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Newspaper: Pennsylvania Pension Funding and Shale Tax Shouldn’t Be Linked

Last week, a Pennsylvania lawmaker proposed levying a shale tax of 3.5 percent on the state’s frackers. The revenues – estimated to be $400 million annually – would then go to paying down the Public School Employees’ Retirement System’s (PSERS) unfunded liabilities.

One Pennsylvania newspaper agrees that paying down pension liabilities should be a top priority. But it disagrees that a shale tax is the way to do it.

From the Pittsburgh Tribune Review editorial board:

The GOP-controlled state Legislature must make Pennsylvania’s biggest financial woe — $50-billion-plus in unfunded pension liabilities — its top 2015 priority. And it must do so without linking pension reform to Democrat Gov.-elect Tom Wolf’s proposed natural gas severance tax.

Incoming Senate Majority Leader Jake Corman, R-Centre, during a Pennsylvania Manufacturers Association forum at the Pennsylvania Society gathering in New York earlier this month, said he’s willing to consider the severance tax if Wolf will negotiate on pensions. Going beyond compromise, that sets up GOP lawmakers to capitulate to Wolf’s taxing agenda.

Allegheny Institute scholar Frank Gamrat reminds that the extraction tax would have to compensate for the state-mandated elimination of the impact fee, a levy that has brought counties and municipalities nearly $130 million over the last three years. And for the tax to yield the Wolf-estimated $1 billion-plus at current gas prices, “production would have to rise by more than 50 percent.” It’s a quite iffy proposition given current market trends.

A too-high severance tax “could have adverse consequences for Pennsylvania,” says Gamrat. GOP leaders must take heed when he urges that the Legislature not spend “a great deal of (its) time and political capital” on a severance tax and focus instead on “pension reform” to address “the principal cause of the commonwealth’s budget problem.”

The Public School Employees’ Retirement System was 63.8 percent funded as of June 30, 2014.

Benchmarks, Transparency Could Bring More Pension Funds to Infrastructure, Says Group

The European Association of Paritarian Institutions (AEIP) last week called for greater transparency and more performance data in the infrastructure sector.

These changes, according to the AEIP, could help attract more pension funds to the sector.

From Investments and Pensions Europe:

Infrastructure markets need to be more transparent, with greater emphasis placed on the development of sector benchmarks, according to the European Association of Paritarian Institutions (AEIP).

Setting out its views on infrastructure, the association said that while pension funds were long-term investors – and therefore well-suited to invest in the asset class – they first and foremost needed to abide by their fiduciary duties to members.

“The reality is that infrastructure represents a valuable asset class and for sure a viable option for long-term investors, but these latter face several hurdles to access it,” the AEIP’s paper noted.

It said the lack of comparable, long-term data was one of the hurdles facing investors and that the absence of infrastructure benchmarks made it difficult to compare the performance of the asset class.

It also identified an organisation’s scale as problematic to taking full advantage of the asset class.

“Direct investments, those that yield the most interesting returns, are the most difficult to pursue, as their governance and monitoring require skilled individuals and a strict discipline regulating possible conflicts of interests,” it said.

“National regulation does not always simplify direct investments, and pension regulators in some cases limit the use of the asset class in a direct or indirect way.”

The association called on governments to play their part in making infrastructure accessible.

“Often the lack of infrastructure investments is not due to a lack of projects but not finding the right match with investors,” the AEIP added. “Some form of standardisation might be investigated.”

Read the paper here.

Ventura County Pension Seeks CIO

California’s Ventura County Employees’ Retirement Association (VCERA) is currently without a chief investment officer. But the fund is looking to hire one.

The description of the position, from the VCERA recruiting brochure:

Under general direction of VCERA’s Board of Retirement, in conjunction with the Retirement Administrator, the Chief Investment Officer serves as the in-house investment expert and acts as a liaison to the Board’s investment consultant and investment managers providing independent analysis of their investment proposals; administers, monitors and evaluates the investment program, including asset allocation, and rebalancing under the authority of the Board; and plans and develops investment strategies. This position is exempt from civil service and serves at the pleasure of the Board.

