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HomeMy WebLinkAbout2003-08-28 - Agendas - FinalFiremen's Pension And Relief Fund Meeting Agenda August 28, 2003 A Special meeting of the Fayetteville Firemen's Pension and Relief Fund will be held at 11:00 am. on August 28, 2003 in Room 326 of the City Administration Building. 1. Approval of the Minutes: • July 31, 2003 2. Approval of the Pension List: • September, 2003 Pension List Approval 3. Investment Report: • Longer Investments will not be here this month. They have sent a copy of the report for review. 4. Old Business: • LOPFI Plan 5. New Business• • Daran Williams on line log in with Northern Trust 6. Other: • Budget Report from Accounting • Copy of the Monitor Fire Pension July 31, 2003 Page l of 10 Firemen's Pension And Relief Fund Meeting Agenda July 31, 2003 A meeting of the Fayetteville Firemen's Pension and Relief Fund will be held at 11:00 a.m. on July 31, 2003 in Room 326 of the City Administration Building. Present: Danny Farrar, Pete Reagan, Robert Johnson, Marion Doss, Ronnie Wood, Marsha Farthing, Steve Davis, Sondra Smith, Secretary, Kim Cooper with Longer Investments, Attorney Mark L. Martin, Attorney Daran Williams, City Attorney Kit Williams & guest. Absent: Mayor Coody The meeting was called to order by Marion Doss. Report from Attorneys Chuck Stutte and Mark L. Martin: Mark L. Martin: We are here today to report on our progress since the last time we met. There were two issues that we were researching that we told you we would have answers by today on. The first was the issue of how to proceed on this claim, either through levitation or through arbitration, of course there is an arbitration clause in the agreement, we researched it thoroughly, it is our recommendation to this board that we proceed by arbitration, as we pretty much feel it is an air tight clause. We would like your permission to do so at the appropnate time. Our two law firms as we discussed earlier are working on this as a project, first of all we are monitoring the agreement and we are also working together on the losses that have been substained by the Board. We are also here today to answer any questions about how those losses have been identified in value. To the best of our knowledge the losses which have been substained by this organization are $2.9 million, of those we have determined that $1,883,000 are identified losses and we are still exploring another $740,000. Of those identified losses $1,355,920 are securities bought when the ratings were below the required levels, the other $443,000 of losses are attributable to investments m foreign stocks, it is our position they did not have authority to engage in Daren Williams: Mark gave the basic overview, your investment policy outline for your broker how you want to invest and what you should invest in. The investment advisor here clearly acted outside of your investment objectives. $1.3 phis million in securities were bought that do not conform with investment objectives, they didn't at the time of purchase nor have they ever conformed with your investment objects. Those were clearly outside the realm of what your broker should have been investing in. The foreign securities, $443,000, your investment objectives, the ones that we have state that in order to invest in a foreign security, the board had to approve that prior to any investment, so unless there was board approval all of these investments also fell outside the scope of your investment objectives. • Fire Pension July 31, 2003 Page 2 of 10 There were about $84,000 worth of investments that at the time of purchase they were clearly withm your investment objectives. However those securities fell below the weighting of securities that you allowed for investments, therefore your broker should have immediately sold those securities and put them into securities that were within your investments objectives. You have to give them a reasonable time to sell, so to say all that $84,000 is a loss is probably not correct. There is $740,000 worth of investments that we have to do further research on to find out exactly some of the weightings at the time. We did not have time to do extensive research beyond what we could pull from the records that you already had. It is quite possible that many of the investments within the $740,000 are outside the scope, we know for sure some of them are outside the scope, some are within the guidelines but probably fell outside the guidelines while the securities were held within your portfolio. You have a case that is clearly worth pursuing, you have about $2.9 million in potential damages some of which have been identified some of which we have to figure out. A broker has to invest within the investment objectives that you have set forth. Your investment objectives were fairly conservative and for the long term. The broker you had invested in some very volatile stock. Stock which would generally cause you to have tremendous gains or tremendous losses in a short period of time, clearly much of what he invested in was totally outside of the realm of the type of investments that you asked him to invest in. With regard to the arbitration clause it is pretty air tight we could fight and litigate to get around the arbitration clause, it would take a tremendous amount of time; the likelihood of success is probably not on our side. Most cases like this you do not succeed in trying to get out of a signed, sealed arbitration clause. Our recommendation would be to proceed with arbitration. We have had some experience with Merrill Lynch and they have had some problems in Arkansas. Pete Reagan: You first reported $2.9 million as what you calculated, does that include the other $700,000. Daran Williams: We are including all of that as a loss because your portfolio loss that amount during the time that you had this broker. To properly characterize that as a loss that is attributed to fraud or being outside