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.
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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
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Fire Pension
July 31, 2003
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• 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.
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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.
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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.
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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:
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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.
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fsim Ri 11 Approved by House Committee
The House Ways and Means Committee
approved the pension bill introduced by
Representatives Rob Portman (R -OH)
and Ben Cardin (D -MD) in an extremely
partisan atmosphere, placing the bill's
future in doubt. 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.
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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?
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•
•
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
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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.
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