Duties of the Chief Investment Officer include, but are not limited to:

– Evaluates and provides reports on all types of investment products, including real estate, and alternative investments such as private equity, infrastructure, and limited partnerships, analyzing suitability for VCERA.

– Provides advice to the Board on recommended investment strategies and tactics, and reviews new strategies in coordination with the investment consultant.

– Reviews asset allocations and performs rebalancing in coordination with the Chief Financial Officer, pursuant to Board Policy.

The deadline for applications if January 26.

The recruiting brochure, which contains a full description of the position, can be read here.

Los Angeles Pension Invests $500 Million In Real Estate

The Los Angeles County Employees Retirement Association (LACERA) has invested $506 million in real estate, including two apartment complexes, an office building and a distribution center.

From IPE Real Estate:

The US pension fund agreed eight separate account purchases in gateway and secondary markets.

Two of the investments, made by Clarion Partners, were in core assets and leveraged at 50%.

LACERA invested $300m in the Palazzo-Westwood apartment complex in Los Angeles, which, over 10 years, is expected to achieve a projected 8.5%. The pension fund took an interest-only, seven-year facility at a fixed 3.4% rate.

Clarion also bought the 138,000sqft Las Cimas IV office building in Austin, Texas for $43m.

LACERA is looking to hold the asset for 10 years, with a projected 8.4% net-of-fee return.

The transaction was funded by a floating rate loan at an interest rate of LIBOR plus 180 basis points.

Deutsche Asset & Wealth Management bought two properties for LACERA.

The $35m all-cash acquisition of the 525,000sqft Ingram Micro Distribution Center in Chicago is projected to achieve a net 8.95% IRR over 11 years.

LACERA expects a 8.25% return over 10 years for the North Clark apartment complex in Chicago, bought for $51.1m.

Stockbridge Capital Group bought two core assets and two non-core properties, investing $62.4m in the 208,705sqft Pinole Vista Shopping Center in Pinole, California and the Junction Business Park in San Jose, bought for $14.2m.

Pinole Vista is projected to achieve an 8.6% net IRR.

Non-core assets in San Diego and Fremont were also bought for a respective $16.4m and $13.4m, with expected net-of-fee returns of 9.25% and 9.5% over five and three year holding periods.

LACERA manages approximately $38 billion in assets.

Video: Update on Illinois Pension Lawsuit

Here’s a discussion with attorney Aaron Maduff, who is representing the State Universities Annuitants Association in their lawsuit against Illinois’ pension reform law. Maduff gives us a recap and update on the high-profile pension lawsuit, and an idea of what we can expect in the coming months.

Federal Judge Won’t Issue Ruling in Pension Fight Between City, Public Safety Workers

A U.S. District Court Judge has declined to issue a ruling in a decade-long dispute between the city of Annapolis and its retired public safety workers.

The dispute, explained by the Capital Gazette:

A federal judge has declined to wade into a 12-year dispute between the City of Annapolis and retired public safety workers over pension benefits.

Senior U.S. District Court Judge for the District of Maryland William M. Nickerson issued an opinion on Tuesday dismissing the city’s claims for declaratory judgment in its case against some 60 retirees. The city filed the federal action in August, after a 10-year old case filed by the retirees against the city was reopened in Anne Arundel Circuit Court.

The city sought to have changes to its retirement program over the past year declared constitutional and consistent with state law. This was after the retirees filed their own motion for declaratory judgment in Anne Arundel Circuit Court in June in light of the changes to the retirement program.

[…]

Former Annapolis police and firefighters are classified under four retirement plans. Individual retirees receive benefits from the plan in place upon their retirement. Two of the plans contain language in the city code tying pension increases to active-duty employee salaries.

“Each retired member’s pension shall be increased by the same percentage as any increase in the pay scale for members of the same rank and years of service who are on active duty,” the code reads.

Retirees sued Annapolis in 2002 seeking retroactive payments dating to 1995. After six years of legal battles, the state’s Court of Appeals ruled in favor of the retirees. The Circuit Court of Anne Arundel County later issued a declaratory judgment for pension increases, despite a premonition from then-Mayor Ellen Moyer that the ruling would bankrupt the city.