of the investment objective, I have to do more research In the time you had this investment advisor a $2.9 mullion decline in a portfolio this size is alot. Somebody was really not doing their job, clearly an almost $3 million loss in a portfolio this size is a substantial amount, particularly given your investment objectives which were very conservative over the long run as opposed to short term investments. Kit Williams: I wonder about the potential time frame to get to some sort of final resolution. The reason I am asking that is I am confused a little bit about what is going to happen, there has been a suggestion that the pension funds including this pension fund be transferred to the state LOPFI system which is the system for current employed firemen and policemen. I don't know how that would affect this board's ability and the contract that we have with you. That concerns me a little bit especially with that much money out A • • • Fire Pension July 31, 2003 Page of lO • there with you all putting in all this time. Can you give us any kind of indication when is the earliest that you can expect to be able to come to some sort of resolution. Daran Williams: With regards to the timeframe on arbitration, I understand the Board is moving forward with LOPFI in the next several months, clearly this arbitration would not be complete by that time. We are still in the beginning stages, to give you a timeframe of arbitration that is like throwing a dart at a wall. Marion Doss: Do you think about year? Daran Williams: It could be that long. There are not a whole lot of complex facts. There are going to be defensives raised. I believe the action that you may take today in your resolution may speak to how this will be handled if we move forward. Mark L. Martin: What we would like is the opportunity to proceed with this. Kit Williams: I don't know if the Board would remain in any kind of control if they did that. Pete Reagan: I spoke to Cathryn when she was here about his, she will not take plans that are under litigation, she said you keep your Board intact and draft your resolution to reflect that until the asset recovery is completed, then you transfer the administrative powers to LOPFI, but in the interim you can send the money. That is the way our resolution is drafted, that the Board stays intact for the purpose of asset recovery. Kit Williams: But they don't administer it then? Pete Reagan: LOPFI will manage the money. The only reason this Board would stay intact is to deal with asset recovery. I drew the resolution up, this is what was recommended, but it includes some work for Kit to draft an ordinance to reflect all of that. A discussion followed on the resolution that was given out by Pete Reagan. Kit Williams: I will probably ask the Attorney General about our rights and powers and how that could possibly affect the contract. It says we are going to transfer the administration of assets of Fayetteville's Fire Pension Relief Fund, well an asset is this, and you all are representing a big asset, almost a $3 million asset potentially. A cause of action is an asset, so I need to talk to the Attorney General just to make sure that somehow we don't get ourselves in some sort of bind on this if we move to fast. I am a little concerned about somehow getting to a situation, possibly giving Merrill Lynch some sort of defense, saying you are not representing them. We don't want to give Merrill Lynch any possible way out if there is a reasonable chance that we can collect some sizeable money. • Fire Pension July 31, 2003 Page 4 of 10 Mark Martin: I think that is a very good idea, that way we will know that we are going to accomplish what we are attempting to accomplish. Danny Farrar: Kit, how long as far as an opinion from the Attorney General, how long does something like that take. Kit Williams: My experience has been it will probably take two or three weeks to get any opinion from the Attorney General, depending if it's something they don't know anything about it is could be longer, if it something they already know about that they have looked at before, then they would be real fast. Kit Williams: I will go ahead and request that today Steve Davis: The other part of it too, we can split the transfer, right now it is one ordinance. Kit Williams: I have already drafted the ordinance; I drafted it the same for both Police and Fire and police does not have any litigation going on. Steve Davis: We can split them; City Council probably doesn't want to pass this in one meeting. I think we have time to look at as many of the aspects of this that we can. Kit Williams: I will request an Attorney General's opinion hopefully today, if not today certainly tomorrow I will get it out, and have him maybe even advise on how the ordinance should read to make sure that we are protected. Marion Doss: Steve I was under the impression that we needed to move forward on these pretty fast, I don't want to do anything careless and leave anything out. Steve Davis: There are two overriding concerns, one is from the City's stand point we want to make sure that the Fire Pension fund has recorded all of the monies that it is legally entitled to recover, second from the City's perspective we do not want to be put in a position where we have to record an liability on our financials if we can avoid it. The recoding of a liability on the City's financials is of secondary in collectingthe monies due to the Fire Pension Board in recovering as much as we can. Kit Williams: You all have a fiduciary responsibility and we need to make sure to collect all the money that rightfully can get. We have to make sure that we don't do anything to mess that up. The City is concemed about whether or not this goes down on their debt, you concern is you need to make sure the fund has as much asset as it possibly can. Steve Davis: The recording of the debt on the financials, it may be a fairly lengthy explanation in our financial