Stephen H. Cypen, Esq., Editor

1. 2007 PUBLIC FUND SURVEY SUMMARY OF FINDINGS:

The Public Fund Survey is an online compendium of key characteristics of most of the nation’s largest public retirement systems. The survey is sponsored by the National Association of State Retirement Administrators and the National Council on Teacher Retirement. As usual, the survey is prepared by Keith Brainard, Research Director of NASRA. Beginning with fiscal year 2001, the survey contains data on public retirement systems that provide pension and other benefits for 13.2 million active (working) members and 6.5 million annuitants (those receiving a regular benefit, including retirees, disabilitants and beneficiaries). Based on the latest information published in annual financial reports, systems in the survey hold in trust $2.79 Trillion. The membership and assets of systems included in the survey represent approximately 85% of the entire state and local government retirement system community. According to a 2007 study by the Government Accountability Office, employees of state and local government make up 12% of the nation’s full-time workforce, including public school teachers/administrators, firefighters, judges, police officers, public health officials, correctional officers, transportation workers, game wardens, compliance officers, nurses, engineers, inspectors, procurement specialists, computer programmers, custodians and many others responsible for providing myriad public services. The source of survey data is primarily public retirement system annual financial reports. Data also are taken from actuarial valuations, benefits guides, system websites and input from system representatives. The survey is updated continuously as new information, particularly annual financial reports, becomes available. The report of findings focuses on fiscal year 2007, which is reported for 94 of the 101 systems in the survey. As other systems report their fiscal year 2007 data, results presented in the report may change slightly. A key objective of the survey is to increase the transparency and understanding of the public pension community and pension funding levels by providing a factual and objective basis on which to discuss many issues related to retirement benefits for public employees. Here are some specifics:

• For the first time since fiscal year 2001, aggregate public pension funding levels rose in fiscal year 2007, from 85.7% to 86.1%.
• Most plans calculated actuarial value of assets over five years, although the number of plans using longer periods has grown, particularly since 2005.
• Average asset allocation for 2007 was equities - 59.7%, fixed income - 26.6%, real estate - 5.4%, alternatives - 5.3% and cash/other - 3.0%.
• The ratio of actives to annuitants declined from 2.45 in fiscal year 2001 to 2.05 in fiscal year 2007.
• According to the U.S. Census, from 1982 to 2006, contributions from employees and employers, respectively, accounted for approximately 12% and 24% of public pension fund revenues.
• The median investment return assumption remains unchanged at 8.0%. Although the inflation assumption has shifted from 4.0% to 3.5%, the real rate of return has increased from 4.0% to 4.50% in 2007.

The Public Fund Survey is probably the single most valuable source of retirement data.

2. COMPENSATION COSTS IN STATE AND LOCAL GOVERNMENT, 3RD QUARTER:

Compensation costs for state and local government workers increased by 0.9% from June to September 2008 (seasonally adjusted), the same as in the previous quarter. Compensation costs (also known as employment costs) include wages, salaries and employer costs for employee benefits. Benefit costs increased 0.7% for the same period, less than the 1.1% increase in the previous quarter. Meanwhile, wages and salaries for state and local government rose 1.0% for the June to September 2008 period, compared with 0.9% in the prior quarter.

3. TWO NEW CRS REPORTS:

A. Report on Retirement Savings Plans. The Congressional Research Service has released a report entitled “Individual Retirement Accounts and 401(k) Plans: Early Withdrawals and Required Distributions” (updated October 27, 2008). A variety of savings plans was created to encourage workers to save for retirement and differ primarily in tax treatment of contributions and distributions. The most common retirement savings plans are the individual retirement account and the employer-sponsored 401(k) plan. Plan contributions are excluded from income, investment earnings are tax-deferred and distributions are taxed as income. Minimum distributions must be made beginning at age 70 1/2. Roth IRA and Roth 401(k) contributions are not tax-deductible, but distributions are tax free and do not require minimum distributions.

