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Illinois Likely Faces Long Odds on Pension Reform Ruling

In 2015, the Illinois Supreme Court will decide the legality of the state’s pension overhaul that reduced benefits of public workers.

But if legal challenges to similar laws in other states are any indication, the chances of Illinois’ pension reform being upheld are slim, according to a Reuters analysis.

From Reuters:

Court rulings in Arizona show that Illinois, which has the worst funded pensions of any U.S. state, may not have much chance.

The problem is that Illinois, Arizona and New York states all provided public workers, such as police, teachers and even judges, near iron-clad pension guarantees that were embedded in their state constitutions.

Two Arizona laws enacted in 2011 to increase employees’ pension contributions, restrict certain people from receiving pensions, and institute a new formula for calculating benefit increases, floundered in the face of legal challenges. One law, challenged by teachers, was overturned by a Maricopa County judge in 2012, while another, contested by retired judges, was tossed out by the Arizona Supreme Court in February this year. The courts tied their rulings to constitutional language that membership in public pension systems is a contractual relationship, and retirement benefits cannot be “diminished or impaired.”

Illinois and its Republican Governor-elect Bruce Rauner are likely to find themselves in similar bind to Arizona where the only answer appears to be a long-shot effort to amend the state constitution.

“There aren’t many options at this point,” said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College, referring to both states. “The (pension) payments need to be made or the constitution needs to be changed.”

Altering the constitution, however, isn’t a practical option. From Reuters:

Altering the Illinois Constitution’s 1970 pension provision would be a massive undertaking, requiring a three-fifths vote of lawmakers in the House and Senate to get it on the ballot. It would then need approval from three-fifths of voters or a majority of individuals actually voting in a general election — not an easy proposition as people often don’t vote on every item on the ballot and given Illinois is a largely Democratic state with activist public unions.

Illinois’ state-level pension systems were collectively 42.9 percent funded as of June 30, 2014.

Pension Funds Find Farmland To Be Fertile Investment

Institutional investors are donning their straw hats, opening their tool sheds and getting to work in the crop fields.

Investors are drawn to farmland by strong returns and its weak correlation with other assets.

From The Economist:

Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards. Investors who are keen on even bigger risks and rewards flock to places such as Brazil, Ukraine and Zambia, where farming techniques are often still underdeveloped and potential productivity gains immense.

Farmland has been a great investment over the past 20 years, certainly in America, where annual returns of 12% caused some to dub it “gold with a coupon”. In America and Britain, where tax incentives have distorted the market, it outperformed most major asset classes over the past decade, and with low volatility to boot. Those going against the grain warn of a land-price bubble. Believers argue that increasing demand and shrinking supply—as well as urbanisation, poor soil management and pressure on water systems that are threats to farmland—mean the investment case is on solid ground.

It is not just the asset appreciation and yields that attract outside capital, says Bruce Sherrick of the University of Illinois at Urbana-Champaign: as important is the diversification to portfolios that farmland offers. It is uncorrelated with paper assets such as stocks and bonds, has proven relatively resistant to inflation, and is less sensitive to economic shocks (people continue to eat even during downturns) and to interest-rate hikes. Moreover, in the aftermath of the financial crisis investors are reassured by assets they can touch and sniff.

Read the full report from the Economist here.

Ohio Pensions Seek to Lead Lawsuit Against Firm Accused of Fraud

The State Teachers Retirement System of Ohio (STRS) and the Ohio Public Employees Retirement System (OPERS) are looking to be lead plaintiffs in a lawsuit against an investment firm that allegedly misled investors about its performance and financial state.

The alleged fraud led to investment losses of $7.5 million for the two pension funds, as well as billions in losses for other investors.

From the Pike County Daily:

Following a recent review of securities and accounting fraud allegations, Ohio Attorney General Mike DeWine announced that he has filed a motion for two of Ohio’s pension funds to lead a class of investors in a lawsuit against American Realty Capital Properties (ARCP), Inc.

