1.
CONCERNS RAISED OVER PENSION FUND CONSULTANTS:
A recent New York Times piece deals with the small
but growing part of the $2 Trillion State and Local Pension Funds that
is being steered into high-risk investments by pension consultants
and others who often have business dealings with the very money managers
they recommend. After making such investments, a few of these pension
funds have come up short, forcing governments to draw on tax dollars.
The Securities and Exchange Commission is so concerned that it has
begun an inquiry into the practices of pension consultants, who serve
as gatekeepers for thousands of money managers. Regulators will find
not just financial consultants but a web of intermediaries -- marketing
agents, lobbyists, brokers and world leaders -- between pension funds
and the investments they choose. Some pension consultants play host
to gatherings that showcase famous people to pension officials. Money
managers may pay tens of thousands of dollars to participate and often
supply the talent. Consultants, meanwhile, are being paid by the pension
funds to track and rate the money managers but may take money from
the managers for other services. Under the consultants’ watch,
more money is flowing into private or alternative investments, which
are not publicly traded like stocks and bonds and whose performance
cannot be tracked in any agreed-upon way. Private investment pools
attracted virtually no state pension money a decade ago, but the typical
state pension fund now has nearly 5% of its assets in them, and some
states have far more. A 2002 audit of one state pension fund found
that its nationally-known consultant had recommended 16 money managers,
14 of which were paying the consultant for marketing advice and other
services. Of course, the consultant said that it kept its various business
lines separate, and that it told all money managers that they would
not win preferential treatment from the pension consultant by buying
its other services. The SEC inquiry began in December, with 12-page
letters to about two dozen pension consultants, requesting extensive
information about what they do for pension funds, how they are paid
and how their pension work may conflict with other business operations.
The agency appears to be trying to learn how often pension consultants
work for both sides of the table, receiving compensation from their
pension clients and money managers. We will see what eventually comes
out of the SEC’s look-see.
2. REPORT
ON THE “U.S. PENSION CRISIS”:
The Association for Financial Professionals is a membership organization
of global corporate financial professionals, comprising more than 14,000
individual members from a wide range of industries. The Committee on
Investment of Employee Benefit Assets is a committee of the AFP, formed
to provide a nationally recognized forum and voice in public policy
for ERISA-governed corporate plan sponsors on fiduciary and investment
issues. Members are senior corporate financial officers who individually
manage and administer corporate retirement plan assets. In March 2004,
CIEBA released a report entitled “The U.S. Pension Crisis - Evaluation
and Analysis of Emerging Defined Benefit Pension Issues.” Although
the report is a summary and evaluation of CIEBA member survey data,
it should still be of interest to participants in public plans, the
vast majority of which are defined benefit. The following are some
of the key findings in the report:
- Seventy-five percent of large U.S. corporations continue to offer
a defined benefit pension to their employees.
- DB Plans currently
cover approximately 35 million Americans and their families, an
all-time high.
- Corporations have been stable and effective long-term
investors, primarily through disciplined, long-term commitments
to the world’s
equity markets. As a result, the median ten-year return for corporate
pension plans has been approximately 9.4% per year, while the corporate
return on asset assumption over the period has been approximately
8.8%.
- Approximately 75% of aggregated pension liabilities continue
to relate to traditional, final average pay plans (although new
and more
flexible plans have been implemented over the past several years).
- The fall in stock prices, combined with a decline in interest
rates, would have the unintended consequences of reducing the funded
status
of most pension plans by perhaps 10% or more.
- If the corporate DB
system is undermined, lower income Americans are likely to be affected
most, increasing pressure on government programs
to make up the potential shortfall, at a time when those programs
are under stress already.
CIEBA perceives threats coming from an unprecedented, and largely
uncoordinated, series of emerging accounting, legislative and regulatory
initiatives. Specifically, these initiatives include new accounting
methods under consideration by the Financial Accounting Standards Board,
funding rules crafted by the Treasury Department, proposed changes
to the Pension Benefit Guaranty Corporation’s Risk Premium System
and the means by which various rating agencies treat pension obligations.
Fortunately, public plans would not thereby be adversely affected,
if at all. View the entire 26 page report at www.afponline.org/pub/pdf/0304_cieba_pension_crisis_full.pdf.
3.
DOW WILL DROP AT&T:
For the first time in over four years, Dow Jones & Co. will make changes
in stocks that compose the Dow Jones Industrial Average. As of April 8, 2004,
American International Group Inc., Pfizer Inc. and Verizon Communications Inc.
will replace AT&T Corp., Eastman Kodak Co. and International Paper Co. Although
the last rebalancing was as a result of mergers, this time it is a recognition
that the domestic stock market has shifted from basic materials stocks to financial
and health care. As in the past, there will be no distortion in the industrial
average, as the formula is adjusted to assure comparability.
4.
PTSD RESULTING FROM HARASSMENT MAY BE SERVICE-INCURRED:
According to the New York Law Journal, a Manhattan Judge has rebuked New
York City for its challenge to the disability benefits of a former police officer
who helped uncover corruption and became an outcast within the department. The
ex-officer, Jeffrey Baird, diagnosed with post-traumatic stress disorder, applied
for accident disability retirement. He claimed that his PTSD arose from an intense
campaign of harassment against him. Baird played an instrumental role in the
work of a commission that investigated police corruption in the early 1990s.