statement but it can work on it. 4 • Fire Pension July 31, 2003 Page 5of10 • Danny Farrar; ICA basically until you get the Attorney General's opinion back, we are on hold. • Kit Williams* I think we ought to be, I want the Attorney General to tell me that we can do this without jeopardizing this lawsuit and the possible recovery of $2 million. That is a lot of money, I will ask him if he wants to suggest any language, so that we can accomplish what we want to accomplish, usually the Attorney General does not draft out any ordinance for you, but I will still ask if he wants to make a stab. I thin they can certainly answer questions about what we can and can't do and when we can do it. Marion Doss; If you get an answer back we could probably hold a special meeting. Kit Williams: I think we could get a meeting called in two or three days. I think in this meeting you should g� forward and give them the authority to get moving. Marion -Johnson: Is there anything you need from us. Daran Williams: What we need is a recommendation with regards to arbitration versus litigation and our reason for that is we would like your authority to proceed with the arbitration. Pete Reagan moved to proceed with the arbitration. Robert Johnson seconded. Upon roll call the motion carried unanimously. A discussion followed on moving the funds to LOPFI. Investment Report: Kim Cooper with Longer Investments: We have in your package the June 30th report just so we can show you where the account stood at the end of the month, at that point your equities and equities mutual funds were about 33% of your portfolio. Your fixed income which includes all the preferred stocks, preferred debt, corporate bonds, treasuries, agencies, those were about 55% of your portfolio, cash and CD's were 10.4%. As of June 30th the total market value was 9.639 million and on that you had a current yield of 3.7%. To show you the difference we have also included a July 25, 2003 report. Your equities and your equity mutual funds are now 40.3%, so we have somewhat Increased your equity exposure, we are still within your investment policy but we have Just done a little bit more buying of some selective items since the end of the quarter. Your fixed income is still about at the same level, about 57% and what we have done is used your cash reserves to increase your equity exposure. As of the end of July your current market value is 9.648 million with again a yield of 3.7%. Page 15 shows what your largest equity holdings are, those are Pfizer, L-3 communications, Microsoft, Minnesota Mining & Mfg and Illmois Tool Works and those are all within the guidelines of your investment policies with percentages that range from 1.4% to 1.1% of your portfolio. The next report that is titled Fixed Income Holdings shows you what the S&P and Moody's credit ratings are on all the bonds that you hold, plus if there are any call Fire Pension July 31, 2003 Page 6ofl0 features on it. That is a report we like to put in there occasionally just so you can see the bonds that are rated, what those ratings are and just let you know what those are. We have some of the bonds that we purchased for you and some of the CD's have matured or been called but as we saw opportunities in fixed income we have gone ahead and reinvested and kept your fixed income level at about the same as it was last month. The one bond on page 17 the Enron Bonds Those are still in default, but we did read some news on that, they have a bankruptcy plan in place and they are saying it will be somewhere under 20 cents on the dollar that you will get on those bonds. We can't sell them out right in the market because they are in default, but once that plan goes through you should get some money back on them. There is also in the back of your packages a copy of that news article. Pete Reagan: We have $32,000 worth of what we bought it at. Kim Cooper: That was your cost; you have 50,000 in bonds so of that $50,000 you will get about $10,000. Page 20 includes a summary of what your income and realized gains have been year to date, you have realized gains through June 30th of $64,000 and your net income, that's just the cash flow on your bonds and your dividends, is $115,000. Page 21 gives you a summary of your bonds and the total portfolio income on the account, right now the your fixed income securities alone are earning 5%, that is the yield to maturity on those securities and then adding all of the stock dividends, your total yield on your portfolio is 3.7%. Your weighted average maturity in your bonds is less than 10 years and as a percent of total portfolio your bonds are about 48%. The next report shows contributions and distributions since inception which have been $760,000. Page 23 is a performance report so far this year equities are up 13.5% and this we also updated through July 25, your equities are up 13.5% year to date, your bonds are up 1 5% so your total portfolio is up 5.5% and since we have been managing the account your total return has been 4.3%. The equity return since inception compares to the S&P which is about 7.4 and the Dow which is 7.2 so you have seen about market performance in your stocks. Page 24 is a report that shows you how we calculated the weighted average credit ratings on. the equities that we hold in your account. Your policy calls for a minimum rating of B and an average rating of B+ and right now you are about at an A-. We have a copy of you investment policy. Marion Doss: Why are some called not rated? Kim Cooper: Some of the small companies aren't rated they a based on market capitalization and Standard and Poor's doesn't rate every single company. There is also B.P. Amoco is a foreign entity and those companies aren't rated. What we do on the companies that aren't rated we assign a rating that's lower that the lowest rating so it doesn't skew your rating on the high side. Pete Regan: Can you tell me what L-3 Communications is Kim. Kim Cooper: It's a defense