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Cypen & Cypen
MARCH 20, 2003

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

We have just been made aware of a Florida League of Cities Memorandum dated February 12, 2003, issued in response to AGO 2003-01 (January 3, 2003) (see C&C Newsletter for January 15, 2003, Item 1). The League contends that The Municipal Home Rule Powers Act, Chapter 166, Florida Statutes, provides that the legislative body of each municipality has the power to enact legislation concerning any subject matter upon which the State Legislature may act. Further, the League states that AGO 1974-18 specifically stated that municipalities have the Home Rule Power to enact per diem and travel allowances that vary from Section 112.016, Florida Statutes. The League notes that numerous municipalities have relied on their Home Rule Power and the earlier Attorney General Opinion to adopt their own reasonable per diem and travel allowances. (There is no indication as to whether these municipalities have adopted their own allowances by ordinance, which would seem to be required even under the League’s reasoning.) In any event, the League will pursue legislation during the 2003 Session to make clear that municipalities have the authority to establish their own reasonable per diem and travel allowances in excess of the rates established by Section 112.061, Florida Statutes. While we do not necessarily agree with the League’s premise -- because of the statute’s unique provision stating that only a conflicting special or local law of the Legislature will prevail -- we do applaud its efforts to resolve the obvious problem. And while the League is at it, we would suggest that the existing rates (breakfast - $3.00, lunch - $6.00 and dinner - $12.00) be raised substantially, so that a city (and pension board) can avoid what may be a politically-unpopular decision to reimburse in excess of State limits.


Under Section 72(p) of the Internal Revenue Code, loans from a qualified employer plan to a participant or beneficiary are treated as taxable distributions unless certain criteria are met. Generally, a loan may not exceed the lesser of 50% of the participant’s vested account balance or $50,000.00. The term of repayment may not be more than five years, except if the loan is to acquire a principal residence. Payments must be substantially level and may be made no less frequently than quarterly. Back in 1995 and 1998, IRS issued two sets of proposed regulations on these criteria. In 2000, IRS issued final regulations and a new set of proposed regulations. IRS has now finalized the 2000 proposed regulations. The new final regulations provide guidance on suspension of loan payments during military leave of absence, new loans following a deemed distribution of a prior loan, loan financing and multiple loans. The suspension of loan payments while a participant is on military leave of absence will not cause the loan to be deemed distributed, regardless of the length of the leave. For other unpaid leaves of absence, the suspension period may not exceed one year. Generally, the loan is reamortized over the remaining term plus the period of military leave, either to provide for higher periodic payments or to provide the same payments but with a balloon payment at the end. As with any other leave of absence, the periodic repayment amount may not be less than it was before the military leave. And, as with any other loan suspension period, interest must continue to accrue during a military leave of absence, although the maximum rate that may be charged during the leave is 6% per annum (per the Soldier’s and Sailor’s Civil Relief Act of 1942). When a loan is deemed distributed and not repaid, it is treated as outstanding for purposes of determining whether additional loans can be made. No future payout made to the participant or beneficiary can be treated as a loan unless one of two conditions is met: the repayments are made by payroll deduction or the plan receives adequate security other than the participant’s accrued benefit under the plan. The final regs also provide that if the original loan repayment period was less than the maximum five years a refinanced loan period can be extended to five years from the original loan date. Last, the final provisions do not restrict the number of loans a participant may take in a 12-month period -- a change from the proposal that would have limited the number to two. However, a plan may restrict the number of loans a participant may have outstanding. The final regulations are effective December 3, 2002, but apply only to loans made on or after January 1, 2004. We adapted this piece from a summary prepared by Buck Consultants, Inc.


A draft audit prepared by the Inspector General of the U.S. Department of Health and Human Services concludes that the Florida Retirement System owes the federal government over $500,000,000.00. Because FRS had more money than it needed to pay pensions, the excess federal contributions must be refunded. The half-billion dollars, owed as of July 1, 2002, is part of a total FRS excess of $3 Billion. One of our astute pension fund administrator’s questioned what federal contributions go into the State Retirement System. Well, apparently the federal government makes contributions to pension funds for state employees who administer joint state/federal programs like Medicaid.


The 2002 Wilshire Report on State Retirement Systems, summarized in, shows the state pension fund landscape to be rather bleak. About 79% of all state plans are now underfunded, up from 31% in 2000 and 51% in 2001. By comparison, Wilshire estimates private pension plans had a combined 86% funding ratio at the end of last year. (Maybe so, but we’d like to see what private plans’ funding ratio would be using reasonable interest earning assumptions.) State plans went from being overfunded by a combined $112 Billion in 2001 to a $180 Billion shortfall in 2002. Only nine states had assets in excess of liabilities, compared to 23 in 2001. As measured by the ratio of assets to liabilities, the honor of strongest plan goes to Texas (129%), while the weakest is West Virginia Teachers (21%). Finally, the report shows combined public plans’ asset allocation was

Domestic Equities - 42.3%
Non-domestic Equities - 12.9%
Domestic Bonds - 35.2%
Non-domestic Bonds - 1.4%
Real Estate - 4.0%
Private Equity - 4.2%


