November, 1998Stephen H. Cypen, Esq., Editor
1. GASB ISSUES TECHNICAL BULLETIN ON YEAR 2000 DISCLOSURES: On October 22, 1998 the Governmental Accounting Standards Board issued Technical Bulletin 98-1, entitled "Disclosures about Year 2000 Issues." The TB is effective for financial statements on which the auditor's report is dated after October 31, 1998. It terminates for financial statements for periods ending after December 31, 1999 unless systems and other equipment are not Year 2000-compliant as of the balance sheet date. The TB requires, among other things, that state and local governments disclose a general description of the Year 2000 issue as it relates to their organizations, including a description of the stages of work in process or completed to make computer systems and other electronic equipment critical to conducting operations Y2K compliant. Readers can obtain a copy of the TB on GASB's website, www.gasb.org. The American Institute of Certified Public Accountants immediately expressed concerns about the nature of the new required disclosures. The AICPA is advising auditors to be cautious about being associated with disclosures required by the TB. Because of the unprecedented nature of the Y2K issue, its effects and the success of related remediation efforts will probably not be fully determinable until the year 2000. Therefore, AICPA warns, auditors may need to consider modifying their audit opinions with respect to such disclosures.
2. INVESTORS BENEFIT FROM TAX LAW CHANGES: KPMG Peat Marwick has analyzed the Internal Revenue Service Restructuring and Reform Act of 1998. According to the accounting giant, short-term gains on assets held one year or less will be taxed at ordinary rates, up to 39.6%. Long-term gains, now defined as assets held more than twelve months, are taxed at a maximum rate of 20%. (The Tax Reform Act of 1997 had originally set the long-term holding period at eighteen months.) In addition, there are now four different methods of determining a gain from the sale of mutual fund shares. The first in-first out (FIFO) method treats shares as being sold in the order in which they were acquired; unless another method is selected, IRS presumes the use of FIFO. The average cost method computes gain using the average cost of all owned shares. The average cost double category method allocates its shares to long-term and short-term holding periods according to the ratio of such holdings. The specific share method allows the investor to choose among all shares and select for sale those that produce the best results; the investor must have cost records for every share owned and must notify the fund to identify the shares being sold. Once a method is used for a particular fund, an investor cannot change without IRS approval.
"Government expands to absorb revenue, and then some."
3. SENATE BILL WOULD PROTECT PENSIONS IN BANKRUPTCY: The United States Senate has passed the Consumer Bankruptcy Reform Act of 1998, which includes an amendment protecting retirement savings during bankruptcy proceedings. Offered by Senator Hatch and co-sponsored by Senator Graham, the amendment is designed to insure that retirement benefits of elderly Americans would not be at risk during bankruptcy proceedings. BNA reports that, among other things, the amendment would prevent loans from pension plans from being discharged in bankruptcy; provide a uniform exemption from a participant's bankruptcy estate for all types of tax-favored qualified pension plan assets; and protect retirement assets that are in the process of being rolled over into a new qualified plan. Earlier this year the House of Representatives passed a version of bankruptcy reform, but the administration opposes that bill's inflexibility. Hopefully a House/Senate Conference Committee will be able to work out a compromise bill acceptable to Congress and the White House.
4. TO PROTECT ITS INVESTMENTS, CALPERS WILL ASK Y2K QUESTIONS: A brief report in Pensions & Investments says that California Public Employees' Retirement System will survey the almost-2500 public companies in which it invests, in order to determine their Y2K readiness. The $140 Million behemoth hopes the information will help it protect its investments.
5. NEARLY ALL STATE PENSION PLANS ALLOW FOR SERVICE-CREDIT PURCHASE: A survey of over 100 state pension plans conducted by Public Retirement Institute found that 92% of all state public pension plans allow employees to purchase service credits. All general employees' plans are portable, while 98% of teachers' plans and 81% of public safety employees' plans allow purchase of service credits. The most common types of service purchase are service with state governments, local governments, out-of-state governments, the federal government and the military. Actuarial cost is the most common method for determining how much an employee will pay. We thank Pensions & Investments for reporting the survey results.
