1.
PUBLIC EMPLOYEE RETIREMENT PLANNING:
A lead article in the June 2003 Employee Benefits Journal
recognizes that public employees’ retirement benefits and career
patterns differ significantly from private sector employees. Providing
adequate flexibility in response to emergencies and changing circumstances,
and for sufficient cost-of-living protection may need greater attention
than insuring lifetime income. Although remaining defined benefit plans,
some public employee retirement systems are adding innovative defined contribution
features, such as deferred retirement option plans and purchase of service
credit. Social Security issues unique to public employee retirees are also
concerns. The author sets out some comparisons between private sector and
public sector workers:
- They are more likely to be female – 58% of local and state
government workers are female, compared to 49% in the general labor
force
- They are far more likely to be covered by a pension plan – 90%
of all public sector employees are covered by a pension plan, compared
to half of all private employees
- Their pension is more likely to be a defined benefit plan – 90%
of plans that cover public employees are DB plans
- Their pensions are more likely to be adjusted for inflation – 80%
of public sector retirees receiving a DB pension have a cost-of-living
adjustment, compared to 13% of their private sector counterparts
- They are older and longer-tenured but retire younger – 74%
of the government workers are over 35, compared to 61% in the private
sector
- Some are not participating in Social Security – about 6,000,000
public employees are not covered by Social Security
- They may identify
strongly with their jobs – police
officers, firefighters, teachers and public service workers in general
are known to have strong professional identities
In sum, with effective planning most public employees can achieve the
self-sufficient retirement that has become an American expectation.
Effective retirement planning by and for a public employee is based
on the individual’s values and circumstances, and seeks to
make best use of their retirement benefits.
2. FORMER
UNITED WAY HEAD WILL NOT GET “REPLACEMENT BENEFITS”:
Aramony served for many years as President and CEO of United Way.
In 1992 he was terminated amidst allegations of fraud and financial
improprieties, for which he was subsequently convicted and sentenced
to seven years in prison. United Way provided its employees with a
qualified defined benefit plan. However, as our readers know, under
a 1982 amendment to the Internal Revenue Code, Section 415 set a limit
of $90,000.00 (as adjusted) on benefits that an employee may receive
each year under such qualified defined benefit plan. Section 415 reduced
the benefits available to Aramony and other highly-paid United Way
employees under its qualified defined benefit plan. In order to offset
such reductions, United Way adopted a non-qualified pension plan, called
a “Replacement Benefit Plan.” The RBP’s purpose was
to restore the benefits lost because of restrictions imposed by IRC
Section 415 and to restore pension benefits lost as a result of Revenue
Ruling 80-359, which excluded deferred compensation from the definition
of compensation under the plan. So far, so good...for Aramony. Then,
as part of the Tax Reform Act of 1986, Congress enacted Section 401(a)(17)
of the Code, which placed a cap of $200,000.00 (subsequently reduced
to $150,000.00) on the annual compensation that could be taken into
account by a qualified plan in calculating the benefits due to an employee.
Because Aramony’s salary was in excess of $350,000.00, the effect
of IRC Section 401(a)(17) was to decrease the annual compensation that
could be taken into account in calculating his pension benefits under
the qualified defined benefit plan. Aramony sued under ERISA, seeking
declaratory judgment that he was entitled to the benefits under the
RBP, which was, at least, ambiguous. (The trial court did find that
Aramony was liable to United Way under its counterclaim for, among
other things, breach of fiduciary duty.) On appeal the United States
Court of Appeals for the Second Circuit, the judgment in favor of Aramony
was reversed because the trial court erred in interpreting the RBP
as ambiguous: the RBP can only be read reasonably as not providing
IRC Section 401(a)(17) replacement benefits. Aramony v. United Way
of America, Case No. 00-7146Pv3 (U.S. 2d Cir., May 16, 2003).
3. MONTANA
DC PLAN SUFFERS FATE LIKE FLORIDA’S:
Montana’s retirement plan that allows for self-directed investments
by employees has attracted only 600 of the 30,000 eligible public employees.
In what may be the understatement of the year, the Executive Director
said “we had expected a lot more.” Of course, like Florida’s,
the Montana plan was conjured up in 1999, when the country was in the
midst of one of the greatest stock market booms in history. Everybody
figured they could do better investing their own retirement funds.
Last time we heard about Florida’s brainchild on the subject,
the DC option had attracted only 15,000 participants and $145 Million
in assets. Our readers will remember original estimates of 200,000
participants and $13 Billion in assets. Ha Ha.
4. HOW
WILL YOUR PENSION BOARD HANDLE A “VERMONT WIDOW?”:
On July 1, 2000, Vermont’s law creating the civil union became
effective, legally recognizing marriage-like status for same-sex couples.
Within the state, there is no problem with recognition of same-sex
unions. However, 85% of civil unions created in Vermont have been to
out-of-staters, meaning that other states may have to deal with the
rights of one partner upon death of the other partner. There is also
the question of “divorce.” Like all states, Vermont has
a residency requirement for divorce --six months at time of filing--for
marriage or a civil union. And then one must be a resident for at least
a year before a divorce can be granted. Thus, to end a civil union,
non-Vermonters must either move there temporarily (slightly impractical)
or convince a court in their home state to recognize the union--at
least long enough to dissolve it. Courts of two different states have
recently found that a Vermont civil union is not a “marriage,” and
thus could not be dissolved. However, a trial court in another state
recently allowed a civil union partner to sue as a “spouse” under
that state’s wrongful death statute. As with the “marriage” of
a transsexual (see C&C Newsletter for April 4, 2003, Item 3) it
probably won’t be long before a pension board is faced with a
same-sex “Vermont widow.”
5. CALIFORNIA
WILL ISSUE PENSION OBLIGATION BONDS:
Like New York and New Jersey before it, California will issue $2.2
Billion in pension obligation bonds to help fund its contributions
for this year and next. Had the pension obligation bond bill not been
passed earlier this month, the state would have had to make an October
1, 2003 $650 Million pension payment out of general funds. Overall,
California is facing a record $35 Billion budget shortfall.
6. WHAT
A DIFFERENCE A DECIMAL POINT MAKES:
A slip of the pencil two years ago at the State of Wisconsin Investment
Board, which put a decimal point two places further to the left than
it should have been, almost cost the now-underfunded state pension
plan $4.5 Million. Luckily, a state auditor caught the error during
a routine audit earlier this year, but the system has not yet recovered
the $1.3 Million due from Milwaukee’s plans--one of which is
no longer in the system. The system had reported in 2001 that the return
on its variable equity fund was -.089%, when it was actually -8.90%.
On the fixed fund, which is balanced, the negative 4.6% return was
erroneously reported as negative .046.
7. UAAL,
IN 54 WORDS OR LESS:
A recent column in the Philadelphia Inquirer is a somewhat tongue-in-cheek
bit about unfunded accrued actuarial liabilities--UAALs as they are
called in Actuaryese, which the author believes is a “dialect
of Farsi.” The piece’s title is “The ‘U’ should
stand for ‘UH-OH.’” In any event, the author explains
UAALs in exactly 54 words: “You have a pension fund at work.
It must have money to pay pensions to all current and future retirees.
Actuaries determine how much is needed. If the fund doesn’t take
in enough--in contributions from you, your employer, or income from
investments--you’ve got yourself a UAAL. A hole that must be
filled.” Enough said.
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