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Texas Bill Seeks to Boost Employee, Employer Pension Contributions

The Texas House of Representatives unveiled a bill on Tuesday aimed at shoring up the funding status of its pension system.

The reforms specifically target members of the Employees Retirement System (ERS), which is 76 percent funded.

The bill would boost contributions to the System for both employees and employers.

More details from the Texas Tribune:

The roughly $440 million proposal would increase how much the state and its workers contribute to the Employees Retirement System pension fund, which currently holds just 76 cents for every dollar it promises retired workers.

Employees — who gave the plan mixed reviews — would get across-the-board pay raises to ease the strain.

“This is a balanced proposal to assure that neither the state employees nor our taxpayers are expected to fix the problem on their own,” said Rep. Dan Flynn, R-Van, who chairs the House Pensions Committee.

Under the plan, employees and the state would each boost their contributions to the fund to 9.5 percent of payroll by 2017 – 2 percent more than what each would chip in otherwise. Meanwhile, workers would see a 2.5 percent pay boost.

ERS is Texas’ second-largest pension system, with 230,000 members.

ERS Executive Director Ann Bishop testified in front of state lawmakers late last year and warned that pension liabilities, if not dealt with, could hurt the state’s credit rating soon.

New Jersey Grapples With Cost of Pension Bonds Issued in ’90s

In 1997, New Jersey issued $2.8 billion of pension bonds to shore up its underfunded retirement system.

The success of such a plan depends on investment returns outpacing interest payments. But the ensuing dot-com crash threw a wrench into the plan’s efficacy, and more than 15 years later, New Jersey is now dealing with the cost of the bonds.

More on the mounting debt service payments, from Bloomberg:

The payments on the debt, which was sold in 1997 to bolster the public-employee pension plans, are set to grow to almost $500 million in 2020 from $342 million this year, according to a Feb. 13 report released by the state treasurer. The annual cost will remain close to that level until the debt is paid off at the end of next decade.

“The pension debt service is skewed to the out-years,” said Richard Keevey, a fellow at Rutgers University in New Brunswick, New Jersey, who was budget director for former Governor Jim Florio, a Democrat. “It starts out low and rises sharply.”

[…]

Interest and principal payments on debt will rise 15 percent next year to $3.99 billion.

Investors demand additional yield to buy New Jersey debt. An index of 10-year New Jersey bonds yielded about 2.8 percent Tuesday, 0.63 percentage point above AAA munis, data compiled by Bloomberg show. The yield gap reached 0.64 percentage point Feb. 18, the most since at least January 2013.

The pension bonds carry yields as high as 7.65 percent on debt maturing in 2026. Most can’t be repurchased from investors before they mature, which prevents New Jersey from refinancing to take advantage of lower interest rates.

The pension bonds will cost $350 million in FY 2015-16 and $397 million in FY 2016-17, according to the state treasurer’s report.

Photo credit: Lendingmemo via Flickr CC License

Arguments in Illinois Pension Lawsuit Begin Wednesday

It’s been nearly 15 months since Illinois’ pension overhaul was passed, and 13 months since the first lawsuits began rolling in.

Now, the state and its public workers are finally squaring off in the halls of the state Supreme Court.

Arguments over the constitutionality of the law, SB-1, begin on Wednesday.

From the Chicago Tribune:

More than a year of legal wrangling over Illinois’ attempt to curb benefits in the nation’s most underfunded pension system will come down to 50 minutes of courtroom debate Wednesday…

Lawyers for public workers and retirees argue the law violates what’s known as the “pension protection clause” of the Illinois Constitution, which holds that public pensions are a “contractual” benefit and cannot “be diminished or impaired.”

But lawyers for the state argue that the government’s emergency police powers — in this case the ability to fund necessary government services — trump the constitution’s pension guarantees.

The arguments are scheduled to begin at 2:30 pm.

Audio and video of the arguments will be available in the coming days, and can be found here.

UK Pension Group Accuses Barclays of “Misleading Shareholders” Over Executive Pay [UPDATE: Barclays Pay Chief Resigns]

UPDATE: On Tuesday, Barclays announced the resignation of Sir John Sunderland, chair of the bank’s pay review committee.

Barclays says the resignation was unrelated to pressure from the LAPFF, who publicly called for Sunderland’s resignation on Monday.

The bank has been criticized by the LAPFF and others over high bonuses and compensation.

Read the original Pension360 story, published on Monday, below.

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The UK’s Local Authority Pension Fund Forum (LAPFF), a group of 62 public sector pension funds, is taking Barclays to task for failing to replace the chairman of the bank’s pay review committee.

LAPFF, a group that has previously expressed outrage over bank’s “grossly excessive bonuses”, is now saying that the bank promised to replace the chairman of its pay review committee.

But 11 months after the promise, no change has been made.

Study Examines Herd Mentality in Pension Investing

Pension funds exhibit a herd mentality when formulating investment strategies, according to a new paper that studied the investment decisions of UK pension funds over the last 25 years.

The paper, authored by David P. Blake, Lucio Sarno and Gabriele Zinna, claims that pension funds “display strong herding behavior” when making asset allocation decisions.

More on the paper’s conclusions, from ai-cio.com:

According to the study, there was overwhelming evidence of “reputational herding” behavior from pension funds—more so than individual investors.

Pension funds are often evaluated and compared to each other in performance, the paper said, creating a “fear of relative underperformance” that lead to asset owners picking the same asset mix, managers, and even stocks.