6. FRS DEBATES INDEXING VERSUS ACTIVE MANAGEMENT: The Florida State Board of Administration, responsible for investing assets of the Florida Retirement System, and the State Office of Program Policy Analysis and Government Accountability are arguing over whether the Fund's entire $51 Billion domestic equity portfolio should be indexed. As part of its annual performance audit, OPPAGA reported that FRS could have earned an additional $612 Million for the fiscal year ended June 30, 1997 and could have saved $49 Million in investment fees if it had used passive portfolios. Currently, active managers have about 40% of the domestic equities, which are managed both internally and externally. In a letter to members of the SBA, reported in Pensions & Investments, its Executive Director defended the current position: "We do not believe that 100% passive equity investing is appropriate, realistic or safe!" SBA's Chief of Equities, also so quoted, said the report "smacks of hindsight, and that's always an easy thing to do in the equity market."
"There's always a solution that's neat, plausible and wrong."
7. UNCHANGED 1999 IRS LIMITS OFFICIAL: As predicted (see C&C Newsletter for October, 1998, Item 5), IRS pension limits officially will not change for 1999. For those of you who want to know all the details, the following are the unrounded limits, which did not reach the next $5,000 or $10,000 threshold: Section 415 Defined Benefit Plan dollar limitation, $133,164; Section 415 Defined Contribution limit, $33,630; and Section 401(a)(17) annual compensation limit, $168,150.
8. SOCIAL SECURITY INCREASES WILL BE LOWEST IN TWELVE YEARS: Low inflation also has an effect upon the annual cost-of-living increase to be received next year by the 44 million Americans on Social Security. Beginning in January, Social Security checks will increase by 1.3%, the lowest since the same increase was set in 1987. The maximum earnings subject to Social Security taxes will rise to $72,600 from $68,400. The payroll tax, payable equally by employers and employees, will remain at 6.2%. Maximum after-retirement earnings that will not trigger benefit reductions rise to $15,500 a year (from $14,500) for individuals from 65 through 69 and to $9,600 (from $9,120) for those under 65. Individuals over 69 continue to be exempt from the earnings test. Almost simultaneously, new Medicare figures for 1999 were announced: the Medicare Part A premium will remain at $309 per month, with an annual deductible of $768 (from $764); the Medicare Part B monthly premium will be $45.50 (from $43.80), but the $100 annual deductible will not change.
9. STANDARD OF PROOF IN EMPLOYMENT TERMINATION IS PREPONDERANCE OF EVIDENCE: A Florida District Court of Appeal has affirmed an order of the Public Employees Relations Commission upholding a Correctional Officer Lieutenant's dismissal by the Department of Corrections. The officer argued that the standard of proof should be that of clear and convincing evidence. However, the court determined that the hearing officer and the commission correctly applied the preponderance of evidence standard, "which is consistently applied in cases involving the termination of employment." Dalem v. Department of Corrections, 23 Fla. L. Weekly D2265 (Fla. 4th DCA, October 7, 1998).
10. DIVISION HAS FIRST RIGHT TO SOCIAL SECURITY OFFSET: A recent Florida appellate case involved the question of whether the employer/carrier or the Division of Workers' Compensation is entitled to the Social Security offset in a case where the employer/carrier is required to pay permanent total disability benefits and the Division is required to pay supplemental benefits. Here, the employer/carrier reduced claimant's PTD in accordance with the statutory Social Security offset and the Division also reduced the supplemental benefits by the Social Security offset. The court affirmed an order of the Judge of Compensation Claims determining that the Division shall have first priority in taking any available Social Security offset on dates of accidents prior to July 1, 1984. Highlands County School Board v. Carrasquillo, 23 Fla. L. Weekly D2280 (Fla. 1st DCA, October 7, 1998).
11. BULLS VERSUS BEARS: In the last 72 years, since 1926, there have been 23 bull markets and 22 bear markets, but that's where the similarities end. The typical bull market lasts about 29 months and results in an average gain of 110%. In contrast, a bear market typically lasts 9 months and averages a decline of 25%.
"Economists have predicted eight of the last three recessions."
12. GOD HELP US?: Southern Methodist University recently conducted a survey to determine if there is any correlation between a person's religious beliefs and his or her investment performance. Those surveyed were over 500 randomly-selected residents of Dallas's most affluent neighborhoods. Respondents were asked to rate their belief in God on a scale of 1 (atheist) to 7 (very strong belief) and list their investment returns. A comparison of the most religious 25% with the least religious 25% showed that for a one year period the believers gained an average of 31.2% compared with 18.4% for nonbelievers. The conclusion: "the more strongly you believe in God, the more willing you are to take risks, and risk taking was rewarded in the 1990's bull market." One other warning according to Money Magazine, which reported the study: surveyors had unquestioned faith in respondents' numbers because there was no verification made. Keep the faith, Baby.