The news comes after the company, a real estate investment trust based in New York City, disclosed that ARCP officials intentionally misstated company financials and subsequently covered up the accounting irregularities, resulting in approximately $3 billion in losses for the company’s shareholders, including State Teachers Retirement System of Ohio (STRS) and the Ohio Public Employees Retirement System (OPERS).

“The information American Realty Capital Properties provided pension fund managers was false, misleading, and purposefully hid accounting fraud,” said Attorney General DeWine. “This fraud inflated the true value of the company, causing Ohio teachers and public employees to lose millions of hard-earned retirement dollars.”

The motion alleges that ARCP issued materially false and misleading financial statements by, among other things, overstating reported adjusted funds from operations and then intentionally covering up their impropriety. In addition, it alleges that ARCP improperly accounted for various accruals and expenses that materially affected the company’s reported earnings per share. As a result of ARCP’s improper accounting and cover-up, key performance metrics were overstated and reported net losses for the reporting periods ending June 30, 2014 were understated. Revelation of this alleged accounting fraud by ARCP on October 28, 2014 resulted in losses in the company’s stock value of approximately $3 billion. STRS and OPERS lost in excess of $7.5 million as a result of the alleged fraud.

There are several lawsuits against the firm stemming from the fraud allegations. The motion filed by the Ohio Attorney General would consolidate those lawsuits and name the Ohio pension funds as lead plaintiffs.

Photo by Joe Gratz via Flickr CC License

Second Lawsuit Filed Against Chicago Pension Changes

A second lawsuit has been filed against Chicago, challenging the pension cuts passed by the state this year.

The pension changes raise contribution rates for employees and employers, and reduce COLAs. The changes apply to members of the Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund.

From Reuters:

Litigation seeking to derail changes to Chicago public worker pensions on constitutional grounds ensnared a second city retirement system on Monday.

Attorney Clint Krislov said he filed a lawsuit in Cook County Circuit Court on behalf of members of the city’s pension fund for laborers. That lawsuit followed one filed Dec. 16 by a coalition of labor unions against Chicago’s municipal pension fund.

An Illinois law enacted earlier this year for the two funds requires higher worker contributions and limits cost-of-living increases for retirees. The lawsuits contend the law violates a prohibition in the Illinois Constitution against reducing public worker retirement benefits.

Cook County Associate Judge Rita Novak on Monday set a hearing on the unions’ motion for a temporary restraining order in the municipal fund case for Jan. 28 and 30.

[…]

Like Illinois, Chicago is arguing that its so-called police powers to provide essential services to residents trump constitutional protections for pensions.

[…]

Under the law that takes effect on Thursday, Chicago’s payments to its two funds increase over five years. Workers’ current contributions of 8.5 percent of earnings rise to 11 percent over five years. Instead of receiving an annual 3 percent cost-of-living increase, retirees will receive increases tied to inflation. The increases will be skipped in certain years.

Mayor Rahm Emanuel has warned that the funds face insolvency within nine to 17 years unless changes are made. The funding shortfall is $8.4 billion for the municipal system and $1 billion for the laborers system. Police and fire pensions were not affected by the law.

The Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund manage a combined $6.7 billion in assets.

Photo by bitsorf via Flickr CC LIcense

Report: Japan Pension Set to Benefit From Reforms

Japan’s Government Pension Investment Fund (GPIF) – the largest pension fund in the world – implemented numerous changes in 2014, including an asset allocation shake-up and the hiring of its first chief investment officer.

A new report says the reforms will benefit the fund going forward. From Chief Investment Officer magazine:

A report jointly published by Cerulli Associates and the Nomura Research Institute (NRI) stated that the reforms to the ¥130.9 trillion ($1.1 trillion) pension, announced by its management team earlier this year, would help it become “more dynamic.”

“In terms of hiring, the GPIF will not be shackled by low salaries and will be better positioned to recruit top-notch talent,” said Yoon Ng, Asia research director at Cerulli Associates. “This will add more quality to its external manager selection processes.”

[…]

“With public pension fund reforms in place, the GPIF… may show a stronger tendency to hire managers with highly distinctive investment strategies that are differentiated from and relatively uncorrelated with other companies’ strategies,” the report offered.