The city’s retirement plan liabilities increased by $6.2 million because of the ruling, according to a 2013 report produced for the city.

Annapolis had suspended adjustments to police and fire retiree benefits since 2009. City employees did not receive pay increases during that time period.

In Oct. 2013, the city announced a deal with its four public-sector unions on pay increases. Employees would receive a 10-percent raise over the next three fiscal years. Retirees would receive annual 2-percent increases, regardless of future city pay increases.

“Thus, the Retirees would receive only a 6 percent pension increase while active members would receive a 10 percent increase in pay,” Nickerson’s opinion reads.

The changes funded the retirement plan by 100 percent, according to the city.

The Annapolis City Council says it is deciding how to move forward in light of the ruling.

Photo by Joe Gratz via Flickr CC License

Florida Town Negotiates Pension Changes With Police Force

The Florida town of Delray Beach this week negotiated a series of pension changes with its police force; the town eliminated early retirement for new hires and lowered the multiplier used to calculate pension benefits for new and current employees.

Un-vested employees also won’t be able to use overtime to boost their pension benefits.

In return, employees will see higher salaries.

From Boca:

Delray Beach successfully completed the city’s push for pension reform this week when the Police Benevolent Association ratified a three-year contract that will save the city $21.3 million in pension contributions over 30 years.

The vote by the police department’s officers and sergeants was overwhelming. Ninety-two approved ratification while just 11 opposed it. The contract will be retroactive until Oct. 1, the start of Delray’s budget year.

For pensions, the contract divides the officers and sergeants into four tiers. Tier 1 includes all employees with at least 20 years of service and all retirees. Their pension benefits won’t change.

Tier 2 includes those with between 10 and 20 years of employment. The “multiplier” used to calculate their benefits will drop from 3.5 percent to 3 percent, and their starting benefit will be limited to $108,000, which is still generous. The lower multiplier also will apply to those in Tier 3—employees with fewer than 10 years of service, meaning they are not yet vested. For new hires—Tier 4—the multiplier will be 2.75 percent, and early retirement will be eliminated.

Not surprisingly, the contract favors seniority, which is typical with most union deals. For all but the new hires, vested officers and sergeants will get at least a 1 percent annual cost-of-living increase in their pensions. That is a perk almost no private-sector employees enjoy.

Still, the contract does a lot for pension sustainability. New hires and those not vested won’t be able to use overtime in calculating pension benefits. Delray Beach should insist on continuing that change in future contract negotiations. New hires won’t get early retirement, and their benefit will be limited to roughly two-thirds of their final average salary.

Just as important, the contract achieves the city commission’s goal of focusing more on pay for police officers when they are working. The annual starting salary will be $48,000 in the first year of the contract. The officers and sergeants will get an immediate raise to compensate for the previous three years, when salaries were frozen. There will be a merit system for raises.

In an email, Mayor Cary Glickstein said, “We achieved our objectives of substantive pension reform, with benefit reductions of over $21 million and re-establishing taxpayer control of the board that manages the pension fund’s assets, while providing substantial wage increases required to attract and retain the best law enforcement personnel in South Florida.”

Delray Beach’s City Manager, Don Cooper, is expected to attempt to negotiate a similar contract with the city’s firefighters.

Photo by pshab via Flickr CC License

UK Pension Funds Raise Concerns Over Bonuses, Pay of Corporate Executives

U.S. public pension funds are no stranger to using their sway as major shareholders to push for corporate governance changes.

U.K. pension funds have that same influence – and this week, they used it to call for new rules surrounding executive bonuses and pay.

The pension funds say that executive compensation should be linked to company performance.

Reported by EveryInvestor:

In a letter sent to the chairmen of FTSE 350 businesses the National Association of Pension Funds warned that companies that have failed to create a strong link between executive rewards and performance should expect shareholders to repeat their concerns of spring 2012.

The NAPF also set out some guidelines it wants to see reflected in the pay policies set through 2014.

These include capping executive base pay increases at inflation and keeping them in line with the rest of the workforce. Where this is not the case, companies should offer a sound explanation.