company they make communications for defense. • • Fire Pension July 31, 2003 Pagel of 10 A discussion followed on previous stock that was sold. Marion Doss: Any more questions for Kim. The Board thanked Kim for her report. Approval of the Minutes: Marion Doss: We didn't get around to approving the minutes of the last meeting. Pete Reagan moved to approve the minutes of the June 26, 2003 meeting. Danny Farrar seconded. The motion carried unanimously. Approval of the Pension List: Marion Doss* I noticed there are a couple of changes on the Pension List. The volunteer firemen received an increase as per Act 1370 is that correct Sondra. Sondra Smith: Yes, I have highlighted that on the report the ones highlighted received the increase, what they were receiving and what they will be receiving with the increase. Marion Doss: So they will receive the minimum for the 20 years of service and some of • them still get the $5.00 per year for each additional year over 20 is that correct. • Sondra Smith: According to Marsha Farthing in accounting yes. Pete Reagan: I was thinking the fund had to be actuarially sound before you could do that Marsha. Marsha Farthing: It was a State Law. I think you all can't pass an increase without it being sound but this was through the State. Pete Reagan: Right, but I thought any time we give an increase it has to go through the Pension Review Board, I don't think that this and I may be wrong, we need to check on this before we approve this, but I think it has to be before we give a benefit increase the fund has to be actuarially sound. Marion Doss: The difference might be this, we are not giving this benefit increase, it might be similar to the one a few years ago where the minimum for paid firemen went to $350 per month and we didn't have anything to do with that it just happened. Sondra Smith: Act 1370state "for voluntary firefighters in no case shall the payment to the retired member be less than $100" and it use to say less than $50 per month "and the payment shall be made in accordance with the justice and equity of each case as determined by the Board of Trustees of the Firemen's Relief and Pension Fund". It says in no case shall it be less than. Fire Pension July 31, 2003 Page 8 of 10 Robert Johnson: So we can do anything we want to as long as we vote yes. A discussion followed. Pete Reagan moved to approve the pension list and the pension increase for voluntary firemen as per Act 1370. Danny Farrar seconded. The motion carried unanimously. Old Business: LOPFI Plan: Danny Farrar: I have a question for Pete, the resolution, on the 10year drop you had a conversation with David Clark addressing it which I am all for and Steve emailed you something back saying he wasn't real sure. Pete Reagan: What I got in our phone conversation yesterday from David because Cathryn was out of the office was that it would have no increase on the cost to the fund or the cost to the City. I asked him if he could put that in writing so I could take it to my meeting, he said well I would share a copy of the email from the actuary but I have already deleted it„ so I said well get me something. I guess in the conversation David had with Steve, he told Mr. Davis that there would be no significant impact, which no impact and no increase is two different things. So Steve faxed this to Cathryn this morning and asked for her comments, and one of the questions was the closed Fire Pension Board wants to consider a ten year drop, what impact this change will have on the calculation dated July 16, 2003. Marion Doss: David Clark sent to Steve on the 28th regarding a follow up on the telephone conversation regarding extending the drop to ten years and allowing continued employment after the drop for your local plan fire members. Due to the fact you are consolidating with LOPFI these previsions would not have a material impact on cost as provided in the consolidated evaluation you received when you were in Fayetteville on the 17th. GRS advised me the cost would not material due to the small number of active local plan participants compared to the active LOPFI participants 5 versus 74 and the low number of active DROP participants compared to the other local plan participants 5 versus 50. Also as you know these provisions only apply to local plan members, not LOPFI members. That was actually from him and it was copied to Steve Davis. Pete Reagan: I did this resolution all on my own and you are free to change whatever you fell like needs to be changed. A discussion followed on LOPFI and the resolution drafted by Pete Reagan. Draw Down: • • • Fire Pension July 31, 2003 Page 9 of 10 Sondra Smith: The draw down memo you we received from Sharon in Accounting was just letting us know that the total amount for all pension plans was the $384,000. Fire was $209,000 for Larry, $78,000 for the pension payments. The $96,000 did come out of the Police Pension. Larry Freedle's Employee Number Missing: Marion Doss: Larry Freedle has a number next to his name now I noticed. Sondra Smith: The numbers are new employee numbers that are assigned after someone retirees. Marion Doss: I just always thought the first guy retired was number 1 and the next is number 2. New Business: Sondra Smith: Someone mentioned at one of the meetings about doing a resolution if you do change the fund to LOPFI showing your support of Longer Investment and what all they have done for the fund since they have had it so there will be no negative effect on there business. Pete Reagan moved to draft the resolution on Longer Investments. Danny Farrar seconded. Upon roll call the motion carried unanimously. Marion Doss: I think it has been obvious that Longer has done a real good fob for us. I want to think Pete for working on that resolution. Steve Davis: I spoke to Cathryn and she is just as interest as we are in not doing anything to jeopardize the claim against Merrill Lynch. So in order to bring this thing to an understanding