Atsuo Urakabe, a senior researcher at NRI, said the new asset allocation would push the GPIF to hire managers with “highly distinctive investment strategies” that can offer uncorrelated performance, as it seeks to achieve a higher annual return.

Cerulli’s report said Japanese pension funds had been “bogged down by ultra-conservative investment policy requirements” but pointed to the GPIF’s reforms as an indication that other pensions in the country could revise their asset allocations, diversify, upgrade risk management, and reform governance.

As well as identifying external managers, Cerulli’s research paper predicted that Japanese public pension funds outside of GPIF may seek to build up their in-house expertise.

“In the long run, this will help to bring their costs down and lead to some insourcing of assets that had previously been farmed out to be managed,” the report said.

The GPIF manages $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

Illinois Gov. Signs Law Allowing Felons To Be Stripped of Pensions

Illinois Gov. Pat Quinn has signed into law a measure that allows the Illinois Attorney General to strip pension benefits from public officials who have been convicted of felonies related to their job.

The bill was passed unanimously by the state Senate earlier this month.

From the Associated Press:

A new state law will make it tougher for felons to receive a public pension.

Gov. Pat Quinn signed legislation Monday giving Illinois’ attorney general more power to stop pension payments to convicted felons.

[…]

The Illinois Supreme Court in July upheld a lower court ruling that Attorney General Lisa Madigan couldn’t challenge a Chicago police pension board decision allowing Burge to keep his taxpayer-supported pension.

State Sen. Kwame Raoul is a Chicago Democrat. He says it’s “unconscionable” that Burge receives a pension and the law allows “taxpayers a way to fight back.”

The bill came about after former Chicago policeman Jon Burge was allowed to keep his pension even after being convicted of a serious felony. From the Sun-Times:

In July, the Illinois Supreme Court ruled a Cook County court was correct in not allowing Madigan to intervene in a police pension matter. The decision allowed disgraced former Chicago Police Cmdr. Jon Burge, who was convicted in 2010 for lying about the torture of police suspects, to keep his public pension of about $54,000 a year.

The police pension board deadlocked 4-4 on a motion to strip Burge of his pension. Some argued his conviction was not related to his police work, since he was convicted on perjury and obstruction of justice from a civil suit filed after he left the force.

Under the law, the state attorney general will be able to petition the court to strip pension benefits from public officials. Previously, the attorney general wasn’t allowed to intervene in the decision, which was left to pension boards.

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen. Via Wikimedia Commons

Is It Harder Than Ever for Pension Funds to Invest With Top Private Equity Funds?

Many more private equity funds reached or surpassed their hard caps in 2014 than in 2013, and the funds are also raising capital at a faster pace.

As a result, many pension funds are finding it difficult to put their money in the most sought-after private equity funds.

From the Wall Street Journal:

Heated competition to get into top private-equity funds is leaving some investors out in the cold.

Pension funds, endowments and wealthy individuals that invest with private equity are finding it increasingly hard to get into the most sought-after funds, according to data and industry participants.

Private-equity firms, which raise money from such investors and then put it to work in various investment strategies, are generally filling their coffers faster this year from clients. The proportion of private-equity funds that reached or exceeded the maximum amount the firms set out to raise this year is at its highest level since at least 2009, according to a snapshot of funds for which private-equity tracker Preqin has data. Typically, firms put a limit on the size of the fund they are raising, known as a hard cap, at the beginning of the fundraising process. That hard cap generally can’t be exceeded without approval from fund investors.

As of Nov. 13, 55% of roughly 280 funds for which Preqin had hard-cap data reached or surpassed that maximum size. Last year, 43% of funds hit or exceeded those limits.

Also, private-equity firms have taken an average of 16.4 months to raise capital for funds that have closed this year, Preqin data show. That’s two months shorter than the average time it took to raise funds that closed in 2013.

“The number of quick fund closings has been especially pronounced this year,” said Cathy Konicki, a partner at investment-consulting firm NEPC LLC.

Read the entire Wall Street Journal report here.

