March, 1998Stephen H. Cypen, Esq., Editor
"DROPs" HELP EMPLOYERS KEEP KEY EMPLOYEES: The February 1998 Plan Sponsor contains an article entitled "Building a Better Nest Egg - How 'DROPs' Can Help Employers With Defined Benefit Plans to Keep Key Employees." DROP, an acronym for Deferred Retirement Option Program, allows a participant to stop making his usual contribution to a Defined Benefit Plan once he reaches eligible retirement age and to continue working while his monthly retirement benefits remain in the plan, earning a return. When the participant actually leaves employment, the funds are paid out to him, usually in a lump sum. Employees like DROPs because they provide flexibility. Employees get their regular monthly pension payments plus a lump sum which can help them to cover extra costs such as paying down a mortgage. Even though the pension may be at a lower rate (because the benefit is "frozen" at time of entry into the DROP), the amount that builds up in the DROP is still attractive because it comes at a time when participants are earning their highest average salaries. DROPs also make sense for employers wishing to retain experienced workers, and so cut the cost of hiring new ones. There is little or no additional cost because the DROP generally accrues benefits at a lower rate than did the participant's regular Defined Benefit Plan. Some employers report that 80% to 90% of eligible participants are enrolling in DROPs.
MIAMI F & P SAYS "THANKS A BILLION": Congratulations to our client City of Miami Fire Fighters' and Police Officers' Retirement Trust which just reached the elite Billion Dollar mark. As far as we can tell, City of Miami Fire Fighters' and Police Officers' Retirement Trust is the largest local fire and police fund in the State of Florida. Keep up the good work.
SARASOTA COUNTY SHERIFF LIEUTENANT ANALYZES RETIREMENT SATISFACTION OF FLORIDA POLICE OFFICERS: Kevin J. Lynch, a Lieutenant in the Training Section of the Sarasota County Sheriff's Office, has received a doctorate, his dissertation entitled "Retirement Satisfaction of Florida Police Officers as Related to Preretirement Training and Other Variables." The purposes of the study were to (a) evaluate the effectiveness of preretirement preparation programs offered by the pension boards of three Florida cities, by comparing retirement satisfaction with those who had attended a preretirement training program with those who had not; (b) compare the participants based on the city they retired from; (c) compare the preretirement preparation program content of the three cities that offered preretirement training at the onset of the study; and (d) identify demographic variables that would serve as predictors of the level of retirement satisfaction among Florida police officers. Lynch's policy recommendations: Employing agencies which expect to deal with an employee for a majority of the employee's career should recognize their responsibility to care for the ongoing mental and emotional health of the member. Preretirement training taken within a few years of retirement is too late. In order to meet the challenge of retirement, early in their careers employees should be made aware of the profile of those who are heading for both positive and negative retirement experiences. There is a need for a career-long curriculum that includes concepts and aspects of preretirement training from the onset of employment. Training should be offered on a periodic basis, and should include peers and retirees, as well as specialists in the appropriate professions. Longer programs, or programs started earlier in an employee's career, may raise the impact of preretirement preparation programs on retirement satisfaction and result in statistical significance. The study recognized that "all Florida cities were being urged by the Florida Public Pension Trustees Association to start preretirement training immediately. Annual meetings of this group include a day consisting of such a training session." Nice going, Lt./Dr. Lynch.
FORMER EMPLOYEE NOT REQUIRED TO RETURN SEVERANCE PAY TO SUE UNDER ADEA: An employee, as part of a termination agreement, signed a release of all claims against her employer in exchange for severance pay. The release, however, did not comply with the specific federal statutorial requirements for a release of claims under the Age Discrimination in Employment Act of 1967 (ADEA) as amended in 1990 by the Older Workers Benefit Protection Act (OWBPA). The ex-employee brought suit against the employer, which claimed that because the severance pay was not tendered back the release barred the action. Reversing lower court judgments to the contrary, the United States Supreme Court held that the "tender back" doctrine did not preclude the action because the release did not conform to the statute. The Court found that the rule proposed by the employer would frustrate the statute's practical operation, as well as its formal command, since in many cases a discharged employee likely will have spent the money received and will lack the means to tender their return. Thus, employers might be tempted to risk noncompliance with OWBPA's waiver provisions, knowing it will be difficult or impossible for employees to repay monies. "We ought not to open the door to an invasion of the statute by this device." Oubre v. Entergy Operations, Inc., 11 Fla. L. Weekly Fed. S301 (U.S., January 26, 1998).