Data showed herding was most evident at the asset class level, with pension funds following others out of equities and into bonds at the same time. They were also likely to herd around the average fund manager producing the median return—or a “closet index matcher.”

The paper can be found here.

Photo by Nick Wheeler via Flickr CC License

Kentucky Pension Bond Bill Rejected, Amended in Senate

The Kentucky Senate has rejected a bill that sought to issue $3.3 billion in bonds to help ease the funding shortfall of the Kentucky Teachers’ Retirement system (KTRS).

The bill passed the House late last month, but was stopped short in the Senate on Monday.

Some lawmakers cited the risk of the bonds as a reason for the bill’s rejection; the success of the plan depended on the system’s investment returns exceeding the interest on the issued bonds.

If that were to happen, KTRS could pocket the difference and funding will improve. But if investment returns lag, the pension-funding situation would worsen further.

Senators amended the bill to call for the creation of a task force to examine the pension system and recommend funding solutions.

More on the new bill, from the State-Journal:

The substitute adopted in the Senate Standing Committee on State and Local Government instead directs the Legislative Research Commission to create a Kentucky Teachers’ Retirement System task force to study and make recommendations for funding and stabilizing the retirement system.

The task force will include:

* Six members of the Senate with four appointed by the Senate president, two appointed by the Senate minority floor leader;

* Six members of the House with four appointed by the House speaker, two appointed by the House minority floor leader;

* The House speaker and Senate president will each appoint one co-chair from their chambers;

* The task force will have monthly meetings during the interim and report its findings to the LRC for referral to a committee by Dec. 18, 2015.

The bill is officially called House Bill 4.

Photo credit: “Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons

Arizona Pension Nabs Canadian Administrator for Top Job

The Arizona Public Safety Personnel Retirement System (PSPRS) concluded its months-long search for a new executive this week.

The fund’s Board has selected Kevin Olineck to take over as administrator, according to the Arizona Republic.

More on Olineck, from the Arizona Republic:

Olineck is scheduled to assume his role with PSPRS in October, contingent upon receiving H-1B visa approval from the U.S. Citizenship and Immigration Service, according to PSPRS.

Olineck, of Victoria, B.C., currently works as vice president of member experience for British Columbia Pension Corp., which provides services to five public-sector pension plans that together have more than 500,000 members and more than $80 billion in assets.

Olineck has more than 15 years of experience in strategic and operational positions with both public-sector and private-sector pension systems, and has been a frequent visitor to Arizona for more than 20 years.

PSPRS manages over $8 billion in assets.

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Entering_Arizona_on_I-10_Westbound.jpg#mediaviewer/File:Entering_Arizona_on_I-10_Westbound.jpg

Chart: The Role and Importance of Diversity on Investment Committees

A recent Vanguard survey probed the thoughts of pension investment committee members on the topic of diversity. The members’ thoughts on the meaning of diversity can be seen in the chart above. Below, respondents rated how important they thought diversity was in an investment committee:

Respondents were asked about their satisfaction with the level of diversity on their committees:

Finally, respondents were asked to rate the importance of various factors to committee effectiveness. 19 percent said diversity was “extremely important.”

The full survey results can be read here.

Top New Jersey Lawmaker Calls for Tax on Millionaires to Help Fund Pensions

A New Jersey court ruled last month that the state acted illegally in cutting its pension contributions over the last two years.

As a result, the state will need to pay its full contribution in 2015 – which means New Jersey will need to come up with about $1.6 billion that hasn’t yet been budgeted for.

In lawmakers’ search for new streams of revenue, one idea has come to the forefront.

New Jersey Senate President Stephen Sweeney is proposing a tax on millionaires.

The policy would boost the income tax on earnings over $1 million and could raise $600 million in revenue in its first year, but Gov. Chris Christie has historically been opposed to the measure.

How Would Illinois’ Supreme Court Pension Ruling Affect Public Schools?

Arguments will soon be underway in the lawsuit challenging the constitutionality of Illinois’ 2013 pension overhaul.

Many observers expect the state Supreme Court to uphold the opinions of lower courts and rule the pension law unconstitutional.

If the law were overturned, what would it mean for Chicago Public Schools?

In a column in the Chicago Tribune over the weekend, Chicago Board of Education president David Vitale talked about the implications of such a ruling for Chicago’s schools.

Vitale writes:

You may not realize that if the Supreme Court upholds the lower court’s approach, it will have a significant impact on Chicago Public Schools and the nearly 400,000 students we serve. These consequences are potentially catastrophic, and even under a best-case scenario, would still cripple CPS’ ability to fulfill its obligation to educate these students, many of whom are from disadvantaged backgrounds or in need of special education services. The fact is, CPS does not have the resources to both shoulder the entire burden of saving the pensions and serving its students.

In the absence of changes to pension funding, CPS will be forced to decide between funding the pensions of retired employees and funding the education of Chicago students.

[…]

CPS’ projected deficit for next year is $1.1 billion, and pension costs account for approximately $700 million of that amount. While pension reform alone will not eliminate that huge deficit, it is an essential component of any solution. Without pension reform, there simply will be no alternative to implementing even deeper, more painful cuts that will directly affect the classroom; we have exhausted all other alternatives. To put these cuts into perspective, each $100 million spent on pensions translates into 1,000 fewer teachers. And a smaller number of teachers translates directly into larger class sizes and less attention and fewer educational opportunities for students.

Over the weekend, Moody’s downgraded Chicago Public School’s credit rating to Baa3, one notch above junk. The agency cited pension costs as a major driver of the downgrade.

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