2000, Item 2.) ADA, on the other hand, is far more lenient, only requiring a claimant to prove that he is disqualified from a "broad range of jobs" -- not all jobs -- by limitations in a substantial life activity. Despite the differences, the report claims that the Social Security Administration has granted claimants full disability benefits even after a federal court has ruled that the claimants did not even meet ADA's more lenient disability definition. The author concludes that there should be an independent oversight and review of individual Social Security Disability awards and that the multiple opportunities available to an individual for challenging denial of Social Security Disability benefits unnecessarily increase opportunities for abuse. Guess where the CATO Institute is on the political spectrum.

"Don't sweat the petty things, and don't pet the sweaty things."

15. OLDER AMERICANS MORE DEPENDENT ON SOCIAL SECURITY AND PENSIONS: Since the early 1960's, the proportion of income for older Americans derived from Social Security and pensions has increased and the proportion from earnings has decreased. In 1998, Social Security benefits provided about two-fifths of the income of older persons. Pensions, personal earnings and asset income each provided about one-fifth of the total. In 1975, only 6% of private-sector employees depended primarily on defined-contribution plans for pension benefits. By 1994 the number had increased to 21%, corresponding to the fall of primary-coverage defined-benefit plans from 39% to 24%. Social Security accounts for 82% of income of older Americans with the lowest income; public assistance provides another 10%. Logically, those 85 and older depend more upon Social Security than those between the ages of 65 and 69. These data are from a Federal Interagency Forum on Aging-Related Statistics report entitled "Older Americans 2000: Key Indicators of Well-Being." The report was reviewed in Pension Benefits and is available at http://www.agingstats.gov/chartbook2000/default.htm. Incidentally, this forum, which we just learned about, is a consortium of the following U.S. Government agencies working together to improve the quality and usefulness of data on older Americans: Administration of Aging, Bureau of Labor Statistics, Census Bureau, Health Care Financing Administration, National Center for Health Statistics, National Institute on Aging, Office of the Assistant Secretary for Planning and Evaluation (HHS), Office of Management and Budget and Social Security Administration.

16. CEO PAY OUTSTRIPS THE RANK-AND-FILE: The Institute for Policy Studies and United for a Fair Economy, two pro-labor nonprofit groups, have issued a report showing that the pay of top executives significantly outpaced that of the average employee between 1990 and 1999. Entitled "Executive Excess 2000," the report found that Chief Executive Officers saw their total compensation grow by 535% compared to the pay for production and non-supervisory workers (who make up about 80% of the American work force), which barely outpaced inflation at 32%. The rank-and-file earned about $24,000.00, while CEO compensation average $12.4 Million, including stock options used as compensation. Recommendations to close the gap: increase the hourly minimum wage to at least $8.10 per hour; establish local "living wages," up to as much as $10.00 per hour, depending upon the region; and eliminate tax subsidies on CEO salaries, prohibiting corporations from deducting same unless CEO pay is capped at 25 times that of the lowest paid worker. The full report, which is available at http://www.ufenet.org, was summarized in Pension & Benefits.

17. EEOC ISSUES NEW ENFORCEMENT GUIDANCE: A report from Pension & Benefits indicates that on October 3, 2000 the Equal Employment Opportunity Commission issued new enforcement guidance analyzing benefit discrimination claims under the Age Discrimination in Employment Act, the Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964 and the Equal Pay Act. The 70-page document covers the legal standards that apply to discrimination claims in health and life insurance, long-term and short-term disability benefits, severance benefits, pension or other retirement benefits and early retirement incentives.

18. FLORIDA APPELLATE COURT UPHOLDS BROWARD COUNTY DOMESTIC PARTNERSHIP LAW: The Fourth District Court of Appeal has upheld constitutionality of the Broward County Domestic Partnership Law (see C&C Newsletter for August, 1999, Item 10). One section, dealing with health care surrogates, was found to conflict with state law and is thus invalid. However, because that section is severable from the balance of the law, all other parts were upheld. Finally, the court certified to the Florida Supreme Court the following question of great public importance: Does the Broward County Domestic Partnership Act contravene Article VIII, Section 1(g) of the Florida Constitution because: (1) the Act improperly intrudes into a matter purely of Statewide concern under City of Miami Beach v. Fleetwood Hotel, Inc., 261 So.2d 801, 804 (Fla. 1972); or (2) the Act is inconsistent with Section 741.212, 112.08(2)(a), 741.211, or 798.02, Florida Statutes (1999)? Lowe v. Broward County, 25 Fla. L. Weekly D2282 (Fla. 4th DCA, September 20, 2000).

