Pension360

Last week, Pension360 covered former San Jose Mayor Chuck Reed’s push to get a pension reform measure on California’s statewide ballot in 2016.

Details are sparse on what exactly the measure would look like.

But based on Reed’s comments to the media in recent weeks, it’s likely the measure would aim to make it easier for cities to cut pension payments to CalPERS, or reduce the cost of leaving the system entirely.

In any case, union leaders are already indicating that the fight against the measure will be hard-fought – and exceptionally expensive for both sides.

From the National Review:

[The potential ballot measure is] a direct challenge to the state’s unions, and one that Dave Low, executive director of the California School Employees Association, promised that labor would answer forcefully. “If that’s the direction they go,” he said, “it’s going to be World War III.”

And what an expensive war it will be: In 2005, unions spent about $100 million against a series of ballot measures on teacher tenure, union campaign spending, and other topics pushed by then-Gov. Arnold Schwarzenegger, including $60 million from the California Teachers Association alone.

“We will spend whatever it takes to defeat it,” Low said of the pension-reform initiative. “No other issue gives rise to the same level of strong opposition from rank and file members than this issue.”

The plan’s supporters won’t be so well funded, Reed admits, but the question is how big the spending gap will be. Reed has been “using the ballpark number of $20 million” when planning how much they’ll be able to spend. (Steve Maviglio, a Democratic strategist and the spokesman for Californians for Retirement Security, said he thinks Reed and his allies will have to spend $30-50 million to have a shot at getting the ballot initiative passed.)

To put the measure on the 2016 ballot, Reed and his backers will need to obtain the signatures of 585,000 registered voters, according to Reuters.

New York is one of a handful of states that has a great track record of making its full annual pension contributions over the last 10 years, according to a report by the National Association of State Retirement Administrators.

It has achieved that result, in part, through a process called amortization, which lets the state defer part of its obligation.

The amortization process was set to end this year. But in his recent budget proposal, Gov. Andrew Cuomo recommends the state defer an additional $1 billion in pension payments over the next five years.

From Capital New York:

Governor Andrew Cuomo, a Democrat, proposed another five years of “pension amortization” in his proposed $141.6 billion budget, the state’s most recent financial plan shows.

[…]

The amortization program lets them defer a portion of their bills and pay them back over 10 years, at interest rates between 3 percent and 5 percent, a move critics say is akin to borrowing. Dozens of municipalities have used the program, holding their short-term costs down to prevent tax hikes or reductions in other services.

The state has deferred $3.2 billion in payments since 2011, and was set to stop borrowing this year. The budget division reversed course in October, after DiNapoli’s office announced it was adjusting the way contributions are calculated to reflect longer lifespans.

Cuomo’s spending proposal includes another five years of amortization, including $395.1 million in the upcoming fiscal year. Members of both the State Senate and Assembly accepted the idea in their one-house budget resolutions.

One group, the Citizens Budget Commission, estimates that amortization has cost the state $144 million in interest payments so far. The latest round could increase the tab to almost $800 million.

The New York State and Local Retirement System (NYSLRS) is 92.2 percent funded.

 

Photo credit: Andrew Cuomo by Pat Arnow.jpeg: Pat Arnow derivative work: UpstateNYer (Andrew Cuomo by Pat Arnow.jpeg) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

The Bank of New York Mellon on Thursday reached a $714 million settlement with investors who claimed the bank defrauded them by intentionally assigning them high rates on Forex transactions.

[Read the official court document here.]

A handful of pension funds will be receiving a chunk of that settlement, including two of Ohio’s largest.

From the Columbus Dispatch:

Two Ohio pension funds — the Ohio Police & Fire Pension Fund and the School Employees Retirement System of Ohio — were among the four pension funds that led the class litigation, said the office of Ohio Attorney General Mike DeWine.

Together, the two pensions stand to recover about $5 million as a result of the resolution.

The bank was accused of executing currency trades at a rate that was less favorable than the “ best possible” rate they promised their clients, enabling the bank to make extra cash.

Bank of New York Mellon — one of the world’s largest so-called custodial banks, which holds and safeguards financial assets for other banks and investors — said in a statement that it was pleased to put the matter behind it.

The two other pension funds who were lead plaintiffs: the Stationary Engineers Local 39 Trust Funds and the Southeastern Pennsylvania Transportation Authority (SEPTA).

 

Photo by Sarath Kuchi via Flickr CC License

Brian White the chief executive officer at the San Diego County Employees Retirement Association (SDCERA) announced this week that he is stepping down from his position.

March 30 will be his last day at the fund, according to the San Diego Union-Tribune.

The last six months of White’s tenure were defined by negative media attention relating to the fund’s investment strategy, which employed extensive use of leverage.

