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Kansas Treasurer Considers Pension Obligation Bonds Amidst State Plans to Cut Annual Pension Payment

Kansas Gov. Sam Brownback announced plans this week to cut nearly $60 million from the state’s annual pension contribution and use the money to plug budget holes elsewhere.

In light of that news, Kansas Treasurer Ron Estes is considering issuing bonds to help fund the state’s pension system.

From Bloomberg:

Brownback, a Republican who starts his second term in January, last week proposed shortchanging the state’s pension contributions by $58 million to close a $280 million budget hole caused in part by tax cuts the governor championed. Kansas, with the fifth-weakest pension system among U.S. states, had its issuer ratings downgraded by Standard & Poor’s and Moody’s Investors Service this year.

To close a $7.35 billion funding shortfall, the state needs to keep commitments that were part of a 2012 pension overhaul, said Estes, a Republican who also won re-election last month. The plan called for more funding from the state, including revenue from casinos it owns, and raised the amount employees pay.

“We need to keep working on our pension reforms passed two years ago or we’ll fall further behind,” Estes said in an interview from Topeka.

Kansas can take advantage of interest rates close to five-decade lows to raise cash, increase the funding level and create fixed payments, Estes said. The state issued $500 million of pension bonds in 2004; a proposal to sell another round stalled in the legislature last year.

[…]

The [Kansas PERS] system supports issuing bonds or any measure that boosts its funding, said Kristen Basso, a spokeswoman.

“Pension bonds would reduce our unfunded liability and improve our funded ratio,” she said in an e-mail.

But the bonds aren’t a problem-free solution. From Bloomberg:

The debt, which is typically taxable, carries risk. The strategy is to invest the proceeds, usually in stocks, and earn more than it costs to repay bond investors. The approach can backfire if issuers borrow when equities are at historic highs, said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College. The S&P 500 Index this week posted its best two-day gain in more than three years.

“There are instances where they can work, but they can be risky financial tools for cash-strapped borrowers,” Aubry said in a phone interview. “They’re gambling on the market and should be undertaken by those with the appetite for the risk and the ability to absorb the risk.”

Kansas’ state pension systems were collectively 56.4 percent funded as of 2013.

Photo credit: “Seal of Kansas” by [[User:Sagredo|. Licensed under Public Domain via Wikimedia Commons

Rhode Island Pension Payments to Total Over $400 Million in FY 2016, 2017 As New Contribution Rates Approved

Rhode Island’s Retirement Board approved employer contribution rates for fiscal years 2016 and 2017 on Wednesday.

Total state and local pension payments are projected to top $400 million in those years, just as they did in 2015.

From the Providence Journal:

New contribution rates approved by the state Retirement Board on Wednesday will require state and local payments into the pension fund of a projected $171.2 million for state employees, and $237.3 million for teachers during the budget year that begins on July 1, 2016.

At those projected payment levels, state and local taxpayers will pay a total of $408.5 million in fiscal year 2017, compared with a potential $411.6 million during the budget year beginning July 1, 2015, according to information the state’s actuary provided the Retirement Board chaired by General Treasurer and Governor-elect Gina Raimondo.

[…]

While most state employees are now required to contribute 3.75 percent of their pay toward their reduced defined-benefit pensions, the actuaries recommended the state share go from 23.65 percent of payroll to 23.78 percent come July 1, 2016.

And while teachers also contribute 3.75 percent of their pay, the state — and the communities that employ them — would pay 22.76 percent of payroll, compared with 23.14 percent a year earlier. (The drop is a result of a lowering of earlier projections of potential teacher salaries.)

The net result: the required contribution to teachers’ pensions will drop from a projected $241,742,873 in the new budget year that begins on July 1, to $237,251,068 the following year, while rising for state employees from a projected $169,811,685 to $171,169,925.

Rhode Island’s pension system for general state employees was 57 percent funded as of June 30. The teachers’ system was 59.6 percent funded as of June 30.

Photo credit: “Flag-map of Rhode Island” by Darwinek – self-made using Image:Flag of Rhode Island.svg and Image:USA Rhode Island location map.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons

Wisconsin Supreme Court Affirms County’s Pension Cuts

In 2011, Wisconsin’s Milwaukee County reduced pension benefits for nurses by cutting the pension multiplier from 2 to 1.6.

