Cypen & Cypen
MARCH 24, 2011
Stephen H. Cypen, Esq., Editor
1. SETTING THE RECORD STRAIGHT ABOUT PUBLIC PENSIONS: In an article from Government Finance Review entitled “Setting the Record Straight About Public Pensions,” the author recognizes that state and local governments have recently come under substantial criticism about the condition of their pension plans. Critics maintain that the vast majority of public pension plans are significantly underfunded and seem to see this situation as the main cause for the current financial crisis in which state and local governments find themselves, along with the nation's difficulties in achieving a robust economic recovery. Indeed, some academics, as well as federal and state politicians, are claiming that state pension funds are running out of money. They are raising the specter of a large-scale federal bailout, and calling for pension reform. Is there really a public pension crisis of this magnitude? And what can -- and should -- be done to address legitimate concerns about sustainability of pension benefits of public workers? Before any productive discussion can occur, it is necessary to agree on some basic facts, distinguish reality from hyperbole and set the record straight:
Public pension plans are not in crisis and they are not seeking any federal financial assistance in connection with their funding needs. On the contrary, throughout 2009, organizations representing public pension plans, plan sponsors and plan participants have been advising Congress that state and local governments are moving aggressively to address sustainability challenges confronting their pension plans, that federal involvement is neither sought nor needed and would be counterproductive; and that public pensions are not in need of a federal bailout. State or local governments are not in danger of filing for bankruptcy as a result of their pension obligations. Municipal bankruptcies are extremely rare, and are not result of unfunded pension liabilities. Cities and counties that have filed have experienced a confluence of extreme and unique circumstances, including a series of poor investment decisions resulting in significant financial losses or excessive and inappropriate spending. The public pension system is not in crisis.
2. ADDRESSING MEDIA MISCONCEPTIONS ABOUT PUBLIC SECTOR PENSIONS: Government Finance Review says that everyone who pays attention to the news has noticed the drumbeat of reports urgently warning that the public pension system is perched on the brink of disaster and that it will soon collapse, bringing a number of state and local governments down with it. These stories are based on questionable research from self-proclaimed experts in public finance and their predictions have created misconceptions about the health and future of the public sector pension system. Further context and balance are essential to clearing up these media misconceptions. Media outlets have been starting with a thesis -- that a public pension crisis is upon us. They cite opinions and research studies that support their position, without offering a counterpoint from professionals who understand public finance. Before rushing to publication, reporters should test their assumptions by vetting all their information and conclusions, otherwise the picture presented is not fair and balanced. Providing perspective is a critical role for the finance officer, who should be able to respond to media inaccuracies and misunderstandings, as well as providing rapid but measured responses to media inquiries or published articles. Finance officers can give the public information it needs to preempt or correct inaccuracies that are being reported. And of course, where real problems exist, it is essential to address them through formal action plans for solving problems that involve all constituencies and stakeholders. Several common themes have evolved in media reports of pension valuations, bond defaults and budgetary deficits. “The sky is falling” school of coverage features multi-trillion dollar amounts of supposedly unreported pension liabilities and so-called experts who predict state bankruptcies, bond defaults and pension fund collapses. Recent examples include a New YorkTimes article indicating that some states might not be able to make their bond payments. The reports was based on questionable assumptions and did not mention pension reforms many states -- including Illinois, which was featured -- have enacted. In addition, today's reporters are reporting yesterday's results, and they do not acknowledge the difference or the significant impact the Great Recession had on funded ratios for virtually all pension systems in 2009, along with most other public and private entities. They also omit the significant recoveries the equity market has experienced since then. By December 31, 2009, the Dow Jones Industrial average was up 59 percent from its March low, and by December 31, 2010, the rebound was 77 percent. The piece is so chock full of good information that it should be read in its entirety at http://goo.gl/VAJ8y.
Nevertheless, the following sidebar provides responses to key media misconceptions:
Worth its weight in gold.
3. SOME STATISTICS FROM FLORIDA RETIREMENT SYSTEM: In a Miami Herald article on the current pension battle in Florida, the writer has provided some interesting statistics about the Florida Retirement System:
In other words, “I got mine, but you ain’t gonna get yours.”
