1.
RISK AND REWARD IN VOLATILE TIMES ... HOW DO TRUSTEES COPE?:
In the lead article in February 2004's Employee Benefits
Digest, our good friend Tom Mackell says that, economically, this country
could very well be where it was in the 1930s. In order to cope in this
environment, trustees are challenged to take bold steps. Dr. Mackell suggests
that trustees first review and analyze current asset allocation. For example,
they should question the once-secure haven of bonds, because with such
low interest rates, a potential upwards swing in rates will prove problematic
for the fixed income allocation. Additionally, commercial banks’ exposure
to mortgage markets through aggressive lending practices has the potential
of bursting a mortgage bubble that could unleash broader financial disruptions
than the S&L crisis of the 1980s. Second, Dr. Mackell believes that
alternative investment classes warrant trustees’ attention. They
should look at properly constructed and well-diversified fund-of-fund hedge
funds with all of the appropriate protection and transparency; private
equity funds that are worker-friendly and will enhance a local community’s
economy; job-creating real estate programs; and for the more adventuresome,
venture capital, commodities and forestry funds. However, the overriding
caveat is trustees’ education in conjunction with an extremely thorough
and intensive due diligence process as evidenced by the prospective managers
and conducted by the consultants to the funds. Dr. Mackell does not envision
a magic bullet to correct what he calls “our benefits crises.” Instead,
the world will continue to change and trustees will be challenged to deal
with those changes. Thus, it is critical that trustees and administrators
remain vigilant, be innovative and lead the way for participants and their
families. Nice job, as usual, Tom.
2. RANDOM,
SUSPICIONLESS DRUG TESTING OF FIREFIGHTERS VIOLATES FOURTH AMENDMENT:
The City of Mesa, Arizona, implemented a substance abuse program for
its fire department. The program requires testing of firefighters (1)
if the department has reasonable suspicion to believe an individual
firefighter has abused drugs or alcohol; (2) after a firefighter is
involved in an accident on the job; (3) following a firefighter’s
return to duty or as a follow-up to “a determination that a covered
member is in need of assistance;” and (4) “on an unannounced
and random basis spread reasonably throughout the calendar year.” The
primary purpose of the random testing component “is to deter
prohibited alcohol and controlled substance use and to detect prohibited
use for the purpose of removing identified users from the safety-sensitive
workforce.” This purpose supposedly advances the city’s
goal of establishing “a work environment that is totally free
of the harmful effects of drugs and the misuse of alcohol.” A
firefighter filed a complaint seeking declaratory and injunctive relief,
alleging that the random testing component violated his rights under
the Fourth Amendment to the United States Constitution. The trial court
agreed with him, but the court of appeals reversed, holding that the
program’s random testing component is reasonable under the United
States Constitution. The court of appeals reasoned that the city’s “compelling
need to discover specific but hidden conditions representing grave
risks to the health and safety of the firefighters and the public” outweighed
firefighter’s privacy interests. In an En Banc decision, the
Supreme Court of Arizona reversed, holding that the program’s
random testing component is unreasonable and therefore violates the
Fourth Amendment to the United States Constitution. Balancing the firefighter’s
interests against the interests the city advances in favor of the program’s
random component, the high court concluded that the city’s generalized
and unsubstantiated interest in deterring and detecting alcohol and
drug use among the city’s firefighters by conducting random drug
tests is insufficient to overcome even the lessened privacy interests
of firefighters. The situation cannot be described as one of those “limited
circumstances, where the privacy interests implicated by the search
are minimal, and where an important governmental interest furthered
by the intrusion would be placed in jeopardy by a requirement of individualized
suspicion, and in which a search may be reasonable despite the absence
of such suspicion.” Rather, the increased intrusion occasioned
by the program’s random, suspicionless testing component represents
the very type of “arbitrary and invasive acts by officers of
the government or those acting at their direction” against which
the Fourth Amendment is meant to guard. Petersen v. City of Mesa, Case
No. CV-03-0100-PR (AZ, January 27, 2004).
3.
FLORIDA ATTORNEY GENERAL ANSWERS QUESTIONS ON MILITARY LEAVE:
Answering four interrelated questions, the Florida Attorney General concluded
that a state employee who is ordered into military active duty other than for
training pursuant to the provisions of 10 U.S.C. §12301(d) is entitled to
a leave of absence, receiving full pay for the first 30 days. After that time,
the employing authority may supplement the employee’s military pay in an
amount necessary to bring the employee’s total salary, including his or
her base military pay, to the level earned at the time the employee was called
into active military duty. The period of military leave to which a state employee
is entitled would be governed by the provisions of the Uniformed Services Employment
and Reemployment Rights Act, which limits reemployment rights, with certain exceptions,
to a cumulative period of service in the uniformed service that does not exceed
five years. In addition, such employee would be entitled to continued coverage
under all health insurance and other existing benefits required under the federal
act. That act also provides for a maximum period of coverage of 18 months and
further provides that an employee who elects to continue his or her health plan
may be required to pay not more than 102% of the full premium associated with
such coverage. AGO 2004-02 (January 21, 2004).