13. CUSTODIANS SURVEYED: Global Custodian, a sister publication of Plan Sponsor, has released its eighth survey of worldwide custody services. Ranked by total assets, the top ten are Chase Manhattan, State Street, Bank of New York, Bankers Trust, Citibank, Deutsche Bank, Credit Suisse, Mellon Trust, Northern Trust and Royal Trust. The survey also ranks custodians based on client reporting, client service, securities lending and performance measurement. You can obtain a free copy of the full 60-page survey by calling 203.629.5014 or read the summary in the October 1998 issue of Plan Sponsor.
14. GAO REPORTS ON MANDATORY SOCIAL SECURITY COVERAGE OF PUBLIC EMPLOYEES: The United States General Accounting Office has issued a report entitled Social Security: Implications of Extending Mandatory Coverage to State and Local Employees (GAO/HEHS-98-196). The Social Security Administration estimates that 5 million state and local government workers, with annual salaries totalling $132.5 Million, are currently not covered by Social Security. The report examines the implications of extending mandatory coverage to all newly-hired state and local employees. GAO also discusses the effect of mandatory coverage on the Social Security program, public employers, public employees and pension plans. Specifically, GAO noted that (1) extension of mandatory Social Security coverage to all new state and local government hires would reduce the program's long-term actuarial deficit by 10% and would extend the trust funds' solvency by about two years; (2) mandatory coverage would broaden participation in an important national program and simplify program administration; (3) the impact would depend on how state and local governments with noncovered employees respond to the additional cost and benefits associated with Social Security coverage; (4) Social Security retirement benefits are fully protected from inflation and are weighted in favor of families and low-income employees, while many public pension plans permit employees to retire earlier and provide a higher retirement income benefit than Social Security; (5) those states and localities that decide to maintain benefit levels for new employees would experience increased costs; (6) several groups have stated that mandating Social Security coverage would raise constitutional issues and would be challenged in court; (7) mandatory coverage would also present administrative issues for implementing state and local governments; and (8) up to four years could be required for states and localities to develop, legislate and implement pension plans that are coordinated with Social Security. To read the entire 27-page letter report, visit GAO's Worldwide Web Home Page at http://www.gao.gov and select "Income Security" in the August 1998 Month in Review
15. EDUCATORS GET ADEA EXEMPTION: As we previously reported (see C&C Newsletter for May, 1998, Pages 2-3), tenured college faculty members were pushing for an Age Discrimination in Employment Act exemption then available only to state and local police and firefighters. Well, under terms of a bill passed by Congress and signed by President Clinton on October 7, 1998, educators have succeeded in having the ADEA amended. The measure will allow colleges and universities to offer tenured faculty supplemental benefits upon voluntary retirement that are reduced or eliminated on the basis of age, provided said benefits are in addition to any retirement or severance benefits generally offered to employees with similar contracts. BNA reported on the Higher Education Amendments of 1998, for which we still see no logical justification. Apparently AARP dropped its opposition and took no position on the legislation, which obviously facilitated its passage.
"It's better to retire too soon than too late."
16. CALIFORNIA GOVERNOR APPROVES SOME BENEFITS LAWS AND VETOES OTHERS: Governor Pete Wilson has signed two bills that will improve retirement benefits for California teachers. One law increases the rate at which retirement benefits are calculated for teachers with more than thirty years of service and increases cost-of-living adjustments. The other increases the maximum retirement allowance for California State Teachers Retirement System members from 2% at age 60 to 2.4% at age 64. However, BNA reports that the Governor vetoed ten other benefits bills, one of which would have required health care plans that provide insurance benefits to employers to offer coverage for domestic partners of employees.
17. TUCSON RETIREES TO DIVEST TOBACCO STOCKS: The Tucson, Arizona City Council has voted to divest itself of employees' retirement funds invested in tobacco company stocks. The decision to ban investments in tobacco stocks was strictly a "moral" one, resulting in a $4 Million divestiture (about 1% of the $400 Million fund). One thing that the report in BNA did not explain: why is the City even involved in investing the employees' retirement monies?