where we need to go, she and I talked about having a couple of Fire Pension Board members, Marsha, myself and Kit go to Little Rock and talk with Cathryn and the LOPFI attorney, to make sure whatever the plan is it meets with the objectives with both the board and LOPFI and it doesn't jeopardize any of your standings in the claim against Merrill Lynch. Sondra Smith: Why not have their attorney come here. Steve Davis: Because their attorney cost them money, the LOPFI attorney is going to charge four hours of travel time at their normal billing rate. Pete Reagan: Steve don't you think a teleconference can settle this. Steve Davis: Probably could. A discussion followed on doing a meeting via a telephone conference call. Fire Pension July 31, 2003 Page 10 of 10 Marion Doss: Let's explore that and try to set a time up and do it that way. Manon suggested Thursday, August 7, 2003 for the conference call. A discussion followed on the date and time for the conference call. Meeting adjourned at 12:00 PM. • • • a uA 283112 N555 5155 6 555N 55 5-- - .- - - E Of Ol7)mal. 10xomola10mmolc OfT molm0xmmomOxN01 OITOfNN0f Y1i. O 0 Ma Oa Oa Ca F S •F P SSSSS 1 111` 11 1.1 1 MIZEI gUNEEMERMINEI EINEMINIU Aggq• I�FEIEFfi C �.x.1 '�. C� P�.' .� �W �P 6 �f.7 Pg 8'. 8 o C 8 E 8 6. 8 s 8 FOOMMMMMFIMtaMMMMhhFOPIM�ifIWOIMMWMMMHIPIMMM4iMk,. f�.: �: • �., 111111111E1111/1111/11111/1111111111111[: :. 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During consideration of HR 1776, the Democrats walked out of the session to protest the fact that the chairman provided a revised copy of the bill at midnight and expected them to vote on it the next day at 10:00 am. This resulted in the chairman calling the Capitol Hill police to arrest the Democrats, followed by verbal assaults, and much publicity. The bill was finally approved by the committee, with all Republicans voting yes and the Democrats not in attendance. Since then, Chairman Thomas (R -CA) has apologized to the House for his actions. The Democrats tried unsuccessfully to have to the bill returned to committee -- losing both votes on a party -line vote on the House floor. It is unclear at this time whether HR 1776 will go to the floor or be returned to the House Ways and Means Committee for reconsideration. The issue will not be settled until September when the House of Representatives returns from its August recess. The Speaker of the House of Representatives said such a decision will be made by the committee, not by the speaker. There are several public pension issues contained in HR 1776, which started out as a bipartisan bill. The cost of the bill is $48 billion over 10 years. Included in the bill approved by the Ways and Means Committee on July 18 are the following provisions: 1. Accelerate the contribution savings limits for 401(k), 403(b) and 457 plans so the maximum limit [$15,000 which was to take effect in 2006] would take effect in 2004 and be indexed for inflation thereafter. 2. Accelerate the catch-up contribution limits for those age 50 and above to 401(k), 403(b) and 457 plans so the maximum limit [$5,000 which was to take effect in 2006] would take effect in 2004 and be indexed for inflation thereafter. 3. Exclude from taxes a portion of first five years of "lifetime annuity payments received under qualified plans and similar employer-sponsored retirement plans [401(k), 403(b) and 457] and IRAs beginning in 2004. 4. Eliminate the 10 percent early distribution penalty on withdrawals by public safety officers from a DROP plan before age 55. 5. Clarify the purchase of service credit through 403(b) and 457 plan transfers and provide greater portability between government pension plans. 6. Gradually increase the age at which minimum distributions must be taken from the current age 70 1/2 to 75 by 2008. The number of people retiring with health insurance has dropped significantly since 1996 — dropping from 46 percent in 1996 to 39 percent in 2000. 7. Increase portability by allowing workers to transfer pension savings to a spouse's retirement plan, allowing rollovers by non -spouse beneficiaries, and allowing direct rollovers from workplace retirement plans to Roth IRAs. Unfortunately, two provisions were not included in the bill that are strongly supported by NCPERS. These are: 1. Allowing retirees to pay for their portion of the employer-provided health insurance premium with pre-tax dollars from their defined benefit or defined contribution plan [401(k), 403(b) or 457]. 2. Allowing excess amounts in an employee's cafeteria plan [flexible spending account] to be contributed to a 401(a), 401(k), 403(b) or 457 plan or IRA. When the House of Representatives returns, a decision will be made regarding the bill's future. NCPERS is working to ensure that the bill remains a bipartisan bill. The Senate is expected to consider a pension bill in the fall and NCPERS is working with Senate staff to ensure the public pension provisions are included in their bill. Prer ptim Drug Conference Continues to Meet The House and 'Senate conferees responsible for reaching agreement between the House -passed prescription drug bill, HR 1, and the Senate -passed bill, S I, have not made significant progress. Both bills passed on June 27. The Senate bill passed by a vote of 76- 21, while the House bill passed by a vote of 216-215. One of the sticking points in the conference is the issue of whether to allow the importation of drugs from other countries, where they sell for less than in the United States. The House bill allows for importation from 25 countries; the Senate bill only allows importation from Canada, but only if approved by the Secretary of' HHS. Most supporters say this approval would kill the plan. The House approved a bill to' allow importation of drugs from 25 industrialized countries by a vote of 243-167, giving House conferees instructions to include this provision in the conference agreement. The House Republican leadership attempted to kill