B. Report on Congressional Retirement Benefits. The Congressional Research Service has released a report entitled "Retirement Benefits for Members of Congress" (updated October 28, 2008). Members of Congress can be enrolled in the Civil Service Retirement System and Social Security, a “CSRS offset” plan, the Federal Employees' Retirement System and Social Security or Social Security alone. Pension eligibility is determined by a combination of age and years of service. Of the 435 Members of Congress receiving federal pensions, 286 retired under CSRS with an average annual pension of $63,696.

4. EMPLOYEE LOAN THAT VIOLATES ERISA SUBJECT TO AGREED-UPON OFFSET:

Reilly appealed a district court judgment in favor of his employer’s retirement plans. Reilly had sued for benefits under the Employment Retirement Income Security Act of 1974. Reilly argued that the lower court erred by disregarding ERISA and its accompanying regulations by approving of their offset of the balance due on the loan with Reilly’s retirement plan benefits. Reilly correctly asserted that the loan was secured by 75% of the present value of his vested accrued benefit, and that the regulations plainly state that no more than 50% of the present value of a participant’s vested accrued benefits may be considered by a plan as security for the outstanding balance on all plan loans made to that participant. However, neither ERISA nor the regulations provide for relief in the event of a violation of the security requirement. If Reilly were to prevail, he would receive his benefits twice -- a result that would not serve the purposes of ERISA. Further, the pension plans explicitly allow for offset. Accordingly, in an unpublished opinion, the appellate court affirmed the lower court. Reilly v. Charles M. Brewer, Ltd. Profit Sharing Plan and Trust, a Retirement Plan, Case No. 06-17345 (U.S. 9th Cir., September 9, 2008).

5. U.S. PENSION PLAN FUNDING STATUS FALLS IN OCTOBER:

Funding ratios at the typical U.S. corporate pension plan fell 3.7 percentage points in October, as stocks had their worst month since 1987, according to BNY Mellon Asset Management. For year to date, funding ratios for typical plans have declined approximately 7.7%. Renewed recession fears weakened an already fragile market in which value of assets in a moderate-risk portfolio declined 11.8 percentage points in October. Impact of this dramatic drop in asset values was partially offset by a 7.3 percentage point drop in typical plan liabilities.

6. LAW ENFORCEMENT OFFICER EXEMPTION APPLIES ONLY TO “AGENCY” RECORDS:

Section 119.071(4)(d), Florida Statutes, provides that the home addresses, telephone numbers, Social Security numbers and photographs of active or former law enforcement personnel are exempt from Section 119.07(1), Florida Statutes. The statute does not prohibit an agency from releasing the name of the law enforcement officer. However, Section 119.071(4)(d), Florida Statutes, only provides exemptions from provisions of Section 119.07(1), Florida Statutes: “Every person who has custody of a public record shall permit the record to be inspected and copied by any person desiring to do so, at any reasonable time, under reasonable conditions, and under supervision by the custodian of the public records.” Thus, the exemption is from disclosure requirements of the state’s Public Records Law and applies only to public records of an “agency.” In an Informal Opinion, the Florida Attorney General concluded that the exemption afforded by Section 119.071(4)(d), Florida Statutes, applies only to records held by a public agency or a private entity acting on behalf of a public agency. It does not apply to or preclude a private company from releasing such information unless that company falls within the definition of “agency” because it is acting on behalf of a public agency. Informal AGO, November 3, 2008.

7. YEAR-END PENSION ACCOUNTING DECLINES MAY BE LESS THAN EXPECTED:

Unsurprisingly, the value of pension plan assets has dropped sharply so far this year, and under Financial Accounting Standard (FAS) 158, funded status for 2008 will decline for most pension plans. However, Watson Wyatt posits that today’s higher discount rates will considerably soften the drop. Despite dramatic drops in the stock market during early October, Watson Wyatt projects only a moderate decline in average funding status -- from 96% in 2007 to 88% in 2008. Although the drop in funding levels projected for accounting purposes is moderate, it is important to note that funding status is calculated on a different basis to determine required contributions. Without legislative relief, decline in asset values operating in conjunction with complex funding rules in the Pension Protection Act of 2006 will require many plan sponsors to make sizeable contributions precisely when they can least afford them. To explore the effects of the financial crisis on pension plan funding, Watson Wyatt analyzed pension data for 450 FORTUNE 1000 firms whose fiscal years ended in December, and projected their pension funding status -- pension plan assets over projected benefit obligations -- for 2008. Projections were based on a scenario in which market conditions in effect October 15 will still obtain at the end of 2008. On an aggregate level, total assets over total PBO for all firms in the analysis, Watson Wyatt projected a decline of 9 percentage points in funding status for the FORTUNE 1000 -- from 106% in 2007 to 97% in 2008. Despite poor market conditions, the drop is much less severe than declines earlier in the decade, when funding fell by 20 percentage points from 2000 to 2001 and by 19 percentage points from 2001 to 2002.