"I am grateful that I am not as judgmental as those self-righteous people around me."

19. SOCIAL SECURITY BENEFITS WILL INCREASE BY 3.5%: The Social Security Administration announced on October 18, 2000 that Social Security and Supplemental Security Income benefits will increase 3.5% in 2001. The average monthly check will rise from $816.00 to $845.00. The maximum amount of earnings subject to the Social Security payroll tax will increase from $76,200.00 to $80,400.00. Our readers know that President Clinton signed the Senior Citizens Freedom to Work Act of 2000 on April 7, 2000, eliminating the retirement earnings test for individuals between 65 and 69 (see C&C Newsletter for April, 2000, Item 24). However, the test remains in effect for those 62 through 64 ($1.00 withheld for every $2.00 above $10,680.00 per year), and a modified test applies for the year an individual reaches age 65 ($1.00 withheld for every $3.00 above $25,000.00 per year). Separately, the Government announced that the monthly Medicare premium for Medicare Part B will rise from $45.50 per month to $50.00 per month.

20. IRS PENSION LIMITS OFFICIAL: As predicted (see C&C Newsletter for September, 2000, Item 9), some IRS pension limits will change for 2001. The Section 415 defined benefit plan dollar limitation will increase to $140,000.00 from $135,000.00. The Section 415 defined contribution limit will increase to $35,000.00 from $30,000.00. The Section 401(a)(17) annual compensation limit will stay the same at $170,000.00. And the Section 457 deferred compensation limit will increase to $8,500.00 from $8,000.00.

21. FLORIDA SUPREME COURT RULES THAT WORKERS' COMP IS PRIMARY, SO PENSION FUND IS ENTITLED TO OFFSET: Section 440.21(1), Florida Statutes, prohibits an agreement by an employee to contribute to a benefit fund maintained by his employer for purposes of providing compensation or medical services and supplies as required by Chapter 440, Florida Statutes, the Workers' Compensation Law. Accordingly, the Florida Supreme Court held that where a pension plan is funded at least in part with employees' contributions, decreasing workers' compensation benefits on account of pension benefits runs afoul of Section 440.21(1), Florida Statutes. Thus, once it is determined that the pension plan is funded with employees' contributions, workers' compensation benefits are primary and it is the pension fund that is entitled to the benefit of the offset. The holding should not be read to mean that in all other cases the workers' compensation fund automatically receives the benefit of the offset; rather, the Court only held that where the fund is employee-contributory, it would violate Section 440.21(1), Florida Statutes, for workers' compensation benefits to be reduced. City of Hollywood v. Lombardi, 25 Fla. L. Weekly S895 (Fla., October 19, 2000).

"Two wrongs do not make a right, but three lefts do."

22. MORE DEFINITIONS:

Median market capitalization. The middle market value in a distribution of stock holdings.

Mortgage-backed security. A collateralized fixed income security in which mortgages are pooled together and act as collateral for the issuance of a security. Depending upon the specific structure of the security, some combination of principal and interest payments on the underlying mortgages are "passed through" to the security holder. Types of mortgages that serve as collateral include level payment fixed rate mortgages, adjustable rate mortgages, balloon mortgages and graduated payment mortgages. Most of these securities are issued and/or guaranteed by agencies such as Government National Mortgage Association (GNMA -"GINNIE MAE"), Federal National Mortgage Association (FNMA - "FANNIE MAE") and Federal Home Loan Mortgage Corporation (FHLMC - "FREDDIE MAC"). Only GNMA is an instrumentality of the United States Government, and as such, is backed by the full faith and credit of the United States. FNMA and FHLMC, which are government-sponsored entities, are generally recognized as "government quality" because of the United States' underlying moral obligation.

Errata

In Item 3 of our September 2000 Newsletter, in quoting the certified question answered by the Supreme Court we mistakenly said reasonable "clause" when our readers know we should have said reasonable "cause."

In Item 17 of our September 2000 Newsletter we inadvertently transposed numbers ($3.74 Trillion instead of $3.47 Trillion) in referring to the marketable portion of the public debt. Hey, what's $27 Billion among friends?

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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