the bill (HR 2427), but were unable to do so. Importation of drugs is opposed by drug manufacturers and AARP. However, given the margin of the vote in the House on HR 2427, it would seem such a provision would have to be in the final bill to win House approval. • Another issue is whether to extend Medicare prescription drug benefits to elderly Medicaid beneficiaries. States have seen the costs of Medicaid skyrocket in recent years and strongly support such an effort in order to reduce state costs. The Senate bill keeps drug benefits for elderly Medicaid beneficiaries under Medicaid, thus keeping the costs with the states. The House bill shifts the costs to Medicare over the next 15 years. If the costs are shifted to Medicare, the states would save over $7 billion a year in Medicaid spending. The great concern is that as state budget deficits worsen and baby boomer retire, states will face either higher costs orbe forced to reduce coverage, thus denying many elderly citizens drug benefits. • According to the Americans for Tax Reform, workers had to work an extra 4.5 days this year in order to eam enough to pay their taxes. Under President Bush, the costs of govemnrohl have increased sharply -- federal spending has shot up 12.4 percent, while regulatory spending has dimbed 8.4 percent. IRS Issues Final 457 Regulatichrls The IRS has issued the final 457 regulations affecting governmental plans. The final regulations appeared in the July 11 edition of the Federal Register, at 68FR41230. The. final regulations contain solutions to the issues raised by NCPERSto the Treasury Department and IRS. The biggest issue raised was the proposed regulation limiting transfers and purchases of service credit to within state plans. In other words, an individual could not use 457 funds from one state to purchase service credit in another state. The final regulations eliminated this restriction and provided guidance on how transfer -to -transfer and purchase of service credit can work. Prices of presrxiption drugs taken by seniors rose more than three times the inflation rate last year. The casts increased by 6 percent, while inflation rose by 1.8 percent. — according to Families USA The final regulations cleared up some issues raised as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that made substantial changes in the 457 plans. The regulations also cleared up laws passed over 20 years relating to 457 plans. Some key provisions include: Allowing interstate plan-to-plantransfers between eligible governmental plans and permitting interstate transfers following severance from employment. Transfer of an entire 457 plan is allowed with the same state. Interstate plan -to -plan transfers are allowed between a 457 plan and a defined benefit plan for the purchase of service credit. Terminating employees are permitted to defer vacation pay, sick pay, and back pay into the plan before the month when these benefits are available. The 457 plan regulations are retroactively effective for tax years beginning after December 31, 2001. New 401(k) Regulations Are PZupised The IRS has issued proposed regulations providing guidance for 401(k) plans. These proposed regulations incorporate changes in the law dating back to 1994. The regulations are proposed to be effective for plans 12 months after publication of the final regulations. There will be a public hearing on the proposed regulations on November 12, 2003, with written comments due by October 22. The proposed regulations were published in the Federal Register, July 17. The IRS plans to issue regulations on 403(b) plans sometime later this year. Mr'DFDC Thn Vnira fnr Dnhlir Dancinne nn..,,eI /eo..rere. r.er )nnl AFL-CIO Says Defined Benefit Plans Under Ittack The AFL-CIO Center for Working Capital has issued a report detailing how defined benefit plans are under attack in the private sector. There are many parallels between the private and public sector. The report states that worker defined benefit plans are under attack not only because of the economic conditions, but under attack as worker benefit programs. The report states, "A relatively recent shift in the way employers provide retirement benefits has undermined retirement security by exposing workers to much greater risk, exacerbating the effects of swings in pension asset values, f and limiting the types of retirement benefits available to them. The harm caused by this change will be felt for decades into the future. Defined contribution plans eliminate structural safeguards like pension insurance, strip away advantages like plan -subsidized early retirement and postretirement benefit increases, and undercut a century's worth of public policy, legislative and collective bargaining work designed to promote retirement security, not just retirement'savings." The report concluded that defined contribution plans provide the potential for greater retirement savings and income, but they cannot offer the security of a defined benefit plan. NCPERS agrees with this statement and is on, record in support of defined benefit plans from Congress Two issues are currently facing members of Congress. First, they must approve the 13 annual appropriation bills that fund the government. The new fiscal year begins October 1. Unless the bills are signed into law, Congress will have to fund the government through continuing resolutions, like they did last fiscal year until the final bill, incorporating 11 of the 13 appropriation bills, was adopted in February. As we move closer to the election, this process becomes more difficult. and defined contribution plans as add-ons to the defined benefit plan, but not as a replacement for it. The report is entitled, "Retirement in the Balance: The Crucial Role of Defined Benefit Pension Plans in Achieving Retirement Security in the United States." More information about the report and the Center for Working Capital can be found on their website: www. cen terforworkingcapi