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Philadelphia Pension Debt “An Obstacle” to Long-Term Growth, Says City Oversight Board

The Pennsylvania Intergovernmental Cooperation Authority (PICA) has released a report stating that Philadelphia’s pension system will be “an obstacle” to the growth and prosperity of the city.

The report says that pension costs need to be lower and more predictable for the city to grow.

The recommendations provided in the report, as reported by Philly.com:

The report’s recommendations included:

Making all new employees join the city’s hybrid pension plan, called Plan 10, which is similar to a 401(k). Mayor Nutter tried doing this in the last round of negotiations with the municipal unions, but lost.

Abolishing the controversial Deferred Retirement Option Plan (DROP), which allows city employees to pick a retirement date up to four years in the future, then accumulate pension payments in an interest-bearing account while still earning their salary. They collect a lump sum upon retirement. Council would need to pass legislation to abolish DROP.

Increasing employee contributions to the pension fund. Civil employees contribute between 3.95 percent and 4.75 percent of their annual wages. The median employee contribution for the 10 largest American cities is 6 percent, according to the report.

Lowering expectations for the rate of future returns on investments from 7.85 percent to near 7 percent.

The city’s pension system is 47 percent funded.

Read the full report here.

Photo credit: “GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania” by Massimo Catarinella – Own work. Licensed under CC BY 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg#mediaviewer/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg

CalPERS Board President Feckner Re-Elected to 11th Term

The president of CalPERS’ board of administration, Rob Feckner, has been reelected to his 11^th term. The term is one year long.

The board held the vote on Tuesday.

Feckner has sat on the board since 1999.

Pension Checks of Some Milwaukee County Retirees in Jeopardy After Acting on Government Advice

A few hundred Milwaukee County retirees are facing reduced pension checks in the future – all because they took County advice that for years resulted in benefit over-payments.

The retirees were receiving bigger payments because they were following County advice regarding “buy ins” and “buy backs.” But the overpayments they were receiving didn’t county ordinances or IRS rules.

In total, the County’s advice led to $25 million worth of overpayments.

So now the County wants retirees to give the money back. Milwaukee County Executive Chris Abele is leading the charge.

From Express Milwaukee:

Last April, Milwaukee County Executive Chris Abele sent a letter to more than 200 Milwaukee County retirees warning them that their pension payments weren’t valid and that he would take back any money they’ve been overpaid.

Nine months later, Abele is walking back from those comments.

But his new strategy, outlined in a Jan. 9 memo to county supervisors, would still take money away from 221 retirees whose only mistake was accepting the county’s own advice when setting up their pension plans.

“The county executive’s plan does not try to recoup any money from retirees,” emailed Abele’s spokesman, Brendan Conway. “It only adjusts future payments to the amount that complies with the law.”

And by “adjusting” them, Abele means “lowering” them.

Under this plan, the city would be getting its money back – by reducing future benefit checks for the retirees in question.

The union response:

“As we’ve come to learn about Abele, he’s making the situation worse,” said Boyd McCamish, head of AFSCME District Council 48, the county’s largest union. “Why does he insist on terrorizing retirees who have done nothing wrong?”

[…]

“It’s about the principle,” McCamish said. “If you are a retiree, a pensioner, you should feel no security at all even though you’ve been paying into these things all your life. One of the main things Abele’s trying to do, along with his buddies the Koch brothers, is to create and perpetuate what is known as the precarious workforce. So even retired people should feel levels of instability. Because when people are desperate and scared they will do anything and they will accept anything.”

Abele’s failed to win over the Pension Review Board in December with the plan.

City officials question whether it is legal to reduce future benefit checks based on overpayments stemming from advice the government itself provided.

“It does not seem clear to me that he can do that legally,” County Supervisor Theo Lipscomb told Express Milwaukee. “Another question is whether you morally should do that. These people relied on advice that the county provided.”

Photo by TaxCredits.net

Video: How Are States Responding to Pension Costs?

This presentation was given by Dana Bilyeu, Executive Director of NASRA, at the 2014 CSG National Conference.

From the video description:

This session explored what’s in store for your state in 2015 and beyond as experts forecast fiscal and economic trends for states and the nation. The discussion focused on the most significant fiscal and economic issues facing states— public pensions, tax reform and ways to foster entrepreneurship—and included insights about how states are tackling similar concerns.

Philly Broke Law With DROP Changes, Says Labor Board

Philadelphia acted illegally when it made changes to its Deferred Retirement Option Plan (DROP) in 2011 without first negotiation the changes with unions, according to a hearing examiner for the Pennsylvania Labor Relations Board.

The changes were meant to reduce the cost of the DROP, but unions quickly challenged the changes.

Actuaries Call on Obama to Address Aging Issues, Retirement Security in State of the Union

The American Academy of Actuaries is urging President Obama and the U.S. Congress to tackle retirement security issues through public policy over the next two years.

That includes addressing the solvency of Social Security, improving the governance and disclosure requirements of public pension plans, and ensuring adequate retirement income for seniors who are living longer.

From the AAA:

The American Academy of Actuaries is calling on the president and the 114th Congress to commit to a focus in the next two years on addressing the needs of an aging America. A concerted national strategy on policies to support systems such as retirement security and lifetime income, health care and long-term care for the elderly, and public programs such as Social Security and Medicare, is long overdue.

[…]

As President Obama prepares to address Congress and the American people this evening, the Academy (which celebrates its own 50th anniversary this year) would point out that the state of our union is inextricably linked to the demographic transition of proportionately greater numbers of Americans entering retirement, coupled with increased longevity, or life expectancies, that will compound the fiscal challenges to both private systems and public programs in the years to come.