As a member of the Internal Affairs Unit, Baird told investigators that officers
routinely sabotaged inquiries into police corruption and hid evidence of corruption
from prosecutors. Shortly thereafter, Baird’s troubles began: other officers
referred to him as “rat”, harassed him at work and he began receiving
anonymous, obscene letters at home. Having been diagnosed with PTSD, Baird applied
for accidental disability retirement. Although the medical board found that Baird
suffered from a disability that prevented him from performing his duties, it
recommended ordinary disability retirement. On review, Supreme Court Judge Louis
York described the City’s arguments as “pitiful.” (In New York,
the Supreme Court is similar to the Circuit Court in Florida.) The Court found
that the “accidental” events were not the usual falls or other anticipated
physical injuries, but legally did not have to be. “If each act of harassment
and retribution that the petitioner was subjected to can be deemed by respondents
to be ‘expected’ or ‘ordinary,’ then our police force
-- and our society -- are truly in dire straits.” The Judge ordered the
police department to reconsider its ruling on Baird’s benefits, suggesting
that there is little reason why he should not be eligible for the greater benefits.
Vowing an appeal, a city attorney said that the board of trustees’ determination
denying accidental disability retirement was entirely in accord with applicable
case law. “A pattern of alleged harassment does not constitute a line-of-duty
accident as that term has been defined by the Court of Appeals.” We have
mixed emotions about the results in this case. If, on the one hand, the board
is an arm of the city, then the city should not be able benefit from its own
misconduct. On the other hand, if the board is independent, a decision expanding
the term “accident” to include misconduct by the city would be inappropriate.
5.
STATUTORY PRESUMPTION TRUMPS PLAN PRE-EXISTING EXCLUSION:
Lynn Catterton, a City of Orlando police officer, applied for a service-incurred
disability pension based on her Paroxysmal Supraventricular Tachycardia. There
was no dispute that Catterton was totally and permanently disabled. There was
also no dispute that her condition was congenital in nature. In denying Catterton’s
application, the board relied upon a plan exclusion providing that no member
is entitled to a disability pension “because of or due to the aggravation
of a ... medical condition pre-existing at the time of employment ... provided
that such pre-existing condition and its relationship to a later ... medical
condition be established by competent substantial evidence.” On review
to the circuit court sitting in its appellate capacity, the board’s decision
was quashed. Sections 185.34 and 112.18(1), Florida Statutes, create presumptions
for, among other things, heart disease -- which PSVT clearly is. If the pre-existing
exclusion is construed, enforced and administered without yielding to the statutory
presumptions, an applicant who suffers from one of the enumerated diseases under
the statutes is denied entitlement to the presumptions where his or her condition
is determined to be pre-existing. The congenital nature of a disease should merely
be a part of evidence available to the opposing party to overcome the presumption
of service-connection. The pre-existing exclusion under the plan also undermines
the Legislature’s purpose and goal of dispensing with an applicant’s
need to introduce proof that the diseases enumerated under the statutory presumptions
are occupationally-related, by assuming such conditions are the result of the
inherent hazards faced by all those who occupy the profession. Moreover, it undermines
the Legislature’s purpose and goal to provide a uniform system and establish
minimum standards that are not to be diminished by the plan. Thus, to the extent
that the pre-existing exclusion under the plan precludes an officer suffering
from a condition caused by one of the enumerated diseases from utilizing the
presumptions when applying for service-connected pension benefits, the provision
is inconsistent with the statutes. The court also held that if there is evidence
presented that supports the presumptions, then the opposing party must overcome
them by clear and convincing evidence. Finally, following established precedent,
the court declined to direct the board to grant the pension, but remanded thereto
for further proceedings. Catterton v. City of Orlando, Police Pension Board,
11 Fla. L. Weekly Supp. 281 (Fla. 9th Cir., January 26, 2004).
6.
SHERIFF’S FAILURE TO FOLLOW OWN GRIEVANCE GUIDELINES NOT
PER SE VIOLATION OF DUE PROCESS:
Johnson was a deputy Sheriff with the Orange County, Florida,
Sheriff’s Office, who enjoyed career service status. Following
an investigation, Johnson was charged with unsatisfactory performance
of his duties and conduct unbecoming an officer. After administrative
review was unsuccessful, Johnson appealed to the appeals board, which
upheld the findings. The matter was then presented to the Sheriff, who
sustained the appeals board ruling and terminated Johnson. On review
in the circuit court, the court concluded that the Sheriff had ignored
his own rules and violated Johnson’s due process rights. (According
to a general order, during the appeals board hearing a Level 2 Administrator
in the appealing deputy’s chain of command must present management’s
case. The parties agree that a Level 2 Administrator outside of Johnson’s
chain of command attended the hearing.) On further review to the district
court of appeal, the Sheriff’s ruling was reinstated. Generally,
violation of an internal administrative rule does not constitute a violation
of due process. Although the right to due process is conferred not by
legislative grace but by constitutional guarantee, not every violation
of right granted by state law is constitutionalized, but only those that
deprive a person of some right secured by the constitution or laws of
the United States. Thus, the Sheriff’s failure to follow his own
procedural regulations does not establish violation of due process where
constitutional requirements are nonetheless met. Unless the conduct complained
of infringes on federal or state constitutional safeguards, there is
no constitutional deprivation. Beary v. Johnson, 29 Fla. L. Weekly D758
(Fla. 5th DCA, March 26, 2004).
7.
“TAX FREEDOM DAY” WILL COME EARLY THIS YEAR:
In 2004, the average American will work 65 days to pay his federal
taxes and 36 more days to pay his state and local taxes. That means April
11, 2004 will be celebrated as “Tax Freedom Day.” Americans
have not been able to celebrate Tax Freedom Day this early in more than
35 years. Incidentally, Connecticut residents must wait until April 28
to celebrate, while Alaskans already celebrated on March 26. |