tal. org. It is estimated that health care costs will increase almost 8 times the inflation rate in 2004. The current budget resolution adopted by Congress includes $137 billion in savings by eliminating "waste fraud and abuses" in the government over the next ten years. It is not surprising that none of the committees has found any such savings to date. The proposed budget adds $455 billion to the deficit. Unless the economy makes a "miracle recovery," this deficit number will go higher. Second, the budget also provides for $400 billion in spending on a Medicare prescription drug program. The House and Senate have enacted bills to deal with this issue and both are in the $400 billion range. However, as indicated by the last issue of The Monitor, the bills vary greatly. To reach a compromise, the biggest issue will be the $400 billion cost. Those participating in the conference, as well as other members of Congress, are talking about adding benefits or expanding benefits, all of which will drive up the cost. The House Energy and Commerce Committee is looking at a related issue, namely, hospital billing of uninsured patients. The common perception is that uninsured individuals do not pay for hospital care. However, the facts are these individuals pay far more for the exact same procedures as individuals with health insurance coverage. For example, the committee cited a hospital which charged 304.8 percent markup over actual costs for uninsured patients. The committee stated, "While the third - party health plans have bargained to pay far less than these retail charges, individual uninsured patients are expected to pay this full, undiscounted, 'sticker' price." Research data show that 84 percent of individuals without health insurance coverage are employed. Additionally, 16 percent earn over $75,000 per year, and another 16 percent earn between $50,000 to $75,000 per year. The charges to these individuals, who are self -pay, uninsured and usually walk-in patients, account for as much as 35 percent of the profits made by hospitals. Unless Congress addresses this issue, health care coverage for prescription drugs could be meaningless. They also need to look at the issue of health care costs as hospitals have merged or been taken over by other hospitals. Has the reduction of health care competition increased the price of health cam for all patients — those with insurance and those without insurance? NATTr1Nal r'rnNFFPFNr'F r1N PURI Tr- FMDI r1VFF PPTTAFMFNT cvcTFMG a,,.+tecn♦ -inns • • New Yet At the end of May, Governor Pataki signed legislation that will reduce state and local government pension contributions by $1.6 billion this fiscal year. The bill was designed to stabilize long-tcrm contributions by phasing in increases. The law will require public employers to contribute at least 4.5% of payroll annually. In addition, it changes the billing cycle, so that contributions will be determined a year in advance. Finally, the bill authorizes employers to borrow for contributions over 7% of payroll. If this legislation was not signed into law, public employers were facing substantial contribution increases. Medicaid Cost Savings Three states (Michigan, South Carolina and Vermont) that formed a prescription drug purchasing pool less than a year ago have saved between 25 - 50% in Medicaid costs. Louisiana Citing poor investment performance and bad "chemistry" with pension fund officials, board members of the Teachers Retirement System of Louisiana fired the fund's director. The board invoked a clause in the contract with Brian Mintum, allowing for him to be fired for no cause with 90 days advance notice. Mintum's former assistant, Bonita Brown, has been named his replacement until a formal search is conducted. While the board asserts the reason for the firing stems from chemistry issues, Minturn believes he was let go because he "found and reported ethics violations by board members." Michigan Citing difficulty in obtaining information about the venture capital funds, the pension board for the Kalamazoo city and county, voted unanimously to not invest in the funds. The board felt it would be a risky investment choice. "Venture capital funds are not regulated by the US Securities and Exchange Commission (SEC)," stated John Nelson, chairman of the board. The board had been asked to look at the issue in May, when the county created a $150 million venture capital fund to help scientists that had been laid off from Pfizer, Inc create new companies in the area. It was hoped that the pension fund would invest 2-3% of the fund's assets. This proposal was mired in controversy, as current and former employees expressed concerns about such a risky investment decision. Public employees in San Bernadino will no longer be part of the state's health insurance program. Citing increased costs, fewer provider choices, benefit plan changes and noncompetitive rates, the San Bernadino City Council voted to pull out of the program. "We can provide medical insurance for our employees at a reduced rate," stated Linn Livingston of the city's Human Resources Department. In Los Angeles, a state appellate court ruling will give 8 years of back pensions to some retired workers. The case referred back to a state Supreme Court ruling that required bonuses and any unused sick or vacation time to be included in salaries in order to determine the final pension. The ruling will cost the state an additional $190 million. The California Court of Appeals ruled that the San Louis Obispo County Pension Trust will receive $3 million in lost investment income. The loss came from a glitch in a computer program used by a former actuary, which did not provide for the payout of survivor benefits. The actuarial firm worked for the pension trust for 16 years when it discovered the problem. This made the county's contributions to the fund less than what they should have been. Ohio The executive director, Herb Dyer, of the Ohio State