In a 5-2 decision on Friday, the Wisconsin Supreme Court upheld the legality of the County’s decision to reduce the multiplier.

From the Milwaukee Journal-Sentinel:

The Wisconsin Supreme Court on Friday upheld Milwaukee County’s 2011 move to reduce pension benefits for nurses, which had been struck down by lower courts.

The high court’s ruling preserves millions of dollars in planned future savings by the county.

In a 5-2 decision, the court overturned a trial judge and the Court of Appeals, both of which had sided with Suzanne Stoker and her union, who claimed that enhanced pension benefits granted by the County Board in 2000 was a vested property right that even collective bargaining couldn’t undo.

“We conclude that the Legislature preserved Stoker’s rights and benefits already accrued but also gave Milwaukee County home rule authority with the flexibility to enact such prospective only changes,” Justice Annette Ziegler wrote for the majority.

In a dissent joined by Chief Justice Shirley Abrahamson, Justice Ann Bradley wrote, “It is only by repeatedly ignoring the language of the governing session laws that the majority is able to conclude that the county may reduce the pension multiplier, thereby dealing a blow to the rights of the employees.”

At issue was the county’s move to cut the pension multiplier — a key factor in determining pension payments — from 2.0 to 1.6 for pension credit earned starting in 2012. That amounted to a gradual 20% reduction in pensions.

Two lower courts had sided with unions on the issue and claimed the County could not reduce the pension multiplier because doing so amounted to the County taking away the pensioners’ property. The rationale of the lower court rulings:

Milwaukee County Circuit Judge William Pocan ruled in 2012 that the county nurses had an unconditional property right to their pension benefits. He cited the 1945 state law establishing pension rights for Milwaukee County employees, which says each worker “shall have a vested right to such annuities and other benefits and they shall not be diminished or impaired by subsequent legislation or by any other means without consent.”

The county and its Pension Board argued that the multiplier reduction didn’t violate that law because it applied to future pension service credit only and because the nurses’ union had approved the change. Pocan said, however, the benefit reduction could be done only with consent of individual employees.

The Court of Appeals affirmed Pocan in November 2013.

The Supreme Court opinion can be read here.

Photo credit: “Flag map of Wisconsin” by LGBT_flag_map_of_Wisconsin.svg: This file was derived from:LGBT_flag_map_of_Wisconsin.svgFlag_of_Wisconsin.svg. Licensed under Public Domain via Wikimedia Commons

CalSTRS Loses $125 Million on Florida Industrial Land

CalSTRS revealed Thursday it had lost $125 million on an investment – reportedly written off since 2009 – in a piece of industrial land in Florida that lost much of its value when land values went bust just over a half-decade ago.

CalSTRS had been waiting for the price of the land to recover a bit before selling – and the fund did recover some of its losses.

But the time to sell was now given the fund is restructuring its real estate portfolio.

More details from the Sacramento Bee:

CalSTRS said Thursday it lost around $125 million on the sale of some Florida real estate […]

The California State Teachers’ Retirement System confirmed that one of its investment partnerships recorded a $132 million loss on the recent sale of a swath of industrial land in Florida’s Palm Beach County.

CalSTRS spokesman Ricardo Duran said the teachers’ pension fund owned 95 percent of the investment and took 95 percent of the loss.

The deal was first reported by the Palm Beach Post and South Florida Business Journal.

Duran said CalSTRS wrote off the investment entirely in 2009, so the sale price represents a partial recovery of its losses. The sale price was nearly $3 million higher than CalSTRS valued the land in the third quarter of this year.

CalSTRS decided not to wait any longer for land prices to recover, however. “The likelihood of getting what we paid for it anytime soon is pretty remote,” Duran said.

Besides, CalSTRS wanted to unload the property as it implements a restructuring of its real estate portfolio, moving away from speculative land deals in favor of leased-up, income-producing properties. “This is part of our de-risking,” Duran said.

CalSTRS manages a $189.7 billion portfolio.

Photo by Stephen Curtin

Cuomo Rejects Bill To Increase Alternative Investments By Pensions

New York Governor Andrew Cuomo on Thursday vetoed a bill that aimed to raise the percentage of assets New York City and state pension funds could allocate towards hedge funds and private equity.

From Bloomberg:

Governor Andrew Cuomo vetoed a bill that would have allowed New York state, city and teachers pension funds to allocate a larger percentage of their investments to hedge funds, private equity and international bonds.