The NAPF also criticised the use of peer group benchmarking where pay is set by comparing it to that of other executives from different companies. The NAPF believes this practice has contributed to the escalation of boardroom pay. It said boards should focus more on their own strategies and less on comparing themselves against their peers.

Ahead of the NAPF Investment Conference that opens in Edinburgh on Wednesday Joanne Segars, chief executive, NAPF, said shareholders were vocal last year and those companies that have failed to take a robust stance on boardroom pay should expect similar opposition this spring.

“Too many companies have allowed the link between pay and long-term business performance to weaken in recent years,” she said.

“Companies should keep executive base pay rises in line with the rest of the workforce, and those that deviate from that should have a good explanation ready. Bonus targets should be challenging and allied to the long-term growth of the business.

“Our members will push back on executives who compare themselves with others to try to justify pay rises. So-called peer comparisons have been a major factor behind rising boardroom pay levels.

Read the letter here.

Kolivakis Weighs In On Canada Pensions’ Clean Energy Bet

This week, two Canadian pension funds — the Ontario Teachers’ Pension Plan Board and the Public Sector Pension Investment Board – teamed up with Spanish bank Banco Santandar S.A. to manage a $2 billion portfolio of renewable energy assets.

Leo Kolivakis of the Pension Pulse blog weighed in on the clean energy bet in a post on Wednesday. The post is re-published below.

______________________

Originally published at Pension Pulse

This is a big deal and I expect to see more deals like this in the future as more European banks shed private assets to meet regulatory capital requirements. In doing so, they will looking to partner up with global pension and sovereign wealth funds that have very long-term investment horizons.

The Spaniards are global leaders in infrastructure projects (Germans and French are also top global infrastructure investors led by giants like HOCHTIEF and VINCI). When it comes to renewable energy, Spain is the first country to rely on wind as top energy source:

Spain is the first country in the world to draw a plurality of its power from wind energy for an entire year, according to new reports by the country’s energy regulator and wind energy advocacy group Spanish Wind Energy Association (AEE).

Wind accounted for 20.9 percent of the country’s energy last year — more than any other enough to power about 15.5 million households, with nuclear coming in a very close second at 20.8 percent. Wind energy usage was up over 13 percent from the year before, according to the report.

The news is being hailed by environmental advocates as a sign that Spain, and perhaps the rest of the world, is ready for a future based on renewables. But the record comes at the end of a very rocky year for Spain’s renewable energy sector, which was destabilized by subsidy cutbacks and arguments over how much the government should regulate renewable energy companies.

Despite the flaws in Spain’s system, the numbers are promising for green energy fans. The renewable push brought down Spain’s greenhouse gas emissions by 23 percent, according to another industry report from Red Electric Espana (REE).

Spain also has one of the largest solar industries in the world, with solar power accounting for almost 2,000 megawatts in 2012. That’s more than many countries but still just a fraction of the energy produced by wind in Spain. In 2013, solar power accounted for 3.1 percent of Spain’s energy, according to the AEE report.

By contrast, the U.S. produced only 9 percent of its energy with renewable sources last year, and wind accounted for only 15 percent of that.

But as the world reaches for more renewables, Spain’s record-breaking year is also a cautionary tale.

Going into 2014, it’s unclear how wind will survive steep government cutbacks.

At the moment, Spain heavily subsidizes its renewable energy sector, which costs billions of dollars in a country still in the depths of a financial crisis. When the country tried to raise individual rates for renewables, people complained bitterly and the government backed off, leaving the country with a nearly $35 billion renewable energy deficit.

The idea that renewables can’t survive without heavy subsidies might be cooling off the market in Spain and elsewhere, bringing the future of renewable growth into question. Global investment in renewable energy slipped 12 percent last year, despite the fact that the European Union and the UN have set ambitious energy goals for the next decade.

It remains unclear how the world will meet those goals given the spending-averse climate of most Western governments, but there’s no doubt they’ll be looking to Spain in 2014 to see if it can be done without going broke.