18. FRS AND CALPERS WILL GET U.S. SUPREME COURT REVIEW: The Florida Retirement System (through the Florida State Board of Administration) and California Public Employees' Retirement System objected to settlement of a shareholder action against Archer Daniels Midland Co. Although the funds were substantial shareholders, they never formally intervened in the litigation. The U.S. Court of Appeals for the Seventh Circuit held that nonparty shareholders must intervene in order to object to or appeal any settlement. (The funds were slightly miffed that a case seeking almost $200 Million was settled for $8 Million, much of which went to lawyers for the plaintiffs/shareholders.) The United States Supreme Court granted review, most likely because lower federal courts are irreconcilably split over whether nonparty shareholders must intervene as parties in order to appeal adverse judgments, according to BNA.
19. SMALL PUBLIC ENTITIES EXEMPT FROM ADEA: State agencies and instrumentalities with fewer than 20 employees are not covered by the Age Discrimination in Employment Act, BNA reports. A ruling from the U.S. Court of Appeals for the Eighth Circuit held that Congress intended to treat public and private employers alike, thus extending to public employers the 20-person minimum applicable to private employers. A key element of the ruling: in calculating the number of employees for purposes of ADEA, the instrumentality's employees should not be lumped together with employees of the state or political subdivision of the state because to do so would almost-always circumvent the minimum-employee requirement.
20. CONGRESS PASSES Y2K LEGISLATION: On October 1, 1998 Congress passed the Year 2000 Information and Readiness Disclosure Act. The Act makes Y2K readiness disclosures generally inadmissible in court, so that companies can communicate among themselves and consumers without fear of being sued because their assessments or projections turned out to be less than accurate. The Act preempts state law to the extent that one would otherwise be liable for an inaccurate or misleading Y2K statement (except for fraud). The Act even protects one if one wrongfully accuses a company of having products that are not Y2K compliant, by making the aggrieved party prove by clear and convincing evidence that the statement was made with knowledge of its falsity or with reckless disregard as to its truth or falsity. Another provision says that Y2K statements may not be interpreted or construed as an amendment to or alteration of a contract or warranty. And finally, the Act exempts from anti-trust scrutiny conduct, including the making and implementation of agreements, engaged in for the sole purpose of facilitating responses to correct or avoid a Y2K problem through July 14, 2001. By the time you read this item, President Clinton probably will have already signed the measure into law.
"Discover all unpredictable errors before they occur."
21. U.S. SUPREME COURT DECLINES TO REVIEW ADA CASES: The United States Supreme Court has refused to review two Americans With Disabilities Act cases previously reported here. In Palm Beach County Soil and Water Conservation District v. Bledsoe, the Court let stand a court of appeals ruling that a public employer can be sued for employment discrimination under Title II of the ADA, which bans bias in the provision of public services (see C&C Newsletter for March, 1998, page 5). A suit under Title I of ADA would not lie, because the employer did not meet the 15-employee minimum. In Castellano v. New York, the high court let stand a court of appeals ruling that an employer is not required to provide disabled employees the supplemental benefits available to service retirees in addition to freely chosen disability benefits (see C&C Newsletter for March, 1998, page 5). In its order list dated October 5, 1998, the Supreme Court denied review in over 75 other labor and employment law cases.
22. BUCK SURVEYS FORTUNE 1000 COMPANIES' COMPENSATION BUDGETS: Buck Consultants has released its ninth annual survey of data on the 1998 and 1999 compensation budgets of over 400 Fortune 1000 companies which responded. The overwhelming majority base salaries on merit. Average actual merit budget increases in 1998 were 4.4% for executives, 4.1% for exempt employees and 4.0% for non-exempt employees. Average merit budget increases projected for 1999 are 4.3% for executives and no change for exempt employees and non-exempt employees. Actual promotion budget increases in 1998 averaged 2.4% for executives, 2.1% for exempt employees and 2.0% for non-exempt employees. For 1999, the average promotion increases for the same categories are projected to be 2.3%, 2.0% and 1.9%, respectively.
"Happiness can't buy you money."