The measure approved by lawmakers in June would have increased the cap on such investments to 30 percent from 25 percent for New York City’s five retirement plans, the fund for state and local workers outside the city, and the teachers pension. The funds have combined assets valued at $445 billion.

“The existing statutory limits on the investment of public pension funds are carefully designed to achieve the appropriate balance between promoting growth and limiting risk,” Cuomo said in a message attached to the veto. “This bill would undermine that balance by potentially exposing hard-earned pension savings to the increased risk and higher fees frequently associated with the class of investment assets permissible under this bill.”

[…]

A memo attached to the New York bill said raising the allotment for hedge funds and other investments is necessary for flexibility to meet targeted annual returns. A swing in the value of the funds’ publicly traded stocks can push the pensions “dangerously close” to the investment cap, the memo said. The change would also better enable the funds’ advisers and trustees to “tactically manage the investments to take advantage of market trends, react to market shocks and potentially costly rebalances or unwinds at inopportune times,” it said.

New York City Comptroller Scott Stringer supported the bill.

Photo by Tim (Timothy) Pearce via Flickr CC License

Think Tank: New Jersey Pension Benefits Aren’t That Lucrative

One of the criticisms leveled at New Jersey and its underfunded pension system – and one of the main justifications used to cuts in worker benefits – is that New Jersey’s public employees receive more generous pension benefits than their peers in other states.

But a left-leaning think tank released a report Wednesday that cast doubt on the generosity of New Jersey’s pension benefits relative to other states.

From NJ.com:

New Jersey’s public employee pension plans ranked among the least generous of top public pension plans in the country, according to a report released today.

The study shows New Jersey’s pensions are more modest than 94 of the country’s 100 largest plans.

[…]

The study considered whether pension plans protect retirees from rising inflation, how benefits are calculated and how much employees contribute to their plans.

New Jersey fell in the bottom half in all three fields, which Stephen Herzenberg, the Executive Director of the Keystone Research Center, who authored the report, called the three most important dimensions of generosity.

[…]

Workers kick in 6.93 percent of their pay — and that number is rising — while employees contribute less in more than half of the other systems, according to the findings.

New Jersey’s retirees do not receive yearly cost-of-living adjustments to offset inflation, unlike 69 other plans included in the study that offer some protection from inflation. Retirees are suing to restore the cost-of-living increases that Gov. Chris Christie suspended as part of a 2011 pension reform package.

The state’s formula for calculating pension payments also uses a low multiplier — 1.67 percent — that lands it in the bottom quarter of plans.

The report notes that Garden State workers also receive some of the lowest pension benefits, but those were not factored into the rankings.

On average, pension benefits are $26,000 a year. Local government employees receive less on average, $16,000, while teachers receive more, $40,000. State employees collect $25,000.

Read the full think tank report here.

Photo: “New Jersey State House” by Marion Touvel. Licensed under Public domain via Wikimedia Commons

Many Rhode Island Retirees To See COLAs Unfrozen in 2015

One of the pillars of Rhode Island’s sweeping 2011 pension reform law was the suspension of annual cost-of-living-adjustments for retirees.

According to the Civic Federation, the reform law mandated:

Automatic annual increase in pensions benefits (COLA) is suspended until state employees, teachers, nurses, correctional, officers, judges, and state police plans’ funding level calculated together exceeds 80 percent; interim increases will be paid at 5-year intervals, based on investment returns.

The interim annual increase and all future annual increases will be applied only to the first $25,000 of income (indexed) and based on investment returns.

But in 2015, for the first time in years, many municipal retirees are will receive a COLA. The raise will be to the tune of 2.73 percent.

The increase was triggered by funding improvements that moved many pension systems over the 80 percent funding threshold required for members to receive COLAs. From the Providence Journal:

Good news for many Rhode Island municipal retirees: they will see a 2.73 percent increase in their pension benefits starting next year.

[…]

59 of the 113 municipal plans in the state-run Municipal Employees Retirement System are healthy enough now (at least 80 percent properly funded) that their members will see the COLA next year on the first $25,000 of their pension benefit, reported the state Retirement Board on Wednesday.

The COLAs were approved by the board as it accepted its annual valuation reports for the MERS plans and the Employees Retirement System of Rhode Island, the major retirement plan for state employees and teachers.