4. TIME FOR REALITY CHECK IN CALIFORNIA’S PENSION TALKS: Writing in California Progress Report, Dave Low, Chairman of Californians for Health Care and Retirement Security, writes that one should consider how to ensure that California's public pension systems remain on a sound footing and able to provide a secure retirement for public workers. But issues about the cost/benefit of public employee pensions have become a major point of contention in the heated debate on how to fix California's state budget problems. Pension-spiking poster children, manufactured data supposedly showing huge unfunded liabilities and false charges of labor intransigence have cast a dark cloud over public pensions. For instance, a common claim is that pension costs will bankrupt state government. In fact, the entire costs of pensions for state workers in 2011 will be $3.5 Billion, barely 4% out of an $85 Billion budget. Add the teachers’ plan, and the total is not even 6% of budget. If Californians paid zero into public employee pensions and eliminated them altogether, the state would not come close to solving the budget deficit. In fact, the state of California pays less as a percentage of payroll for pensions today than it did in 1980! Meanwhile CalPERS has earned back more than $70 Billion since the financial crisis, and the system's funding status is estimated near 70 percent. As for spiking, California's public worker unions and its pension system have supported curbs, backing strong legislation last year -- inexplicably vetoed by Governor Schwarzenegger -- that would have ended the practice. Note that only some 2% of CalPERS retirees and 2.2% of CalSTRS retirees have pensions above the poster child level of $100,000. The average CalPERS pension is about $25,000 a year. Half of CalPERS retirees receive pensions of $18,000 per year or less. Unlike the private sector, many public employees do not receive Social Security, making pensions their sole source of retirement income other than savings. (Meanwhile, state employee unions went to the bargaining table and negotiated agreements that significantly tightened the state's pension formula and doubled, to 10%, what workers pay toward their own retirement.) Low’s recommendation? Continue working in good faith at the bargaining table for needed changes, focusing on true issues and not those manufactured to make a political point. The larger pension concern should be for the vast and growing majority of American workers with savings hardly a quarter of what is needed to retire in dignity.
5. IN PENSION DEBATE, DON’T FORGET PRIVATE SECTOR: Reporter Eric Ernst of the (Sarasota) Herald-Tribune just received good news from the New York Times about his pension. Although the Times, which owns the Herald-Tribune, has frozen all pensions, this year it is contributing an amount of 3 percent of 2010 pensionable earnings to Ernst’s 410(k) -- in addition to the match the company already provides to the 401(k). When Ernst came to work for the newspaper in 1985, he was amazed to learn that his employer was setting aside money in what he now knows is a defined benefit plan. Over the years, he did not chip in a single dime, yet the account grew until now it promises to pay almost $1,900.00 a month when Ernst retires. He thought about the situation as the uproar intensified over public employee pension plans. Around the newsroom, people seem particularly riled over Florida's plan, to which government employees have contributed nothing. You would never see that in the private sector, critics say. Wrong. Private companies, especially the big ones, have had similar pension plans for years, since American Express Co. started the first in 1875. As recently as 2005, Pension Benefit Guaranty Corporation reported that 75 percent of the companies in the Standard & Poor’s 500 offered defined benefit pensions. That approach helped corporations recruit employees and keep them. In offering a paternalistic savings account, the companies also deferred the cost of higher wages. Granted, the trend has shifted to plans in which employees contribute, but the point is that government pensions are neither alien concoctions nor anything new. Public employee pensions originated during the Roman empire for military officers on a case-by-case basis. The federal government handled pensions for civilian employees the same way until 1920, when it adopted a universal plan. The year before, Congress had passed 1,497 acts establishing or amending retirement plans for 1,497 individuals, which was long before unions had much power. Ernst is not and never has been a union member; but he is willing to bet a union somewhere made it possible for him to get his $1,900.00 a month. When it comes to pensions, unions have helped those who needed it the most: regular working people who will not or cannot save enough to get them through their retirement years. Collectively, alteration of pension plans will shift billions of dollars from one set of recipients to another. Who will benefit? In the public arena, we would like to think the money will go toward education or better roads or maybe back into our pockets as taxpayers. The world does not work that way, though. For a peek at how it does work, consider how Florida judges and elected office holders accrue retirement benefits nearly twice as quickly as rank-and-file public workers. A recent move to equalize those benefits could not get past a Florida Senate committee. The more things change… .