Gabriel, Roeder, Smith & Company, a national actuarial and consulting firm, has written Wilshire Associates, Inc. to express concerns regarding certain conclusions drawn in the report referred to in the above item. The authors of the letter, who between them have over 50 years of experience in researching, advising and actuarially evaluating state and local retirement plans, object to the report’s alarmist tone, selective use of statistics and use of technical terms without better explanation, which paint a misleading picture of state and state teacher retirement plan funding. For example, the report uses the term “underfunded,” without defining it. The letter writers point out, correctly in our judgment, that when people outside the pension profession hear “underfunded,” they are likely to assume the plan does not have the assets required to pay current benefits or that actuarially determined contributions have not been made. Many people fail to understand that pension funding is intended to be carried out over a long period of time. By not explaining the basic principles of retirement plan funding and by focusing on near-term rather than long-term expectations, the report presents an incomplete picture. Consequently, its findings can be easily interpreted as suggesting the plans are in dire financial condition -- as was actually reported in the press. Apparently GRS wrote the letter in behalf of National Association of State Retirement Administrators, National Council on Teacher Retirement, National Conference of Public Employee Retirement Systems and Government Finance Officers Association, all of which were copied on the March 17, 2003 missive.


Lindquist was a Jersey City firefighter from 1972 until his retirement in January 1995, at age 47. He filed a workers’ compensation claim, alleging occupational exposure to respiratory irritants during his career. Physical examination showed that Lindquist suffered from chronic obstructive pulmonary disease (COPD) in the form of emphysema. His doctor attributed his condition primarily to occupational exposure as a firefighter to fire, smoke, hazardous waste and combustion, and secondarily to cigarette smoking. (Lindquist admitted to having smoked 3/4 of a pack of cigarettes a day for over twenty years.) The fire department’s doctor concluded that Lindquist’s condition was caused by cigarette smoking. The Judge of Compensation found that Lindquist’s occupational exposure materially contributed to his emphysema, and made an award. The Appellate Division reversed on appeal, and the Supreme Court of New Jersey granted review. On review, a unanimous Court reversed, thus reinstating the workers’ compensation award. New Jersey’s workers’ compensation statute contains the following presumption: any condition or impairment of health of any member of a volunteer fire department caused by any disease of the respiratory system shall be held and presumed to be an occupational disease unless the contrary be made to appear in rebuttal by satisfactory proof. (Because, on its face, the statute only applies to “voluntary” firefighters, the Supreme Court first had to find that there was “no plausible reason the Legislature would have intended a difference when voluntary and paid firefighters sustained the same pulmonary conditions after fighting the same fire together.”) Ultimately, the high court held that there was sufficient credible evidence to support the Judge of Compensation’s decision granting disability benefits. The conclusion is compelled by the principles that the workers’ compensation act represents social legislation and is to be interpreted to expand rather than limit coverage, and that under the social compromise theory it is intended that a claimant’s burden of proof be lighter than in a commonlaw tort action. The conclusion is further compelled by the fact that studies reveal that although smoking is the most significant risk factor, some other causal factors must exist because no more than 20% of smokers contract emphysema. It is not necessary for a claimant to prove that firefighting was the most significant cause of his disease; he need only show that his employment exposure contributed in a material degree to development of his emphysema. The case is also interesting because it collects data showing that thirty states have adopted the presumption that a firefighter’s respiratory disease or condition is work related for workers’ compensation, pension or both. Of course, Florida has neither. Lindquist v. City of Jersey City Fire Department, Case No. A-84-01 (N.J., February 11, 2003).


A report from indicates that the $69 Billion New York City Pension Fund may have taken a hit of as much as $80 Million on its securities lending portfolio. The loss apparently stems from investments in the collateral reinvestment program. When securities are loaned, they are generally collateralized with cash, which is invested in securities -- usually short-term fixed income securities detailed in guidelines agreed to by the lender (pension fund) and the agent (custodian -- here Citibank). Apparently $80 Million was invested in National Century Financial Enterprises, an Ohio healthcare finance firm that collapsed last year amidst a federal fraud investigation. It is unclear whether that investment was within agreed-upon guidelines. Regardless, the fund is hoping that Citibank is willing to make up some or all of the losses, because custodian banks historically have been loath to have their reputation tarnished when a prominent client takes a hit on collateral. We’ll just have to wait and see how important a reputation is when 80 Million swords are on the line.


Although this particular item may not be of direct interest to pension trustees, we have many readers who are not pension trustees, including other city officials. So, we decided to report on a United States Supreme Court case of extreme importance to local governments in general. Under the federal False Claims Act, any person who knowingly presents, or causes to be presented, to an officer or employee of the United States a false or fraudulent claim for payment or approval is liable to the government for a civil penalty, treble damages and costs. Although the U.S. Attorney General may sue under the FCA, a private person may also bring a qui tam action -- “in the name of the government.” Only a few years ago, the United States Supreme Court held that states are not “persons” subject to qui tam actions under the FCA. Now, a unanimous court has decided that local governments are amenable to such suits. Interestingly, a private plaintiff -- known as relator -- may share up to 30% of the proceeds of action or settlement, in addition to recovering reasonable expenses, costs and attorneys’ fees. The subject case arose out of a National Incident of Drug Abuse research grant to Cook County Hospital for a study that was to be administered by a non-profit research institute affiliated with the hospital. Dr. Chandler, who ran the study for the institute, filed a qui tam action, alleging that Cook County and the institute had submitted false statements to obtain grant funds in violation of the FCA. Local governments beware! Cook County, Illinois v. United States ex rel. Chandler, 16 Fla. L. Weekly Fed. S162 (U.S., March 10, 2003).

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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.

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