GOVERNOR LEAVES STATE HOUSE FOR BIG HOUSE: Having been convicted of fraud (see C&C Newsletter for October, 1997), former Arizona Governor Fife Symington has commenced a two and one-half year prison term, which will be followed by five years probation. In addition, Symington was also ordered to pay a $60,000.00 fine and restitution to a union pension fund equivalent to whatever amount remains undischarged after a separate bankruptcy case against him is resolved. BNA reports that the defrauded pension funds have sued in bankruptcy court to block discharge of a $14 Million Symington-debt due them. Reached just before the cell clicked shut, the ex-Governor blamed his conviction on El Niņo.
IRS RELEASES FORM 1099-R FOR 1998: The Internal Revenue Service has issued Form 1099-R for 1998 and attendant instructions. You may know that Form 1099-R is used to report distributions from pensions, annuities, retirement or profit-sharing plans and individual retirement accounts. Copy A of the form must be filed with IRS by March 1, 1999, while copies B and C must be provided to recipients by February 1, 1999. Need some forms? Simple -- call (800) TAX-FORM.
CANADA'S LARGEST FUND ALSO MAKES NEWS: Like Canada's number two pension fund (see C&C Newsletter for January, 1998), Canada's largest retirement fund -- Ontario Teachers' Pension Fund -- has made the news, but it may not be all good. In order to balance the Province of Ontario's budget, some governmental officials want to reduce contributions to the $37 Billion fund by $457 Million per year. (That amount is required to pay what was a $5.6 Billion deficit created in 1992.) Speaking to BNA, pension officials say that the money is owed to the plan and there's nothing to talk about. And listen to this...current retirement eligibility is a "rule of 90," with the union proposing a rule of "85!" Is Canada a great country, or what?
CALPERS MAY OPPOSE TOBACCO DIVESTITURE: An investment committee of $128 Billion CALPERS has voted to oppose state legislation that would require divestiture of more than $1 Billion in tobacco company investments. CALPERS follows the "prudent expert" standard, which requires fiduciaries to make investment decisions in a manner that a prudent, knowledgeable expert in the same field would make. CALPERS believes that remaining a shareholder in tobacco companies will give it greater leverage over those firms' business practices than if it pulls out of the investment entirely, reports BNA.
DOMESTIC PARTNER BENEFITS HIT CLOSE TO HOME: Monroe County Commissioners recently voted to grant health insurance and other benefits to domestic partners of County employees. According to BNA, the Florida Keys county is the first county government in Florida to provide health coverage, sick leave to care for a partner, parental leave to care for a newborn or adopted child of a partner and bereavement leave for a partner or his or her family members. A study shows that the policy, which applies to both heterosexual and homosexual partners, will affect about 100 of 1,200 County employees, most of whom are involved in heterosexual domestic relationships.
PRESIDENTIAL LINE ITEM VETO POWER HELD UNCONSTITUTIONAL: As indicated in our February, 1998 Newsletter (pages 2-3), a United States District Judge has declared unconstitutional the Line Item Veto Act (P.L.104-130/April 9, 1996). The Administration has appealed the ruling, which found that the act upsets the balance of power between the executive, legal and judicial branches of government. Meanwhile, the United States Supreme Court has already issued an order indicating it will review the district court's ruling, and has scheduled oral argument thereon for April 27, 1998.
NEW MEXICO ATTACK ON DB SYSTEM FAILS: A bill in the New Mexico Legislature that would have replaced the current defined benefits system with a voluntary defined contribution program has died in this year's session. As we reported (see C&C Newsletter for February, 1998), Minority Leader Nicely did not intend to treat state employees very nicely. The bill, which also died last year, could be reintroduced in future legislative sessions.
LONG-TERM DISABILITY BENEFITS BAR DISCRIMINATION CLAIM: A case reported in BNA indicates that a former police officer who applied for and was receiving total disability benefits is not a "qualified disabled person" who can pursue a discrimination claim under the Minnesota Human Rights Act. Following a federal district court opinion, the Minnesota Court of Appeals held that a plaintiff cannot bring a discrimination claim under the ADA or the MHRA when he has represented that he is totally disabled and continues to collect benefits.