Those valuations reports showed that the state’s overall investments earned 8.23 percent last year on a five-year “smoothed” basis, outperforming the state’s 7.5 percent assumed rate of return.

The ERSRI plans are not expected to reach 80 percent funding until around 2031. But since passage of the pension overhaul law, lawmakers approved a provision where some pension increase for those workers could be added every five years if certain investment levels were met.

To see the list of retirement systems receiving COLAs, click here.

Kolivakis Weighs In On CalPERS’ PE Benchmark Review

It was revealed last week that CalPERS has plans to review its private equity benchmarks. The pension giant’s staff says the benchmark is too aggressive – in their words, the current system “creates unintended active risk for the program”.

Pension360 last week published the take of Naked Capitalism’s Yves Smith on the situation. Here’s the analysis of pension investment analyst Leo Kolivakis, publisher of Pension Pulse, who takes a different stance.

____________________________________

By Leo Kolivakis [Originally published on Pension Pulse]

I was contacted in January 2013 by Réal Desrochers, their head of private equity who I know well, to discuss this issue. Réal wanted to hire me as an external consultant to review their benchmark relative to their peer group and industry best practices.

Unfortunately, I am not a registered investment advisor with the SEC which made it impossible for CalPERS to hire me. I did however provide my thoughts to Réal along with some perspectives on PE benchmarks and told him unequivocally that CalPERS current benchmark is very high, especially relative to its peers, making it almost impossible to beat without taking serious risks.

Almost two years later, we now find out that CalPERS is looking to change its private equity benchmark to better reflect the risks of the underlying portfolio. Yves Smith of Naked Capitalism, aka Susan Webber, came out swinging (again!) stating CalPERS is lowering its private equity benchmark to justify its crappy performance.

There are things I agree with but her lengthy and often vitriolic ramblings just annoy the hell out of me. She didn’t bother to mention how Réal Desrochers inherited a mess in private equity and still has to revamp that portfolio.

More importantly, she never invested a dime in private equity and quite frankly is far from being an authority on PE benchmarks. Moreover, she is completely biased against CalPERS and allows this to cloud her objectivity. Also, her dispersion argument is flimsy at best.

Let me be fully transparent and state that neither Réal Desrochers nor CalPERS ever paid me a dime for my blog even though I asked them to contribute. I am actually quite disappointed with Réal who seems to only contact me when it suits his needs but I am still able to maintain my objectivity.

I remember having a conversation with Leo de Bever, CEO at AIMCo, on this topic a while ago. We discussed the opportunity cost of investing in private markets is investing in public markets. So the correct benchmark should reflect this, along with a premium for illiquidity risk and leverage. Leo even told me “while you will underperform over any given year, you should outperform over the long-run.”

I agreed with his views and yet AIMCo uses a simple benchmark of MSCI All Country World Net Total Return Index as their private equity benchmark (page 33 of AIMCo’s Annual Report). When I confronted Leo about this, he shrugged it off saying “over the long-run it works out fine.” Grant Marsden, AIMCo’s former head of risk who is now head of risk at ADIA, had other thoughts but it shows you that even smart people don’t always get private market benchmarks right.

And AIMCo is one of the better ones. At least they publish all their private market benchmarks and I can tell you the benchmarks they use for their inflation-sensitive investments are better than what most of their peers use.

Now, my biggest beef with CalPERS changing their private equity benchmark is timing. If we are about to head into a period of low returns for public equities, then you should have some premium over public market investments. The exact level of that premium is left open for debate and I don’t rely on academic studies for setting it. But there needs to be some illiquidity premium attached to private equity, real estate and other private market investments.

Finally, I note the Caisse’s private equity also underperformed its benchmark in 2013 but handily outperformed it over the last four years. In its 2013 Annual Report, the Caisse states the private equity portfolio underperformed last year because “50% of its benchmark is based on an equity index that recorded strong gains in 2013″ (page 39) but it fails to provide what exactly this benchmark is on page 42.

Also, in my comment going over PSP’s FY 2014 results, I noted the following:

Over last four fiscal years, the bulk of the value added that PSP generated over its (benchmark) Policy Portfolio has come from two asset classes: private equity and real estate. The former gained 16.9% vs 13.7% benchmark return while the latter gained 12.6% vs 5.9% benchmark over the last four fiscal years. That last point is critically important because it explains the excess return over the Policy Portfolio from active management on page 16 during the last ten and four fiscal years (click on image).