6. FLORIDA GOVERNOR WILL LEAVE PENSION FUND MANAGEMENT IN TACT:While Florida Governor Rick Scott is pushing for changes to who pays for the retirement plan for state workers, he has kept people in charge of the pension fund - and the fund's investment strategy - unchanged since taking office inJanuary. The (Sarasota) Herald-Tribune says Scott's approach is a sharp turnaround from his campaign last fall, when he criticized his Democratic opponent, saying she had been "a failed fiscal watchdog" for her role in overseeing the pension fund. Florida Retirement System is now worth more than $127 Billion, up 19 percent sinceJuly, despite lack of management or investment changes. The plan reached a peak value of $136 Billion in June of 2007, but dropped to $100 Billion two years later, as financial markets fell during the Great Recession. The pension agency controls money to pay for pensions for the state's roughly 900,000 active and retired workers. Scott now says he is very happy with the fund, although he offered no apologies for his scathing critique of the fund's management just a few months ago. Scott is one of the three trustees in charge of State Board of Administration (see C&C Newsletter for September 24, 2009, Item 3 and C&C Newsletter for October 1 2009, Item 14), the obscure state agency that manages more than $150 Billion, including FRS, as well as the state's reinsurance fund and an investment portfolio used by local governments and school districts. Latest numbers show the pension plan is funded at about 88 percent - very near the top in the country.
7. CITIES SOMEHOW FIND CASH FOR MANAGERS’ RAISES: Handing out raises to civic officials rarely plays well with the public, especially during austere times. But, according to wsj.com, dozens of counties, school districts and other entities are doing just that, citing a need to retain experienced people. The mayor of Miami-Dade County, Florida, lost his job in a recent recall election fueled in part by voter anger over raises he approved for top aides in midst of a budget crisis. In Sacramento, California, municipal union leaders are up in arms about raises granted to a handful of department heads at a time when rank-and-file city workers have been asked to take unpaid furlough days. But managers and elected officials handing out pay increases say they are tired of waiting for the economy to improve or the budget picture to brighten. After several years of frozen salaries and other belt-tightening measures, they fear they will lose top talent to better-paying jobs elsewhere if they cannot grant a few targeted raises. One measure of the trend: last June, 67% of counties nationwide had imposed a blanket pay freeze. In a survey just released by National Association of Counties, that number was down to 45%, suggesting that some counties are loosening up a bit on salary. Voters and public workers critical of raises argue that giving more money to top managers sends the wrong message. A fiscal crisis demands shared sacrifice. Critics point out, too, that especially in this economy, a manager may only be bluffing if he threatens to quit in search of a fatter paycheck. Those who do jump ship, moreover, are often fairly easily replaced. The rich really are different.
8. OUTGOING COUNTY MANAGER GETS PAY AND BENEFITS PACKAGE: Apropos the above item, the County Manager of Miami-Dade County, Florida, resigned within hours of the Mayor’s defeat in a recall election. The 52-year-old career bureaucrat served County government for more than 28 years. He will be paid severance of one year base salary, $326,000 (up from $185,000 in 2003), plus deferred compensation of $22,000. He and his family will get medical and dental coverage until he is 65 years old. Unused sick time of about $80,000 and accumulated vacation pay of about $79,000 will be included in his next paycheck. During the one-year severance period he will also receive an expense allowance of $3,000 a month and a car allowance of $600 a month, although he previously returned the car leased on his behalf. Further, he will be paid an annual sum of $10,000 in executive benefits over the coming year and one final $8,000 payment to cover premiums on life and disability insurance policies. According to the Miami Herald, however, the Manager missed out on one other benefit: he fell just short of the 30 years of employment needed to receive full retirement benefits from the Florida Retirement System prior to reaching age 62.