STATUTE DOES NOT ALLOW ATTORNEY'S FEES IN ACTION TO RECOVER UNACCRUED WAGES: Section 448.08, Florida Statutes, provides that the court may award to the prevailing party in any action for unpaid wages costs of the action and a reasonable attorney's fee. A Florida District Court of Appeal has held that while the statute allows an award of attorney's fees to the prevailing party in action for unpaid wages, it does not allow attorney's fees in an action for breach of an employment contract where damages are for unaccrued wages. Joseph v. Commonwealth Land Title Insurance Co., 23 Fla. L. Weekly D539 (5th DCA, February 20, 1998).
GASB 32 ISSUED FOR §457 PLANS: The Governmental Accounting Standard Boards has issued Statement No. 32 on Accounting and Financial Reporting for IRC §457 Deferred Compensation Plans of state and local government employers. The new statement, which replaces Statement No. 2, was necessitated by the Small Business Job Protection Act of 1996 amendments to IRC §457 that require all amounts of compensation deferred under eligible state and local government deferred compensation plans and income earned thereon to be held in trust for participants and beneficiaries. GASB 32 will require that §457 plan assets be included in the government's financial statements only if they are fiduciary funds (that is, held by the governmental employer acting in a trustee capacity). SBJPA's trust requirement was effective immediately for plans established on or after August 20, 1996 and for all plans after December 31, 1998. GASB 32 is effective for financial statements for periods beginning after December 31, 1998, unless the governmental employer complies with the trust requirement in an earlier period, in which case the statement is required for the financial reporting period in which compliance occurs.
TITLE II OF ADA DOES COVER EMPLOYMENT DISCRIMINATION CLAIMS AGAINST PUBLIC ENTITIES: Reversing a district court ruling to the contrary (see C&C Newsletter for January, 1997), the United States Court of Appeals for the Eleventh Circuit held that Title II of the Americans With Disabilities Act, which bars discrimination in public services, programs and activities, does afford protection against employment discrimination by public entities. Bledsoe v. Palm Beach County Soil and Water Conservation District, 11 Fla. L. Weekly C953 (11th Cir., January 22, 1998).
MARYLAND URGED TO IMPROVE PENSIONS: A bill has been introduced into the Maryland House to improve state workers' retirement benefits, which rank next-to-last among the states. Currently, Maryland's pension plan provides benefits that range from 24% to 36% of final average salaries. The proposal would bring everybody up to 45%, BNA reports. If no benefits are changed (and actuarial assumptions remain constant) the state's contribution will eventually decline to about 10% of payroll.
FEDERAL APPEALS COURT REJECTS NEW YORK ADA CHALLENGE: A judgment against disabled New York City Police Officers who filed suit under the Americans With Disabilities Act claiming discrimination because they do not receive supplemental benefits payable to service retirees has been affirmed (see C&C Newsletter for September, 1996). The court held that ADA is violated when employees are forced to accept lower benefits because they are disabled, but an employer is not required to provide disabled employees with supplemental benefits available to service retirees in addition to freely chosen disability benefits. However, according to BNA, the U.S. Court of Appeals for the Second Circuit did hold that the plaintiffs were eligible to sue in that they alleged they were qualified individuals with a disability who could perform the essential functions of the job. Castellano v. City of New York, (2d Circuit, February 24, 1998).
CONGRESS MAY CORRECT USERRA "GLITCH:" Our readers know that the Uniformed Services Employment and Reemployment Rights Act of 1994 was designed to protect the job rights of individuals who serve for a limited period in the United States Armed Forces. Until recently, the states had complied with the seemingly-clear statutory mandate. However, says BNA, several states have recently successfully argued that because of a United States Supreme Court decision, Congress is not authorized under the Interstate Commerce Clause of the U.S. Constitution to pass laws that override states' 11th Amendment immunity from being sued in federal court. An amendment to USERR would clarify that the Attorney General of the United States (rather than the service member) would enforce any noncompliance with the Act.