8. HOW MANY WAGE AND SALARY WORKERS IN EACH STATE PARTICIPATE IN 401(K)-TYPE PLANS?:

A new Fast Facts from EBRI, published by nonpartisan Employee Benefit Research Institute, answers the foregoing question. The data provided are EBRI estimates from the U.S. Census Bureau’s 2001 Panel of the Survey of Income and Program Participation, which contains data for 2003, the latest available with individual state-by-state data on the topic. In 2003, 43.42 million wage and salary workers participated in 401(k)-type plans (including 403(b) and 457 plans), representing 34.6% of wage and salary workers. States with the highest number of participants among wage and salary workers in 2003 were California (4.2 million/29.9%) and Texas (2.96 million/33.7%). States with the lowest number of participants were Hawaii (120,000/34.7%) and Alaska (150,000/49.1%). States with the highest percentage participating among wage and salary workers in 2003 were Alaska and Iowa (43.3%). States with the lowest percentage participation were West Virginia (24.5%) and Utah (26.6%). Florida came in at 2.04 million/28.3%. Note that these data represent all employees, both public and private. FFE #104 (November 6, 2008).

9. UNINTENDED CONSEQUENCES OF PENSION FREEZES:

Americans are increasingly worried about their retirement security in face of falling home values, turmoil in financial markets and general economic stability, according to a current Issue Brief from National Institute on Retirement Security. This insecurity can, at least in part, be attributed to the fact that fewer workers and retirees are able to count on a secure, predictable monthly pension, as more employers in the private sector have “frozen” participation in their pension plans. The trend away from traditional defined benefit pension plans in the private sector in favor of individual retirement accounts has left Americans especially vulnerable to volatility in financial markets. With the economy becoming weaker, many state and local governments will be facing fiscal challenges in months and years ahead. These challenges will undoubtedly prompt governments carefully to examine all aspects of their budgets, including pension costs for state and local workforces. The Brief explores important factors public employers should keep in mind when making decisions about their retirement programs. The Institute concludes that caution should be the watchword for governments that might be tempted to follow the trend in the private sector to abandon defined benefit pensions in favor of defined contribution plans. The Brief contains the following key findings:

• Freezing a DB pension and moving to a DC plan can increase costs to the employer/taxpayer at exactly the wrong time, because (1) maintaining two plans is more costly than just one; (2) forgoing and undermining economic efficiencies of DB pensions drives up retirement plan costs; and (3) accounting rules can require pension costs to accelerate in wake of a freeze.
• Freezing a DB plan and moving to a DC plan can worsen retirement insecurity, potentially damaging recruitment and retention efforts.

Because of the above, most states that have studied whether to freeze a DB and switch to a DC plan have found continuation of the DB plan to be in the best interests of employers/taxpayers and employees (see C&C Newsletter for November 13, 2008, Item 12).

10. NFL UNION ORDERED TO PAY $28.1 MILLION TO RETIREES:

A San Francisco federal jury has ordered the NFL Players Association to pay a total of $28.1 Million to retired players, after finding the union failed properly to market their images. According to the Associated Press, the figure includes $21 Million in punitive damages, just short of the $21.9 Million award the players’ lawyer had asked of the jury, to reflect roughly 10% of the union’s net worth. Hall of Fame cornerback Herb Adderley filed the lawsuit last year on behalf of over 2,000 retired players who contend the union failed actively to pursue marketing deals on their behalf with video games, trading cards and other sports products. Lawyers for Adderley told the jury that the union actively sought to cut them out of licensing deals, so active players could receive bigger royalty payments. Ready, set, hike.