More from the San Diego Union-Tribune:

“SDCERA has enjoyed great success, which I expect will continue,” White said in a statement. “Serving as SDCERA’s CEO has been an incredibly rewarding professional experience.”

White’s announced severance will be $250,000, about one year’s pay, plus accrued vacation and sick leave.

[…]

White’s duties will be taken over on a temporary basis by management consultant David Wescoe, a career financial professional who is credited with turning around the troubled San Diego city pension system nearly a decade ago.

White, 64, was the first and only chief executive officer of the pension system as an independent agency. He joined the organization in December 1996, when the fund separated from the county treasurer’s office.

SDCERA has recently lost two other top-level officials: chief operating officer Mark Mimnaugh and general counsel Steven Rice. Neither has been replaced.

Earlier this week, Maryland lawmakers approved a state budget that carries implications for the state’s pension fund.

Under the new budget, the state’s annual contribution to its pension system will be reduced by $75 million annually.

The state’s official actuarial contribution remained untouched; but the state had also promised to make supplemental contributions to the system, on top of the actuarially-required payments.

It’s the supplemental contributions that were slashed.

More from the Maryland Reporter:

The committee switched payments into the pension system to the full actuarial contribution but it did not totally eliminate a supplemental payment into the pension fund promised to state teachers and employees when their own salary contributions into the system were raised in 2011.

The state will now pay an extra $75 million into the pension fund each year, not the $150 million expected next year or the $300 million initially promised.

“We get to full 80% funding by 2023″ as planned, said Del. Ben Barnes, D-Prince George’s, chair of the pension subcommittee.

“I’m having heartburn for us not keeping our commitment,” Del. Mike McKay, R-Allegany.

“The actual funding is reasonable is if we were doing it the whole time,” said Del. Tony McConkey, R-Anne Arundel. “If we have a couple of bad years [on investment returns], we’re not going to be where we need to be.”

State Treasurer Nancy Kopp, chair of the State Retirement and Pension System Board of Trustees, expressed the board’s rather muted objections to the move.

“The board is concerned that, to the extent proposal for further changes deviate significantly from the reforms adopted [in 2014], such changes … might result in a pattern of reduced funding that threatens the viability of our shared goals to properly fund the System to ensure the full payment of all benefits that have been promised.”

The Maryland State Retirement and Pension System managed $45 billion in assets as of December 31, 2014.

 

Photo by TaxRebate.org.uk via Flickr CC License

Three researchers were awarded the Commonfund Prize this month for their paper on the performance of pension consultants’ hedge fund recommendations.

The paper, titled “Picking Winners? Investment Consultants’ Recommendations of Fund Managers”, found that consultants typically recommended larger hedge funds, but those picks often underperformed.

More from ValueWalk:

The study of funds from 1999 to 2011 showed that, on an equal-weighted basis, the portfolio of all products recommended by investment consultants delivered average returns 1.12 percent annually lower than the returns obtained by other products available to plan sponsors, which are not recommended by consultants.

[…]

The study from Tim Jenkinson and Howard Jones at University of Oxford and Jose Martinez at the University of Connecticut found that “investment consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows,” the report noted. However, the most significant fact was that the study found “no evidence that these recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.”

The study determined that the largest hedge funds, with the highest level of assets under management, receive the highest number of recommendations.

[…]

The importance of these consultants to pension funds was clear, as 63 percent of respondents to the 2011 Pensions and Investments survey said their investment consultants were “crucial” to success, while another 40 percent said consultants as “very important.” While 26 percent rated consultants as “somewhat important” it was a small minority who did not value the consultant’s advice.

Read the full paper here.

 

Photo by www.SeniorLiving.Org

Kansas lawmakers on Wednesday considered a bill that would force the state’s pension system to divest from companies that are invested heavily in Iran’s petroleum industry, according to a report from the Lawrence Journal-World.

The bill was examined and debated by members of the House Pensions and Benefits Committee. A committee vote on the measure could come as soon as Friday.

More from the Associated Press:

The bill, which comes amid a spat between Republicans and Democrats in Washington over President Barack Obama’s handling of Iran, would require the pension system to sell stock in any companies that had invested $20 million or more in Iran’s petroleum industry since 1996. That would immediately impact the Kansas Public Employees Retirement System’s $68.5 million investments in Royal Dutch Shell, Total and Toyota.

KPERS would be required to notify those companies of the move, and if the companies did not divest from Iran voluntarily, KPERS would be forced to sell their stock within 12 months.

Republican Rep. Scott Schwab of Olathe, who sponsored the bill in the Pensions and Benefits Committee, said it would keep Kansas public employees from unwittingly contributing to Iran’s economy and reduce the pension fund’s investment risk should relations with Iran deteriorate.