LACERA DISCOVERS $1.2 BILLION LIABILITY: A front page story in Pensions & Investments indicates that the Los Angeles County Employees Retirement Association has been hit with an additional pension liability of $1.2 Billion because of two computer coding errors. Prior to discovery of the liability during an outside audit of the $22 Billion fund, fund officials thought that recent investment gains would lead to a major surplus, which would reduce employer and employee contributions. Now, not only will LACERA be required to use all of its 1997 investment gains, it will also have to use about $150 Million of its surplus to stay fully funded. One error underestimated liabilities associated with service-connected disabilities for public safety officers. The other underestimated liabilities for retirements that occur at age 60 for public safety members and at age 70 for general employees. Incredibly, it appears that these computer coding errors may have existed for over twenty years!
FRS RETURNS TOP LARGE PUBLIC FUNDS: With a return of 21.6% for calendar year 1997, the Florida Retirement System led the twenty-five largest public funds (the lowest of which returned just over 13%). A report from Pensions & Investments indicates that the $78 Billion fund attributed its sterling performance to a 60% weighting in equities, of which only 8% were international. Incidentally, the earnings assumptions of the funds in question ranged from 7.75% to 8.75%.
COULD SOFT-DOLLAR TRADING BE MORE EXPENSIVE?: A recent study by some professors at very prestigious universities found that a soft-dollar trade costs institutions 23 basis points more than a cash trade! The study, reported in Pensions & Investments, also shows that soft-dollar costs can vary widely, depending on the type of investor and the type of broker. To be fair, the report does not conclude that soft dollars are good or bad, because the study addresses only the cost side of the soft-dollar equation. The authors say they would need more information on the benefits of soft dollars properly to evaluate them.
CalSTRS FINDS FOREIGN BONDS ADD LITTLE VALUE: The California State Teachers' Retirement System had a study conducted to assess the long-term impact of investment in non-U.S. government debt on its $82 Billion portfolio. The study, says Pensions & Investments, found investment in non-dollar fixed income would provide only a modest positive impact in reducing risk. And to get that modest positive impact would require investment of substantial sums of money in the international market. CalSTRS' current exposure to international bonds is only $400 Million (less than 1/2%).
SOME INDEX RETURNS YOU MAY WANT TO KEEP IN MIND: As part of its Performance Evaluation Report, for perspective, Pensions & Investments also publishes various index returns. Among others, the following were reported.
|1 Year||3 Year||5 Year|
|90 Day Treasury Bills||5.29||5.49||4.69|
U.S. FUNDS INVEST IN INTERNATIONAL REAL ESTATE: The California Public Employees Retirement System will invest $100 Million in a Luxembourg-based real estate fund, which will place money into public and private real estate operating companies in Europe, Asia and Latin America. When a fund reaches $130 Billion, it obviously must look at different types of investments in order to stay diversified. Also investing in the venture are state pension funds in Virginia, Colorado, Utah and Wisconsin.
VERMONT TO FOLLOW "PRUDENT PERSON" RULE: A report from Pension & Investments indicates that effective July 1, the Vermont State Employees' Retirement System and the Vermont Teachers' Retirement System will become subject to the "prudent person" rule, which removes caps on investments in various asset classes. Previously, the two funds had been subject to the same restrictions as domestic life insurance companies. Ironically, the state's smallest plan -- Vermont Municipal Employees Retirement System -- has been subject to the more enlightened standard since 1996.
ACTIVE FUNDS CONTINUE DOMINATION: For the second quarter in a row, actively managed equity mutual funds dominated Pension & Investments' performance ranking for one-year and five-year periods. Last year passive funds tracking the S&P 500 Stock Index dominated P&I's ranking of the fifty best performing equity mutual funds. But at year-end 1997, eight of the top ten equity fund performers for the year and all of the top ten for the five-year period were actively managed.
BUT INDEXING ALSO HAS ITS PLACE: The March 1998 issue of Employee Benefits Journal contains an article entitled "The Truth About Active Management." The author, a Vice-President with State Street Global Advisors, concludes that as pension assets grow and investment options become more numerous, the challenge to plan sponsors becomes greater. Plan sponsors face difficult decisions in regard to available investment options. Limiting the number of managers by indexing a portion of assets provides a means by which plan sponsors can avoid receiving suboptimal performance within their plans. Indexing provides the opportunity to reduce investment and administrative costs within a plan. The reduced burden allows plan sponsors to concentrate on finding the best active managers and utilizing them to enhance portfolio returns.
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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.