4.
INVESTORS USUALLY DO WELL IN ELECTION YEARS:
From Bloomberg News we learn that the Standard & Poor’s 500
Index has averaged a 9% gain during election years in the last half century.
The median advance is 12%. Conditions that have helped lift share prices before
-- tax cuts, higher government spending and low interest rates -- are in place
as the President seeks reelection this November. Market history shows that stocks
rise more in the second half of a 4-year presidential term than in the first
-- true in 8 of the past 10 presidential terms. The S&P 500 declined 33%
during President Bush’s first 2 years in office. Statistics show that the
stock market’s best performance happens in the third year of the term,
and 2003 produced a 26% gain for the Index. Economic growth also conforms to
the election cycle. The economy expands at a 2.7% rate in years 1 and 2 of a
presidential term but accelerates to 4.3% in years 3 and 4. The economy grew
.5% in 2001 and 2.2% in 2002. Last year’s growth was 3.1%, projected to
increase by 4.6% this year. Many economists attribute last year’s expansion
to the $330 Billion of tax cuts, together with the lowest interest rates in almost
50 years. In his $2.4 Trillion budget proposed earlier this month, the President
seeks to make tax breaks permanent.
5.
SERVICE MEMBERS GET NEW FEDERAL LAW:
President Bush signed the Servicemembers Civil Relief Act on December
19, 2003. The SCRA revises, clarifies, restates and renames the Soldiers’ and
Sailors’ Civil Relief Act of 1940. The earlier act was designed to assist
and protect servicemembers and their families during periods of active military
duty by insuring that active military personnel were not placed at a disadvantage
in legal, personal or financial matters because of their deployment. One provision
set a maximum interest rate of 6%, during periods of active duty, with respect
to debts incurred by service members before being called to military duty. However,
the earlier statute did not spell out what debt instruments were covered or how
the reduction in interest rate was to be administered. Significantly, during
World War II, 401(k) plans did not exist, so plan loans were not addressed. The
2003 amendments clarify application of the 6% maximum interest rate. An obligation
or liability incurred by a service member before entering active military duty
cannot bear a rate in excess of 6% during a period of military service. Thus
interest rates in excess of 6% must be reduced to 6% during periods of military
service, if so requested. Interest in excess of 6% that otherwise would have
been incurred must be forgiven. The periodic repayment amount calculated to pay
off a debt eligible for the 6% maximum interest rate must be recalculated to
reflect any reduction in interest payments. The SCRA makes clear that in order
for the maximum 6% interest rate to apply, the service member must provide written
notice and a copy of his military orders to the creditor no later than 180 days
following release from active service. Note, SCRA provides that a court may grant
a creditor relief from having to limit interest to 6% if it determines that a
servicemember’s ability to pay a higher interest rate is not materially
affected by reason of his military service. (Although in today’s low interest
rate environment that situation may be moot, it sure sounds like a can of worms
to us.) Finally, the amendments apply to any case that was not final before December
19, 2003. This summary was adapted from a piece prepared by Mellon H R & I
S. For further information on SCRA and frequently asked questions for reservists
being called to active duty, visit http://www.dol.gov/ebsa/faqs/faq_911_2.html.
6.
AARP ISSUES “REPORT CARD”:
AARP has issued a report entitled “The State of 50+ America,” to
answer the question of how we are doing over the past 10 years and over the past
year. The report card gauges change over the past 10 years and also year-to-year
changes in 20 key measures of well-being. These measures cover economic and health
status; consumption and lifestyles; long-term care and independent living; and
attitudes about the future. Looking back 10 years, the picture is mostly one
of real progress: the rising tide has not lifted all boats, but the average indices
show substantial improvements. Median family incomes have grown about 10% over
the past decade, while median assets have grown more than 50%. The distribution
of income and assets has grown more disparate, so gains have not been uniformly
enjoyed. The proportion achieving a minimally adequate standard of living has
improved by only 4 percentage points in this period. Although the proportion
of workers covered by a pension plan has increased 10%, that rate still falls
short of covering a majority of working Americans. More 50+ Americans are working
today than 10 years ago; fewer are unemployed. Despite the long-term good news
documented, older Americans can best be described today as vulnerable. Half the
population 62 and older depends on Social Security for at least half of their
income. Health costs are continuing to soar. The cost of long-term care grows
more unaffordable for most every year. The challenge for society grows larger,
as baby boomers near traditional retirement age, and as greater risk and responsibility
are shifted to individuals to plan and provide for their own retirement futures.
The foregoing is from the Executive Summary. You can view the entire report at
http://www.research.aarp.org/general/fifty_plus_2004.pdf.
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