“You’re also protecting our assets because if we do go to war with Iran — I believe that day will come, I think there will be a day that we go to war with Iran — they’re not going to gobble up our resources,” Schwab said.

KPERS executive director Alan Conroy told the AP that the move to divest would carry costs, including $8,000 in research expenses.

Additionally, he predicted up to $2.6 million in investment losses from being forced to sell positions in major companies like Toyota and Royal Dutch Shell.

 

Photo credit: “Seal of Kansas” by Sagredo. Licensed under Public Domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Seal_of_Kansas.svg#mediaviewer/File:Seal_of_Kansas.svg

Last month, the board of the New Orleans Municipal Employees Retirement System (NOMERS) produced a list of potential benefit cuts and changes that could reduce pension costs for the city.

The suggestions were the result of mounting pressure on the pension fund to work with the city to reduce its annual payments, which totaled $20 million in 2014.

At a more recent meeting on Wednesday, board members debated ways to reduce costs without changing benefits. Ideas were tossed around regarding tweaking actuarial assumptions and amending the fund’s amortization period, according to the Times-Picayune.

From NOLA.com:

Edgar Chase, the chairman, said the board needs to find ways to reduce, or possibly cap, the city’s annual contribution. He suggested tinkering with the fund’s actuarial assumptions as one way to achieve that.

[…]

Pension systems have some flexibility in terms of how quickly they plan to pay down their unfunded liabilities. Since longer amortization periods mean lower annual payments, cities have an incentive to stretch them out as long as possible.

The municipal employees’ pension fund currently assumes an amortization period of 15 years, making it one of the most conservative pension systems in the country in that regard. Actuarial standards permit stretching the period up to 30 years.

Given the pressure to keep costs in check, it may be time for the NOMERS board to consider taking a more liberal stance, Chase said.

Tweaks to actuarial assumptions can ease a city’s financial burden and are common practice across the country, but they aren’t without risk, according to fiscal hawks.

Critics have long said such actuarial wizardry can mask systemic problems.

[…]

The municipal employees board did not move to amend its amortization period Wednesday, but the conversation speaks to the pressure members feel to reduce costs for the city.

NOMERS manages $372 million in assets.

Illinois Gov. Bruce Rauner indicated this week that he’ll attempt to implement his own pension reform plan, regardless of how the court rules on the state’s 2013 overhaul.

Rauner said that SB-1, the state’s pension overhaul that is currently being challenged in court, doesn’t go far enough.

So, regardless of whether the law is upheld or overturned, Rauner said he plans on moving forward with his own version of pension reform. From Illinois Public Radio:

Republican Governor Bruce Rauner says he’ll push forward with his pension fix no matter how the seven justices rule on the 2013 legislation that was passed and signed into law before being put on hold by litigation.

The state’s highest court heard oral arguments last week on the package, which reduces benefits for both retirees and current workers. Projections are that it’ll save the state $137 billion over the next few decades.

Rauner says even if — and that’s a big if — the court upholds the law, more needs to be done.

“Even if the Supreme Court says the old pension change is fine,” the governor said, “it doesn’t fix enough of the problem.”

Rauner says he doesn’t like that the current law slices retirees’ benefits.

“Our plan saves far more money and is more reasonable,” the governor said, “and, frankly, if we did both, that’d be even better for taxpayers. But I believe ours is more reasonable, more fair.”

Rauner’s plan would not affect current retirees. But it would mean big changes for current workers and new hires.

The plan would, among other things, give workers the choice of receiving smaller pension benefits or transferring into a 401(k) plan.

A refresher on the rest of the details of Rauner’s reform plan, from Illinois Policy:

Employees who choose [the 401(k)] option will receive a lump-sum payment to be used as a starting balance for a defined-contribution plan in exchange for a voluntary reduction in their cost-of-living adjustments.

[…]

* Retirement age: Benefits earned before July 1, 2015, could be obtained at the retirement ages now in law, but payment of newly earned benefits could not commence until age 67.

* High-salaried pensions: A cap on the final average salary used to calculate benefits will be placed on newly earned benefits for high-salaried pensions. This cap increases annually.

* Salary spiking: To prevent late-career teacher salary spikes that drive up decades of benefits, the end-of-career salary cap will be changed from the current 6 percent per year to the prior year’s increase in the consumer price index. Any pension costs caused by salary increases above inflation will be paid by the local employer.

* Overtime pay: Going forward, overtime pay will not be counted in an employee’s final average salary. This reform also prevents expensive lifelong benefits triggered by short-term salary spiking.

Read the bullet points of Rauner’s budget proposal here.

 

Photo by Tricia Scully via Flickr CC License