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May, 2001

Stephen H. Cypen, Esq., Editor

1. WHAT PEOPLE HAVE SAID ABOUT TAXES:

"Taxation without representation is tyranny." James Otis (1725-1783), U.S. Politician

"In this world nothing can be said to be certain but death and taxes." Benjamin Franklin (1706-1790), U.S. Statesman

"The avoidance of taxes is the only pursuit that still carries any reward." John Maynard Keynes (1883-1946), British Economist

"It has made more liars out of the American people than golf." Will Rogers (1879-1935), U.S. Humorist

"Death and taxes and childbirth! There's never any convenient time for any of them!" Margaret Mitchell (1900-1949), U.S. Novelist

"They can't collect legal taxes from illegal money." Al Capone (1899-1947), U.S. Gangster

"The Congress will push me to raise taxes and I'll say no, and they'll push, and I'll say no, and they'll push again. And I'll say to them, read my lips: no new taxes." George H. W. Bush (1924-), former U. S. President

"Taxation WITH representation isn't so hot either."

2. FLORIDA INVESTMENT BROKER HEADS TO JAIL: Robin McEachin, an investment broker, has been sentenced to 6 ½ years in federal prison for defrauding a police pension fund and other clients out of more than $2 Million. McEachin, 48, stole $700,000 from the Florida Police Benevolent Association's employee pension fund, $1 Million from a Georgia trucking company's pension fund and as much as $130,000 each from several individual investors. He had not intended to steal from his clients, said his attorney, but rather took the money in an attempt to save his company. (Gee, that's comforting.) The investment broker pleaded guilty to mail fraud and money laundering, and said he intended to repay the money. Meanwhile, a police benevolent association lawyer said some PBA members lost all their retirement money to McEachin.

3. PUBLIC FUNDS HAVE TROUBLE FINDING AND KEEPING STAFF: The median salary for a private sector portfolio manager is between $144,000 and $173,000, depending on the asset class. In the public sector, investment officer salaries range between $56,000 and $72,000, while senior investment officers earn between $81,000 and $104,000. Pensions & Investments reports that the California Public Employees' Retirement System received 193 rejections (out of 221 candidates) in its search for a portfolio manager. Tom Herndon, Executive Director of the $102 Billion Florida Retirement System, says his employees have made a lifestyle choice: living in Tallahassee has advantages for families, and outdoor activities such as hunting and fishing are five minutes away. Really? So how come between 10% and 20% of FRS's investment and information technology staff left last year? Of course, our long-time readers know that FRS's Ash Williams left four years ago (see C&C Newsletter for April, 1997, Page 4).

"Half a mind is a terrible thing to waste."

4. STOCK THERAPY: James B. Stewart, in a Smart Money piece, discusses ways to confront and cope with painful feelings associated with falling stock prices. Here are ways to cure your own great depression:

Recognize your emotions about the market, but don't act on them—there's no point in trying to pretend you feel good when you don't.

Understand that to act rationally at times of intense emotion is difficult—the greatest investment returns are realized by those with sound judgment and the fortitude to go against the herd.

Keep in mind that all bear markets eventually end—even the Great Depression, the worst economic contraction in 500 years, came to an end.

Avoid becoming fixated on the market value of your assets—market prices are simply a snapshot of investor sentiment at a particular moment.

Don't become trapped by hindsight—it's easy now to fantasize about having sold at the market's peak last March.

If you have the cash, concentrate on buying stocks at bargain prices—it's as if the department store of the nation's economy launched a huge sale.

If you don't have any available cash, it's okay just to ignore the market until it turns around—if you don't have any other interests in life, now might be a good time to cultivate them.

Remember, there's no reason to feel paralyzed—this may be as good a time as any to examine your asset allocation.

5. NEW RESOURCE LINKS TO FLORIDA CONSTITUTION AND STATUTES: We have added the Florida Constitution and the following useful chapters as resource links: 112, 119, 175, 185 and 286. We have also added the following sections of the Florida Statutes: 633.35, 633.382 and 943.22.