11. MILWAUKEE SICK PAY MEASURE WILL FACE LEGAL CHALLENGE:

The Metropolitan Milwaukee Association of Commerce filed notice that it intends a legal challenge against the City of Milwaukee sick pay ordinance that won lopsided voter approval. A report from Milwaukee Journal Sentinel says the business group had warned of possible court action, as the measure made its way directly to the voters through a seldom-used process through which more than 40,000 Milwaukee residents petitioned for the legislation. Some 68% of Milwaukee’s voters approved the referendum. In its filing, MMAC asserts that the sick leave ordinance conflicts with federal and state laws for family and medical leaves. It also contends the city would be overstepping its authority by requiring sick pay from employers outside the city that have employees living in Milwaukee. MMAC called the ordinance well-intentioned, but opposed it as a local mandate adding costs to businesses with employees in the city. At issue is a binding referendum that would require private employers in Milwaukee to provide paid sick leave to workers who earn the benefit at the rate of one hour of sick pay for every 30 hours of work. Employer would have to grant 72 hours of sick leave per calendar year or 40 hours if they have fewer than 10 employees.

12. U.S. BAILOUT OF AIG REACHES $150 BILLION:

The U.S. Treasury Department has purchased $40 Billion in preferred AIG stock through the Troubled Asset Relief Program within the Emergency Economic Stabilization Act. The purchase is part of an AIG aid package coordinated with the Federal Reserve. The package now totals roughly $150 Billion, and is to replace the previous aid package which totaled only $85 Billion in loans to the troubled insurer, in what must surely be the largest bailout ever of a single private-sector company. Among other things, AIG agrees that annual bonuses to senior partners for 2008 and 2009 shall not exceed the average of the annual bonuses to senior partners for 2006 and 2007. Gee, that’s real comforting.

13. GM DOES NOT FORESEE REQUIRED PENSION CONTRIBUTIONS:

General Motors Corp. does not expect to have to make any pension contributions to meet minimum funding requirements in the next three to four years, even though its funded status declined in the first nine months of 2008 because of negative investment returns and recent employee-related cutbacks. Workforce Management reports that, as of December 31, 2007, GM’s U.S. pension plans had a combined $104 Billion in assets and $85 Billion in liabilities. But will this relatively good news save GM from bankruptcy?

14. FRS TAKES HIT:

The $100-plus Billion Florida Retirement System returned -15.01% for the 12 months ended September 30, 2008, according to pionline.com. The plan underperformed the -13.46% return of its customized benchmark for the same period. In the three months ended September 30, 2008, the plan returned -8.93%, also underperforming the -7.83% return of the benchmark. Separately, the Miami Herald reported that FRS lost almost $38 Billion -- 27% -- over the 13-month period ended October 31, 2008. Feel better about your plan now?

15. FINANCIAL CRISIS AND STATE/LOCAL DEFINED BENEFIT PLANS:

Equity assets in retirement plans, according to a Issue in Brief from Center for Retirement Research at Boston College, dropped in value by about $4 Trillion between October 9, 2007 and October 9, 2008. The decline was divided equally between defined benefit and 401(k)/individual retirement accounts. Decline in the defined benefit area was, in turn, divided equally between private sector plans and those sponsored by state and local governments. The Brief explores what a loss of roughly $1 Trillion of state and local defined benefit equity assets means for individual participants and for taxpayers of the sponsoring entities. The Brief is structured as follows. The first section describes the important role of defined benefit plans in the public sector. The second section describes the immediate impact of the financial crisis on public sector participants. The third section turns to impact on plan sponsors, by assessing funding status of these plans. The fourth section explores possible responses by plan sponsors should equity values remain low. The final section concludes that, while everyone agrees that funding of state and local plans is an important goal, smoothing of asset values in the public sector allows these plans some space to restore their funding levels. Some specific key findings are

• Prior to the financial crisis, most public pension plans were on a path to full funding.
• But the crisis has pushed the aggregate funding ratio below 80 percent.
• Without action, in five years the funding ratio could be as low as 59 percent or as high as 75 percent.
• The ability to smooth pension asset values provides a buffer against the need for imminent hikes in pension contribution rates.
• But, eventually, taxpayers will have to pay for any permanent damage done by the financial crisis.