The AAA goes on to provide specific points that comprise a public policy “wish list”:

* Take immediate steps to address solvency concerns of key public programs like Social Security and Medicare to ensure that they are sustainable in light of changing demographics. The Academy also urges action to allow the disability trust fund to continue to pay full scheduled disability benefits during and beyond 2016.

* Evaluate and address the risk of retirement-income systems not providing expected income into old age, especially in light of increasing longevity. The Academy’s Retirement for the AGES initiative provides a framework for evaluating both private and public retirement systems, as well as public policy proposals.

* Encourage the use of lifetime-income solutions for people living longer in retirement. The Academy’s Lifetime Income initiative supports more widespread use of lifetime-income options.

* Improve the governance and disclosures regarding the measurements of the value of public-sector (state/municipal) employee pension plans. The Academy’s Public Pension Plans Actuarial E-Guide provides information on the nature of the risks and the complex issues surrounding these plans.

* Explore solutions to provide for affordable long-term care financing, and address caregiver needs and concerns through public and/or private programs.

* Address the impact of delayed retirement, either voluntary or through future retirement age changes, on benefit programs, as well as the needs it may create with increased demand for early retirement hardship considerations and disability income programs.

Read the full release here.

CalPERS Looks to Cut Two-Thirds of Private Equity Managers

As part of its quest to reduce overall costs, CalPERS announced on Monday that the fund would be cutting the number of private equity managers it employs.

The cuts could be deep – the pension fund currently has 291 such managers, but that number could fall to below 100.

Video: Pension Reform and the Implications for Private Equity

Kathleen Kennedy Townsend, Managing Director at Rock Creek Group, gave this presentation on pension reform, retirement security and what it means for private equity. The talk was filmed at the 2014 Women’s Private Equity Summit.

Former Canada Pension Exec Now Working on Restructuring University of California Fund

Brian Gibson, former investment executive at the Ontario Teachers’ Pension Plan, went into semi-retirement in 2012.

Now he’s brought his expertise to the United States, and is helping to restructure the endowment and pension fund of the University of California.

From the Financial Post:

Gibson was hired last May about one month after Jagdeep Singh Bachher, a former AIMCo colleague, was named chief investment officer.

Bachher, AIMCo’s former chief operating officer, turned to Gibson for help in restructuring the fund that had a healthy unfunded liability and was plagued by having too many external managers and being ill-equipped to deal with the new markets.

“The market returns over the coming decade aren’t going to be great. Big balanced portfolios might earn 6%, maybe 7% on average,” said Gibson on Monday prior to flying to California. “Those are pretty modest returns, which makes it challenging to fund pensions and endowments.”

Bachher and Gibson’s goal in restructuring the investment operation was “on generating better returns over and above the market and on reducing their costs. They needed a lot fewer investment managers. They had hundreds of them, way too many,” said Gibson, who has spent half his time since May on the assignment.

Gibson said higher costs result when too many managers are hired and when each manager is given a small allocation. “The benefit of having some very good managers was diluted by having a long tail of other managers who were just okay. They had too many median managers,” said Gibson, one of the three former AIMCo employees at the fund. Arthur Guimaraes, chief operating officer, is the other.

To do that, the fund “eliminated half to two-thirds of the existing managers and re-allocated the capital to the better managers,” said Gibson, it was a change aimed at generating “several hundreds of millions of dollars of improved returns effects and lower costs, because of the ability to negotiate lower fees.”

University of California’s pension and endowment fund manages contains $91 billion in assets.

New Maryland Gov. Turns Focus to State Pensions

Gov.-elect Larry Hogan is busy constructing a budget to give to state lawmakers this week. But next on Hogan’s to-do list is a thorough examination of the state’s underfunded pension system – and how it will affect the budget his team has just put together.

From the Baltimore Sun:

The Maryland State Retirement and Pension System had only about 69 percent of the assets needed to pay for future and current retirees’ pensions in the last fiscal year — well below the at least 80 percent target that many experts consider healthy.

Robert Neall, Hogan’s fiscal adviser, called the nearly $20 billion unfunded liability in the state retirement system “an area of concern.” Hogan’s team has been busy putting together a budget to present to the Maryland General Assembly on Jan. 23, but Neall said the administration will soon begin examining the health of the pension system.

“That’s going to require higher pension contributions [from the state] probably for two decades, that’s why it’s a concern,” Neall said. “They are just facts that we have to contend with as we put together a fiscal ’15 closure and a fiscal ’16 budget to present to the General Assembly.

[…]

Michael Golden, a spokesman for the state pension system, said reforms made to the pension system in 2011, including requiring most employees to contribute 7 percent of their salaries into the fund instead of 5 percent, put it “on the road to stability.”

“We feel like were on track to get to the 80 percent funded ratio by 2024; we think that’s a good track to be riding on,” Golden said. “We have no plans at this moment to do anything differently.”

Robert Burd, the retirement system’s acting chief investment officer, said the board chose to reduce the percentage of money invested in stocks — about 39 percent was invested in stocks in 2014, less than most other states — after the recession because of concern about risk. While Maryland has not enjoyed as much of a benefit from the rebound in the stock market, Burd said, the change leaves the fund less exposed to future downturns.

“That’s why we don’t look as good as some of our peers do when it comes to rankings,” Burd said.

Maryland’s pension system manages $45.4 billion in assets for 143,000 retirees and is 69 percent funded.

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