6. PUBLIC PENSION FUNDS WEATHER STOCK MARKET STORM: Reuters reports that officers of state pension funds are confident they can weather the recent turbulence in U.S. stock markets. The National Conference on Public Employee Retirement Systems, which represents over ten million public employees in funds with assets of more than $1 Trillion, reminds us that these funds invest for the long haul, and actuaries, who determine contribution rates and assumed rates of return, consider fluctuations in the market. Because of outstanding market returns in the last ten years, public pension systems are in a good position as there are still plenty of reserves to take care of requirements. Diversification has also helped: funds balance their assets among domestic equities, international equities and fixed income securities. For example, the California Public Employees Retirement System holds 58% of its assets in stocks, 28% in fixed income, 8% in real estate and 6% in private equity. Of the stock position, only 39% is domestic! (So, how come, CalPERS lost $5 Billion in the first two months of 2001, amounting to over 3% of its entire portfolio?) The Florida Retirement System, which holds 55% in U.S. equities, has been "rebalancing" its portfolio as the market has fallen. Since last July, FRS is down a total of about 10%. Still, public funds have made it through far more difficult times, such as the major stock market downturn in 1987. Then, every fund recovered its losses within 18 months, and this tumble has probably hurt pension funds less.

"What happens if you get scared half to death twice?"

7. PENSION LAWSUIT GETS NEW LIFE: A Wisconsin state appeals court ruling revives a lawsuit filed by a group of retired Milwaukee police officers who want the city to make good on a debt they say the city owes to their pension system. Believe it or not, the case involves a pension system that serves only officers hired before July, 1947. The Policemen's Annuity and Benefit Fund sued the city in 1997, alleging that the city failed to make payments into the fund for a number of years dating back to the 1960s. The fund served officers who were hired prior to July, 1947, after which they were allowed to join the regular city pension system. Under the old system, officers could elect to contribute additional money toward pension benefits for their widows. If they did, the city was also required to make a contribution. The suit alleges that the city, for years, did not make those contributions. The trial court dismissed the case, but the District Court of Appeals ruled that the fund has stated a cause of action. The fund's attorney said the ruling will force the city to determine how much is owed to approximately 300 retirees and beneficiaries who are still a part of the old system.

8. PENSION SURPLUSES BOOST COMPANIES' INCOME AGAIN: Like the year before (see C&C Newsletter for October, 2000, Item 8), pension plans contributed heavily -- more than $5 Billion -- to 2000 pre-tax income of companies in the Dow Jones Industrial Average. All twenty-five of the companies in the benchmark DJIA that offer defined benefit pension plans saw their pension income grow or their pension expense shrink. Those twenty-five companies had an average return of 7% on their pension assets compared to stock prices, which sank .7%, according to a front page story in Pensions & Investments.

9. GROWTH ALLOCATIONS RISE AS VALUE SURGES: Just when Value stocks outperformed Growth stocks by the widest margin in seven years, pension funds moved assets out of Value and into Growth. According to data from Greenwich Associates, reported in Pensions & Investments, the average pension fund had a 31.6% allocation to large-cap Growth assets in 2000, up from 30.8% in 1999. For small-cap Growth, allocations jumped to 8.8% from 6.7%. Meanwhile, Value equity allocations dropped, in large-cap to 25.8% from 32.3% in 1999. The allocation to small-cap Value stocks dropped to 6% from 6.2%. These moves went against the grain of the market in 2000, as Value handily outperformed Growth. The median Value equity account in the P&I Performance Evaluation Report Universe returned 12.7%, while the median Growth equity account returned -7.2%. Curiously, 21% of pension funds surveyed terminated a Value manager in 2000 (up from 17% in 1999) and only 14% of pension funds terminated a Growth manager in 2000 (down slightly from 15%).

"Errors have been made. Others will be blamed."

10. CHRONIC PAIN -- A NEW DISEASE?: Many of our pension board clients are faced with disability claims based upon chronic pain. Therefore, we thought readers might benefit from a recent article in Hospital Practice dealing with the subject. In the United States, nearly one-third of the population experiences severe chronic pain at some point in life. It is currently the most common cause of long-term disability, partially or totally disabling more than 50 million people. As the population ages, the number of people needing treatment for chronic pain from back disorders, degenerative joint diseases, rheumatologic conditions such as fibromyalgia, visceral diseases, cancer, the effects of cancer treatment and other syndromes will undoubtably grow. The good news is that safe and effective medical treatment for chronic pain is currently available. A major barrier to be overcome, however, is that chronic pain is often not viewed as a physical illness worthy of treatment. Recent studies demonstrating that specific changes occur in the peripheral and central nervous systems of patients with chronic pain provide the rationale for changing our approach to chronic pain syndromes and instituting more aggressive and comprehensive treatment. Unlike patients with acute pain, those with chronic pain often appear to be depressed. Another characteristic of these patients is that, in the course of giving their histories, they frequently refer to events and losses that appear to be only peripherally related to the focus of their evaluation. Although this is usually interpreted as evidence of a characterologic disease or psychiatric illness, it could be a manifestation of the link between pain and memory. The new lesson is that proper treatment can reverse the signs and symptoms of chronic pain. We thank Cornel Lupu, M.D., medical advisor to several of our pension boards, for sending us this scholarly piece.