Indeed, over the summer, Spain’s government dealt a death blow to renewable energy:

In the latest move to draw down Spain’s energy sector debt, Madrid unveiled a new clean energy bill this week that will cap earnings on power plants as well as introduce retroactive actions, earning a quick rebuke from the country’s already ailing renewable sector. According to a Bloomberg report, clean energy “generators will earn a rate of return of about 7.5 percent over their lifetimes,” adding that the rate may be revised every three years and is based on “the average interest of a 10-year sovereign bond plus 3 percentage points.” The new plan will be retroactively applied to programs active from July 2013.

The new plan was presented by Spain’s Industry Minister Jose Manuel Soria as a necessary evolution of the country’s renewable energy subsidy system, which he said would have gone bankrupt if no changes were made. Since taking over the country’s leadership in 2011, the right-leaning Partido Popular has continued to expand on earlier efforts to chip away at the country’s renewable energy support programs, which many critics have called unsustainable. Once hailed as one of Spain’s most viable sectors for strong growth, renewable energy has suffered under a steady restructuring of government support programs.

In addition to slowing the country’s solar and wind growth, the restructuring garnered legal action on the part of both international investors and domestic trade organizations, the latter of which has appealed to the European Commission for some level of protection from tariff and agreement reductions. Early cuts resulted in legal action against Madrid from over a dozen investment funds with stakes in the country’s solar market, adding to the unease of foreign investors.

I can tell you the cash strapped Greek government did the exact same thing on solar projects in Greece. One of the biggest risks in infrastructure projects is regulatory risk as these governments can change regulations at a moment’s notice, severely impacting the projected revenues.

What are the other risks with infrastructure projects? Currency risk and illiquidity risk as these are very long-term projects, typically with a much longer investment horizon than private equity or real estate.

But both PSP and Ontario Teachers’ are aware of these risks and still went ahead with this investments which meets their objective of finding investments that match their long-term liabilities. The Caisse has also been buying wind farms but I am wondering whether they’re blowing billions in the wind.

Interestingly, this is the second major deal between PSP and OTPP this year. In November, I wrote about how they are nearing a $7 billion deal for Canadian satellite company Telesat Holdings Inc.

And on last week, Bloomberg reported that Riverbed Technology (RVBD), under pressure from activist investor Elliott Management Corp., agreed to be acquired for about $3.6 billion by private-equity firm Thoma Bravo and Teacher’s Private Capital.

In fact, Ontario Teachers’ has been very busy completing all sorts of private market deals lately, all outside of Canada, which is smart.

Photo by penagate via Flickr CC

Florida Pension Changes May Unravel As Board Debates Reforms

The Jacksonville City Council and Mayor Alvin Brown spent most of the summer months debating and constructing a pension reform measure that aimed to improve the funding of the city’s Police and Fire Pension Fund.

The Council approved the measure earlier this month. Now, the measure sits in front of the Police and Fire Pension Board, which will vote on it by January 15.

There’s no guarantee the board will approve the measure. From the Florida Times-Union:

It’s always been expected that changes to the 3 percent COLA and the guaranteed 8.4 percent return on DROP accounts for current employees were going to be stumbling blocks.

But the benefit changes for new hires hadn’t caused much of a stir until the board met last week to review the agreement.

Board members Richard Tuten and Larry Schmitt, representing the firefighters and police, said the changes are hard to swallow and will make it difficult to recruit good people needed to protect the city.

A third member of the board, former Sheriff Nat Glover, said he is uncomfortable with the changes and also concerned about the safety of the city.

Walt Bussells, the board’s chairman, said if a vote were taken, it would be 3-2 against.

“If we did do that, it kills the whole deal,” he said.

[…]

Tuten was the most vocal in his criticism of the changes for new hires and current employees.

He offered what he said was a string of broken promises and fear of more changes by politicians that “we can’t trust any farther than we can throw them.”

“If we are going to get keistered here, let’s go to court right now,” he said. “That’s what I get from my members.”

The measure calls for benefit changes for new police and fire hires, as well as COLA changes for current employees. In return, the city would pay an additional $40 million a year into the Police and Fire fund for the next 10 years.

Photo by pshab via Flickr CC License

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