Teachers Retirement System (STRS) will be stepping down. In a 5-3 vote, the board of the $47 billion pension fund accepted the negotiation settlement. Dyer had a 6 'h year contract that did not end until June 30, 2005. However, the decision to remove Dyer came after questionable travel practices and spending on director bonuses came into play, followed by insensitive remarks and increased retiree health care costs. Colorado State workers in Colorado are retiring at a very high rate. 33% more workers have ended their employment this year, than did last year. The exodus is attributed to budget cuts, an aging workforce and retirement incentives. Colorado also has a slightly older civil service population, with the average age of workers being 44.5. Another reason for the sudden rush to retire is to do so before the rates to purchase extra years for their pension increases in November 2003. Colorado is expected to see up to 40% of their government's workforce retire in the next five years. A recent study done by Standard & Poor's contends that public pension plans are becoming a bigger drain on state and local government resources. The full report can be viewed at http://www.standardandpoors.com STATE continued Nr DrDC Tho Vniro fnr Dnhlir Dancinnc ,,n,, - /cor*a."r.or ')nn' continued from STATE Georgia Employees of the Fulton County government can now get health insurance and other benefits for their domestic partners. The Board of Commissioners approved the benefits by a vote of 4-2. The policy is unique in that it applies only to same-sex partners, as the board decided that straight couples have the option of marriage, whereas gay couples do not. Employees wishing to apply for the benefits must fill out forms declaring that they are in a "committed relationship." In another part ofthe state, Atlanta officials are looking into improper pension payments made to deceased fire and police retirees. Over four years, 218 accounts (out of 1,300 that were examined) received questionable payments. Officials indicate that they will seek repayment from anyone that was overpaid, even if the overpayment was made in error. Oregon Two bills will appear on the ballot September 16 allowing voters to decide whether to refinance the unfunded debt of the Public Employees Retirement System (PERS). The bills call for offering $2 billion in pension bonds. The bills passed both the House and Senate and await the signature of the governor before the September referendum. According to th Oregon Constitution, the state mut receive voter approval on general obligation bonds that exceed $50,00( with the exception of bonds for roa projects. Natianl Finally, some good news for pensio returns! Many pension funds saw a 10 15% improvement in funding levels at th end of June 2003. Six month return averaged 9%, with year-end return around 3.8%. While the one-year retum are often still below actuarir assumptions, most pension funds ar happy to be out of the red. The good news is that government employees are covered by defined benefit pension plans and covered by health insurance. Needless to say, this didn't just happen. It occurred because of the work of NCPERS and others who are committed to ensuring that government employees have excellent defined benefit plans for their retirement and good health insurance coverage during their employment and retirement years. For the past 62 years, NCPERS has worked to protect defined benefit plans and opposed attempts to reduce, raid or destroy these plans through mandatory Social Security coverage of non -covered employees. That commitment is as strong today as it was 62 years ago and it will continue to be the primary goal of NCPERS. We will oppose all attempts to dismantle these plans or replace them with defined contribution plans. As for health insurance coverage, a recent study showed that 91 percent of government employees had health care coverage provided by their employers, while only 62 percent had similar coverage in the private sector. However, many of the government plans gave their employees double-digit increases in premiums, with an average increase of 12.8 percent. The premium increases ranged from 38 percent in Wyoming to 1.3 percent in Georgia. Government employees paid an average of $276 monthly for single coverage and $643 monthly for family coverage. The highest single coverage was Alaska ($635 per month) and the highest family coverage was Maine ($1,110 per month). Employee contributions ranged from $0 to $125 per month for Frederick H. Nesbitt, Executive Director/ Legislative Counsel single coverage and from $0 to $486 per month for family coverage. Our retirees are seeing their premiums also increase. Some have had to pay a part of the premium for the first time ever. All of this affects retirees living on a fixed income. Next year doesn't look brighter. A recent survey predicted that health insurance premiums would increase as follows: up 16.4 percent for HMOs; up 16.1 percent for point -of -service providers; up 15.7 percent for PPO plans; and up 17.21 for indemnity plans. The Congressional Budget Office (CBO) had even more bad news, especially for retirees. CBO estimates that if the Senate Medicare prescription drug bill became law, over 37 percent of Medicare beneficiaries would lose their employer-sponsored drug coverage. CBO estimates that 31 percent would lose their drug coverage under the House -passed bill. The loss of employer coverage for retirees has been most severe among men aged 65-69 (their coverage dropped from 50 percent to 41 percent between 1996 and 2000), while the drop in coverage for women in the same age group was from 41 to 38 percent. The study shows that employers are cutting back on younger retirees and many male retirees are being covered by their spouse's health benefit plan. Congress must address these issues in any prescription dnig bill adopted and signed into law. IUr'DGDC The Vnire fnr D,ihlir Dencinne And—encat