11. SENATORS OPPOSE MANDATING UNIVERSAL SOCIAL SECURITY COVERAGE: In a letter to their colleagues, Senator George Voinovich and Senator Dianne Feinstein urged that the flawed provision mandating that all state and local employees be forced into the Social Security System be removed from any reform legislation. The letter states that, thanks to sound management at the state and local level, up to five million state and local retirees will receive higher benefits than they would under Social Security. Most reform proposals would bring only newly hired state and local government employees into the Social Security System. While that approach may be fair because it grandfathers current public pension plan participants, it starves public pensions of the continued flow of new participants needed to maintain solvency. The letter also recognizes a distinct problem faced by police officers and firefighters: 79% of police officer and firefighter disabilities do not prevent the individual from taking a less physically-demanding job. Social Security, however, provides benefits only when the individual becomes totally unemployable. (We had never previously heard this argument made, but feel it is extremely well taken.) Finally, the Senators' letter includes a draft letter to the President urging him to exclude this type of provision from any Social Security reform plan.

"Things are more like they are today than they have ever been before."

12. SENATE VERSION OF PENSION REFORM NOT IDENTICAL TO HOUSE'S: Senator Charles Grassley, together with twenty co-sponsors, has introduced S. 742, the Retirement Security and Savings Act. The Senate Bill is similar to H.R. 10, the Comprehensive Retirement Security and Pension Reform Act, which was introduced by Representatives Rob Portman and Benjamin Cardin, along with over two hundred fifty co-sponsors. Both bills would increase the annual dollar limit under defined benefit plans from $90,000 (currently indexed to $140,000) to $160,000 and the IRC Sec. 401(a)(17) annual compensation limit from $150,000 (currently indexed to $170,000) to $200,000. However, the House Bill would increase the limit on contributions to defined contribution plans from $30,000 (currently indexed to $35,000) to $40,000, while the Senate version would not increase this limit. On the other hand, S. 742 would increase income limits on contributions to individual retirement accounts by participants in pension plans to $80,000 for married taxpayers and to $50,000 for single taxpayers; the House version does not contain such provisions. There are numerous other differences in the bills, which may be of importance to our readers. A complete -- seventeen page -- comparison chart can be accessed at http://www.aspa.org/archivepages/gac/2001/sidebyside2.htm. (As we went to press, by a 35 to 6 vote, the House Ways and Means Committee approved H.R. 10, with three minor amendments.)

13. IRS STATEMENT ON CASH BALANCE BENEFIT ACCRUALS MAY HAVE ENCOURAGED EMPLOYERS TO ADOPT PLANS: When the Internal Revenue Service in 1991 issued final Section 401(a)(4) Regulations the following sentence was included in the preamble: "The fact that interest adjustments through normal retirement age are accrued in the year of the related hypothetical allocation will not cause a cash balance plan to fail to satisfy the requirements of Section 411(b)(1)(H), relating to age-based reductions in the rate at which benefits accrue under a plan." IRC Section 411(b)(1)(H) requires a qualified retirement plan to provide continued benefit accruals or allocations without regard to a participant's age. In a recent letter to Senator Tom Harkin, the General Accounting Office concluded that there was "nothing improper" about inclusion of the sentence. GAO observed that "In essence, the sentence said that cash balance plans are not age discriminatory" and accurately "reflected the views of the IRS at that time." However, GAO also noted that the draft of the regulations that had been provided to the Department of Labor and the Equal Employment Opportunity Commission in advance of publication did not contain the sentence at issue, and GAO asserted that IRS should have coordinated the sentence with DOL and EEOC. Remember that a federal trial judge has ruled cash balance plans do not violate the Age Discrimination in Employment Act (see C&C Newsletter for October, 2000, Item 6), but failure to use the IRS method of discounting a cash balance plan participant's lump-sum distribution violates ERISA (see C&C Newsletter for April, 2001, Item 8).

14. WE CELEBRATE OUR FIFTH ANNIVERSARY: Time sure flies when you're having a good time. We started our Newsletter in May, 1996. Then, we said that the Newsletter would be issued from time to time or when special circumstances warrant. Little did we know that there would be enough material -- and demand -- for an issue every single month and for numerous special supplements. We thank all of you for your kind words and encouragement, and we hope our next five years will be just as successful. And our editor would be remiss if he did not publicly thank his secretary of 33 years, Judi Stark, who does most of the work on the Newsletter!

"Someday we'll look back on all this and plow into a parked car."

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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