Photo by Matthias Ripp via Flickr CC License

New York Lawmakers “Retire”, Collect Pensions, But Don’t Leave Office

A quirk in New York state law allows certain lawmakers to “retire” without actually leaving office – letting them collect their pensions while still on the job and earning their normal salary.

From the New York Post:

A wacky loophole in state pension law allows legislators who are at least age 65 and elected before 1995 to retire for pension purposes.

In essence, the double dippers — many of whom make $100,000 or more between their base legislative salary of $79,500 and leadership stipends — will be giving themselves pay hikes of 30 percent to 100 percent, depending on years of service.

The legislators re-elected last month who filed for retirement with the state comptroller’s office are a bipartisan bunch.

They include five Republican senators — John DeFrancisco of Syracuse; John Bonacic of Orange County; Kemp Hannon of Nassau County; Kenneth LaValle of Suffolk County; and Tim Libous of Binghamton.

In the Assembly, three Democrats and one Republican filed for the added benefit — Jeff Aubry (D-Queens); Gary Pretlow (D-Mount Vernon); William Magee (D-Madison County); and David McDonough (R-Nassau).

“It’s a loophole that shouldn’t exist. But as long as this is the law, people are going to exploit it,” said Assemblyman Michael Fitzpatrick (R-Suffolk).

Fitpatrick has introduced legislation that would require elected officials and government workers to enter a 401(k)-style pension system.

E.J. McMahon of the Empire Center agreed. “If legislators were in a 401(k)-type system, like the vast majority of their constituents, this simply wouldn’t be an issue. The existing system shouldn’t simply be mended, it should be ended.”

The lawmakers defended their actions. They told the NY Post:

“I had a heart attack 10 years ago,” said Aubry, 67, first elected in 1992. “Everyone has to look at their own situation. I don’t know if this makes a huge difference to people in my district.”

Aubry, who makes about $100,000, expects a monthly pension of about $2,400 or close to $30,000 extra a year.

Bonacic, 72, told The Post his wife would collect lower benefits if he dies in office without being retired.

“If I were to die while in active service in the state Legislature, the law does not allow my wife to collect my pension. I put this decision off for as long as I can, but I thought it was appropriate at this time to protect my wife,” he said.

Pretlow, 65, said he was thinking of his own mortality.

“I’ve been to six funerals in the past two weeks, 28 to 55 years old. No one was older than me. Life is short,” he said.

In total, nine state lawmakers will be “retiring” this year without leaving their job.

Photo by Tim (Timothy) Pearce via Flickr CC License

Probe of Petrobras Turns to Pension Fund

An investigation into corruption at Petrobras, Brazil’s state-run oil company, has taken a new turn: investigators are now looking into the company’s pension fund, although details are unknown.

From Reuters:

Brazil’s state-run oil company Petrobras on Monday said a growing corruption scandal may implicate its employee pension fund and has led to a freeze on payments to 23 contractors allegedly involved in the scheme.

Petros, the 66 billion real ($24 billion) employee-pension fund of Petroleo Brasileiro SA, as Petrobras is formally known, was singled out by an internal investigation, Petrobras said in a statement.

The law firms that are conducting the internal investigation “have found possible links to the facts that have been investigated” regarding the pension fund, according to the statement.

It did not give details of any possible links.

The investigation was launched after Brazilian prosecutors alleged that Petrobras executives conspired with construction companies to inflate the cost of contracts and then kick back proceeds to executives, politicians and political parties as bribes and campaign contributions.

Last month, Petrobras was fined by Brazil’s security regulator for violating rules regarding the election of board members of Brazilian companies in which the pension fund is invested.

Video: Why Gender Diversity on Pension Boards Matters

http://youtu.be/x5Tx-zcYYVQ

Here’s a video that dives into the topic of gender diversity on pension boards, and why it’s important to have both men and women as trustees.

The issue is discussed by Pennsylvania State Representative Pam DeLissio. She became interested in the issue after learning that there were no women on the 11-member board of the Pennsylvania State Employees’ Retirement System.

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