This piece is the complement to an earlier one dealing with the private sector (see C&C Newsletter for November 13, 2008, Item 7).

16. CalPERS HEAD DEFENDS PUBLIC PENSIONS:

CalPERS board president Rob Feckner has hit back at critics of government pension plans, claiming they continue to provide a good deal for taxpayers despite current difficulties. In a comment piece in The Sacramento Bee, Feckner said every time the stock market suffered a major setback, those who did not fully understand how government pensions worked started sounding alarm bells that the cost of government pensions would be driven up. However, he said a close examination of history and the facts suggested it was way too early to make such assumption. Traditional pension plans are an extremely cost-effective way of providing decent retirement benefits to public employees, with three out of four dollars paid in CalPERS benefits coming from investment earnings, not taxpayers. And remember that public servants pay into the pension fund, too -- without fail. The average CalPERS retiree receives an annual pension benefit of just under $24,000. Many do not receive Social Security. In October, CalPERS announced that its funded status could fall to as low as 68% by the middle of next year unless it can turn around a 20% loss on its value since the first of July.

17. UNIVERSITY OF CALIFORNIA EMPLOYEES WILL RESUME PENSION CONTRIBUTIONS:

Participants in the University of California Retirement Plan will begin making contributions next year, after an 18-year “contribution holiday,” to offset losses amid the financial crisis. According to a story in the San Francisco Business Times, contributions from both the university and employees will be required to maintain the long-term financial health of the retirement plan. As of October 31, 2008, the retirement plan investment portfolio had experienced an estimated decline of approximately 24% for the current fiscal year. As a result of the unprecedented 18-year contribution holiday, nearly 80% of current participants have not contributed a single dollar to the individual accounts from which their future guaranteed benefit payments will be drawn.

18. FLORIDA LAW ON RECORDS IDENTIFYING PARTICIPANTS IN HEALTH INSURANCE PLANS LACKS CLARITY:

The Florida Attorney General was recently asked whether Sections 112.08(7) and 119.071(4)(b), Florida Statutes, precluded release of information that identifies school district employees, their dependents and their health insurance plans. Section 112.08(7), Florida Statutes, provides that all medical records and medical claims records of current or former county or municipal employees and eligible dependents enrolled in a county and municipal group insurance plan are confidential and exempt from Section 112.07(1), Florida Statutes. Over twenty years ago, a Florida appellate court reviewed whether certain medical physical examination reports and related documents pertaining to a city’s firefighters were public records subject to disclosure. In that case, a newspaper had asked to inspect medical physical examination reports and related documents on city firefighters. The newspaper argued that the exemption in Section 112.08(7), Florida Statutes, applied solely to medical records filed in conjunction with an employee’s participation in a group insurance plan. However, contrarywise, the court determined that the Legislature intended the exemption to extend to all medical records relating to employees enrolled in a group insurance plan. Thus, the exemption in Section 112.08(7), Florida Statutes, applies broadly rather than being related solely to medical records filed in conjunction with an employee’s participation in a group insurance plan. Section 119.071(4)(b), Florida Statutes, exempts from disclosure medical information pertaining to a prospective, current or former officer or employee of an agency which, if disclosed, would identify that officer or employee. Clearly, information relating to an insurance program participant’s medical condition is protected from disclosure. However, there is no clear statement that such protection extends to the name, address, age or other non-medical information of such participants. When doubt exists as to whether a particular document is exempt from disclosure under Florida’s Public Records Law, the exemption is to be narrowly construed, and any doubt resolved in favor of public access. Informal AGO, November 10, 2008. (Due to lack of clarity in the matter, the Attorney General felt it advisable for the Legislature to clarify its intent.)

19. APHORISM:

No one has more driving ambition than the boy who anxiously awaits his 16th birthday.

20. QUOTE OF THE WEEK:

“The pursuit of truth and beauty is a sphere of activity in which we are permitted to remain children all our lives.” Albert Einstein