But you might ask what are the benchmarks for these Private Market asset classes? The answer is provided on page 18 (click on image).

What troubles me is that it has been over six years since I wrote my comment on alternative investments and bogus benchmarks, exposing their ridiculously low benchmark for real estate (CPI + 500 basis points). André Collin, PSP’s former head of real estate, implemented this silly benchmark, took all sorts of risk in opportunistic real estate, made millions in compensation and then joined Lone Star, a private real estate fund that he invested billions with while at the Caisse and PSP and is now the president of that fund.
And yet the Auditor General of Canada turned a blind eye to all this shady activity and worse still, PSP’s board of directors has failed to fix the benchmarks in all Private Market asset classes to reflect the real risks of their underlying portfolio.

All this to say that private equity, real estate, infrastructure and timberland benchmarks are all over the map at the biggest best known pension funds across the world. There are specific reasons for this but it’s incredibly annoying and frustrating for supervisors and stakeholders trying to make sense of which is the appropriate benchmark to use for private market investments, one that truly reflects the risks of the underlying investments (you will get all sorts of “expert opinions” on this subject).

Photo by rocor via Flickr CC License

Two Pension Bills Sitting in Pennsylvania Legislature Likely to Resurface In 2015

Pennsylvania’s outgoing governor, Tom Corbett, made reforming the state’s pension system his top priority over the last year. But his plan – which would shift new hires into a “hybrid” plan with characteristics of a 401(k) – failed to enthuse most legislators.

Still, two pension bills are still sitting in the legislature, and they are likely to be brought up again in 2015. The first bill mirrors Corbett’s “hybrid idea”. As described by the Scranton Times-Tribune:

The hybrid plan, proposed by state Rep. Seth Grove, R-York, would maintain defined benefit plans for current employees and retirees and shift new hires into a plan that has features similar to 401(k) plans.

The proposal has several provisions to help municipalities reduce pension deficits, including guaranteeing a rate of investment return and allowing any excess earnings to be used to reduce the pension plan’s unfunded liabilities, said Rep. Grove.

[…]

The bill was introduced in the last legislative session, but never made it out of the Local Government Committee. Rep. Grove said he plans to reintroduce the bill in the next session.

The other bill takes a different approach. From the Times-Tribune:

The other bill focuses on reforming Act 111, which requires binding arbitration when a municipality is unable to reach a contract with its police or firefighters unions.

State Rep. Rob Kauffman, R-Chambersburg, introduced a bill last year that would, among other things, require an arbitrator to consider a municipality’s ability to pay when issuing an award. It did not make it out of committee, but is expected to be reintroduced this session, said Rick Schuettler, executive director of the Pennsylvania Municipal League, which supports the legislation.

Municipal officials statewide have long-complained that binding arbitration is stacked in favor of the unions, with arbitrators often issuing excessive awards.

How likely are these bills to gain any traction? The second one has the better chance, because incoming Gov. Tom Wolf is opposed to changing the pension system to a “hybrid” plan.

Ontario Pension Commits $200 Million to Infrastructure

The Ontario Pension Board has earmarked $200 million to AMP Capital for investment in global infrastructure.

Details from IPE Real Estate:

Launched in October, the strategy is aiming to raise CAD2bn (€1.57bn) for investments in OECD transport, communication and utilities.

AMP, which manages unlisted and listed infrastructure investments in Asia, Europe, North America, Australia and New Zealand, said the strategy currently holds a $750m portfolio of diversified European infrastructure equity assets.

Glenn Hubert, a private markets managing directors at OPB, said the pension fund was attracted by the possibility to gain exposure to multiple, high-quality assets.

OPB had a 3.2% allocation to infrastructure at the end of last year.

The commitment, he added, grows OPB’s presence in North America, a region that AMP has been building its presence in. The manager has an infrastructure equity team in New York.

AMP Capital global head of infrastructure equity Boe Pahari said growing numbers of institutional investors are seeking greater exposure to alternative assets such as infrastructure, attracted to ”predictable risk-adjusted returns, consistent yields and portfolio diversification”.

As reported in October, private equity firm Pantheon is among investors backing AMP Capital’s strategy.

The Ontario Pension Board manages more than $19 billion in assets.

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