23. IN WORKERS' COMP, P.T.D. AND P.I. ARE MUTUALLY EXCLUSIVE: A Judge of Compensation Claims may not award concurrent permanent total disability (PTD) benefits and permanent impairment (PI) benefits. In such case, an award PI benefits will be reversed. In addition, under 1994 amendments to Section 440.09(1), Florida Statutes, a claimant is now required to establish his or her injuries, as well as the occupational cause thereof, within a reasonable degree of medical certainty, not medical probability. Finally, if the injury claimed is mental or psychiatric, claimant then has the added burden of proving the causal relationship by clear and convincing evidence, rather than preponderance of the evidence. Claims Management, Inc. v. Drewno, 23 Fla. L. Weekly D2351 (Fla. 1st DCA, October 12, 1998).
24. FLORIDA CIVIL RIGHTS ACTION DISMISSED AS PREMATURE: A former employee sued his employer for age discrimination under the Florida Civil Rights Act, Sections 760.01-760.11, Florida Statutes. Previously, on March 14, 1996, the employee filed a claim with the Equal Employment Opportunity Commission, a federal agency. However, the complaint was not "filed" under Florida law until EEOC, acting under its work-sharing agreement with the Florida Commission on Human Relations, forwarded the complaint to the Florida agency on April 9, 1996. On September 16, 1996, less than 180 days after the state filing, the employee brought suit. A Florida District Court of Appeal affirmed summary judgement in favor of the employer because Section 760.11(4)(a), Florida Statutes, provides that an aggrieved person may not bring a civil action unless (1) the commission has made an affirmative determination of reasonable cause to believe that a discriminatory practice has occurred or (2) under 760.11(8), Florida Statutes, the commission has failed to act on the complaint for 180 days. On appeal, the employee logically argued for an abatement rather than a dismissal. However, the appellate court held that the premature complaint prevented the existence of either condition precedent to, and thus the very accrual of, the cause of action the employee sought to assert. Filing of the complaint before 180 days rendered it burdened by far more than a mere prematurity that was curable simply by passage of time. Sweeney v. Florida Power and Light Company, Inc., 23 Fla. L. Weekly D2377 (Fla. 3d DCA, October 21, 1998). Apparently many plaintiffs (and their lawyers) have difficulty in sustaining an action under the FCRA (see C&C Newsletter for December, 1997, Page 1 and C&C Newsletter for August, 1997, Page 7).
25. COLLECTIVE BARGAINING ISSUES TO BE DECIDED PURSUANT TO AGREEMENT RATHER THAN STATUTE: In the absence of any contrary language or countervailing public policy, parties must pursue procedures established by collective bargaining agreement rather than by Chapter 120, Florida Statutes (the Florida Administrative Procedure Act), when only rights created by the collective bargaining agreement are at issue. Sickon v. The School Board of Alachua County, Florida, 23 Fla. L. Weekly D2404 (Fla. 1st DCA, October 21, 1998).
26. ELEVENTH AMENDMENT IMMUNIZES STATE FROM ADEA BUT NOT FROM ADA SUITS: A report from BNA indicates how laws having seemingly-similar objectives can suffer different fates at the hands of the same court. The U.S. Court of Appeals for the Eighth Circuit hears appeals from U.S. District Courts sitting in Minnesota, North Dakota, South Dakota, Nebraska, Iowa, Missouri and Arkansas. A divided (2-1) panel recently ruled that the Eleventh Amendment bars suits against state employers under the Age Discrimination in Employment Act. (Most other appellate decisions on the subject have gone the other way.) In another decision last month, the full U.S. Court of Appeals, by dividing evenly on a 6-6 vote, let stand a Minnesota District Court decision that the Eleventh Amendment does not bar Americans With Disabilities Act claims against state employers. Issues involving the Eleventh Amendment to the United States Constitution are decided in accordance with the United States Supreme Court's decision in Seminole Tribe of Florida v. Florida, a 1996 case which established a two-part test for determining whether Congress has abrogated State Sovereign Immunity: (1) courts must first decide whether Congress "unequivocally" expressed its intent to abrogate state immunity and (2) whether Congress acted pursuant to a valid exercise of power. Remember that the Family and Medical Leave Act recently failed to pass Eleventh Amendment muster (see C&C Newsletter for October, 1998, page 10).
27. P&F CONFERENCE ROUSING SUCCESS: As with the previous 29, the 30th Annual Police Officers' and Firefighters' Pension Trustees' Conference held on October 12 and 13, at the Radisson Plaza Hotel in Orlando was fantastic. Once again we must congratulate and thank Andy McMullian, David Jones, Trish Shoemaker, Keith Brinkman, Betty Allen and Melody Mitchell. You guys and gals are terrific.
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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.