9. WISCONSIN IS BROKE … UNLESS YOU COUNT THE $67 BILLION: Writing in Business Insider, prolific author Ellen Brown says as states struggle to meet their budgets, public pensions are on the chopping block, but they need not be. States can keep their pension funds intact while leveraging them into many times their worth in loans, just as Wall Street banks do: a state can form its own public bank. Wisconsin Governor Scott Walker has justified the move to gut benefits, wages and bargaining rights for unionized public workers as necessary for balancing the state’s budget. But is it? Bemoaning a budget deficit of $3.6 Billion, Governor Walker says the state is too broke to afford agreed-upon benefits. But according to Wisconsin’s 2010 Comprehensive Annual Financial Report, the state has $67 Billion in pension and other employee benefit trust funds, invested mainly in stocks and debt securities, drawing a modest return. A recent study by the PEW Center for the States showed that Wisconsin’s pension fund is almost fully funded, meaning it can meet its commitments for years to come without drawing on outside sources. It requires a contribution of only $645 Million annually to meet pension payouts. The pension program can save another $200 Million annually just by cutting out its Wall Street investment managers, and managing the funds in-house. The governor is eying the state’s lucrative pension fund, not because the state cannot afford the pension program, but as a source of revenue for programs that are not fully funded. This tactic, however, is not going down well with state employees. Fortunately, there is another alternative: Wisconsin could draw down the fund by the small amount needed to meet pension obligations, put the bulk of the money to work creating jobs, help local businesses and increase tax revenue for the state. Wisconsin could form its own bank, following the lead of North Dakota, the only state to have its own bank and the only state to escape the credit crisis. This feat could be accomplished without spending the pension fund money or lending it. Funds would just be shifted from one form of investment to another (equity in a bank). When a bank makes a loan, neither the bank’s own capital nor its customers’ demand deposits are actually loaned to borrowers. A bank simply extends accounting-entry bank credit, which is extinguished when the loan is repaid. Creating this sort of credit-money is a privilege available only to banks, but states can tap into that privilege by owning a bank. (For the record, ironically, the only state to have one of these credit machines is a conservative Republican state. Established in 1919 in response to a wave of farm foreclosures at the hands of out-of-state Wall Street banks, the state-owned Bank of North Dakota has allowed the state to maintain its economic sovereignty. Today, the state not only has no debt, but boasts its largest-ever budget surplus.) Seven states (Hawaii, Illinois, Ohio, Maryland, Massachusetts, Virginia and Washington) are now considering setting up public banks. Budget woes of Wisconsin and other states were caused, not by overspending on employee benefits, but by a credit crisis on Wall Street. The cure is to get credit flowing again in the local economy, which can be done by using state assets to capitalize state-owned banks. Against the modest cost of establishing a publicly-owned bank, state legislators need to weigh the much greater costs of the alternatives -- slashing essential public services, laying off workers, raising taxes on constituents who are already over-taxed and selling off public assets. Given the cost of continuing business as usual, states can hardly afford not to consider the public bank option. When state and local governments invest their capital in out-of-state money center banks and deposit their revenues there, they are giving their enormous credit-gathering power away to Wall Street.
10. ORAL COMPLAINT SUFFICIENT UNDER FLSA: Kasten brought an antiretaliation suit against his former employer, Saint-Gobain Performance Plastics Corporation, under Fair Labor Standards Act of 1938, which provides minimum wage, maximum hour and overtime pay rules. FLSA also forbids employers to discharge any employee because such employee has filed any complaint alleging violation of the Act. In a related suit, the District Court had found that Saint-Gobain violated the Act by placing timeclocks in a location that prevented workers from receiving credit for time they spent donning and doffing work-related protective gear. In the instant suit, Kasten claimed that he was discharged because he orally complained to company officials about the timeclocks. The District Court granted Saint-Gobain summary judgment, concluding that the Act's antiretaliation provision did not cover oral complaints. The Seventh Circuit affirmed, but the United States Supreme Court reversed, holding that the scope of the statutory term “filed any complaint” includes oral, as well as written, complaints. A narrow interpretation would undermine the Act’s basic objective, which is to prohibit labor conditions detrimental to maintenance of the minimum standard of living necessary for health, efficiency and general well-being of workers. Kasten v. Saint-Gobain Performance Plastics Corporation, Case No. 09-834 (U.S. March 22, 2011).
11. REMARKABLE QUOTES FROM REMARKABLE JEWS: I don't want to achieve immortality through my work. I want to achieve immortality through not dying. Woody Allen
12. BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT: Ham and eggs...A day's work for a chicken, a lifetime commitment for a pig.
13. PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.): Whenever I fill out an application, in the part that says “If an emergency, notify:” I put “DOCTOR.”
14. QUOTE OF THE WEEK: “Experience means nothing – you can bungle something for thirty-five years.” Kurt Tucholsky
15. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items? Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.
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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.