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For Bond Buyers, Illinois is “Problem State” Until Pension Limbo Resolved

Illinois has been in a state of pension limbo since July, when a state Supreme Court ruling on healthcare premiums hinted that the state’s pension reform law would be struck down by the courts.

Now, bond buyers are watching closely how the Supreme Court rules on the state’s pension reform law – but until then, investors are marred in “uncertainty” and are calling Illinois a “problem state”.

From The Street:

Municipal debt investors are watching the appeals process that will decide whether or not the State of Illinois’ pension reform bill ends up in the wastebasket, which would send the Land of Lincoln back to square one in its attempts to battle its pension funding crisis.

“There’s so much uncertainty there,” Daniel Solender, the lead portfolio manager for municipal bonds at investment manager Lord Abbett & Co., said by phone Wednesday. “It’s hard to know what the right valuation is [for the state’s bonds].”

So far, investors are waiting and watching. Solender noted that there hasn’t been much trading in Illinois’ bonds in response to a Nov. 21 Circuit Court decision that said the reform bill was unconstitutional. If the Illinois Supreme Court upholds that decision, Solender expects a negative effect on the state’s bond values.

“For investors to get comfortable, there has to be some idea of a plan [for pension reform], and there doesn’t seem to be one [now],” he said.

Still, he is confident that Illinois has time to work out its pension issues one way or another.

Solender and other sources are looking optimistically to Governor-elect Bruce Rauner, a Republican, to address the issue. Rauner will replace Pat Quinn, a Democrat, on Jan. 12.

Illinois’ unfunded pension liability has ballooned to $111.2 billion, according to a November report by the Illinois Commission on Government Forecasting and Accountability. The Teachers’ Retirement System accounts for about half of that at $61.6 billion, the report said.

A June 24 report by Standard & Poor’s revealed that Illinois has, by far, the lowest level of pension funding in the country at 40.4% funded, followed by Connecticut (49.1%).

As part of a Dec. 1 panel in New York City that discussed municipal debt restructuring, William A. Brandt Jr., president and CEO of Development Specialists Inc., said that Illinois holds 43% of the public pensions in the U.S. According to Brandt, who is also the chair of the Illinois Finance Authority, those amount to some 652 public pensions.

“Illinois is your problem state,” he warned.

Moody’s gives Illinois’ credit an A3 rating – the lowest of any state.

Texas Teachers Commits $865 Million to Real Estate

The Teacher Retirement System of Texas has committed $865 million to several real estate funds that will invest in Europe, the U.S. and elsewhere around the globe.

Details from IPE Real Estate:

The US pension fund approved a $465m allocation to Westbrook Partners’ UWS Co-Investment 9 venture. The manager, which did not comment, will invest in special situation opportunities on a global basis.

Westbrook is active in the US, as well as London, Paris, Munich and Tokyo.

Texas also made respective $150m and $50m commitments to Square Mile Capital Management’s Credit Partners and Tactical Partners debt funds. Square Mile declined to comment.

Credit Partners, which will raise $750m, includes a $200m co-investment by the manager.

USAA Real Estate Company, which invested in Square Mile in 2012, is understood to be behind the manager’s commitment.

Credit Partners, which is targeting 10% to 12% gross IRRs, will provide new loans, including mezzanine debt on major property asset classes, avoiding land and single-family residential.

Around 85% of capital will be invested in the US, with the remainder in Europe.

Texas Teachers also approved a $200m commitment to Almanac Realty Investors’ Securities VII, investing $100m directly into the fund and $100m into a sidecar for the same fund for co-investments. The fund focuses on US REITs and real estate operating companies.

TRS Texas manages $124 billion in assets.

Pension Funds Sue Chris Christie Over State Contribution Cut

New Jersey’s three largest pension funds filed a lawsuit against New Jersey Gov. Chris Christie on Wednesday for slicing the state’s required pension contribution by $900 million in 2014.

The complaint can be read here.

Video: CalSTRS CIO on Corporate Governance and Splitting CEO and Chairman Roles

In this discussion, CalSTRS Chief Investment Officer Chris Ailman talks about why he thinks corporations need to have separate CEO and chairman roles – and how CalSTRS is pushing companies to divide those roles.

Illinois Supreme Court Expedites Pension Reform Appeal

The Illinois Supreme Court on Wednesday complied with a request by Illinois Attorney General Lisa Madigan to fast track the hearing over the state’s pension reform law, which a lower court found unconstitutional.

From Reuters:

The court ordered public labor unions and retiree groups challenging the law and the state to file their briefs in January and February with oral arguments to be scheduled in March. Illinois Attorney General Lisa Madigan had asked the court last week to speed up the appeal process.

The state asked for oral arguments as early as Jan. 22 and no later than March 10 to enable Illinois’ upcoming budget to incorporate about $1 billion in cost-savings under the law, or adequate spending cuts or tax increases to offset those savings.

The pension reform law was supposed to go into effect on June 1 but was put on hold by Sangamon County Circuit Court Judge John Belz in May pending his Nov. 21 ruling in five consolidated lawsuits. The state’s new fiscal year begins July 1 and the legislature usually passes a budget by May 31.

The law’s opponents asked the supreme court on Tuesday not to speed up the case.

The law raises retirement ages and suspends COLAs for some workers, and makes state contributions to the pension system enforceable by the Illinois Supreme Court.

Urban Institute Launches Public Pension Tool – “Build Your Own Pension Plan”

The Urban Institute has released its “Build Your Own Pension Plan” tool, which allows users to construct and analyze the costs and benefits of self-made pension plans.

The tool, outlined by Pensions & Investments:

State and local governments dealing with pension challenges can use a new tool from the Urban Institute in Washington to model possible changes.

The independent think tank released on Tuesday the interactive tool, “Build Your Own Pension Plan.”

As part of its Public Pensions Project, the Urban Institute also has a pension report card that grades states on pension funding, retirement security for both short-term and long-term employees, and workforce incentives.

New approaches like cash balance plans and offering annuities for public-sector workers score well on the report card, said Richard Johnson, senior fellow and program director for retirement policy at the Urban Institute. While they don’t solve current underfunding woes, “they represent the kind of bold thinking needed to address the pension challenges confronting state and local governments. There are better ways of reforming pensions that can provide public servants with secure retirements and still save taxpayers money,” Mr. Johnson said in a statement.

Use the tool here.

Photo by Michael Scott via Flickr CC License

San Diego Pension Changes Media Policy; Trustees Now Free to Make Public Comments

The San Diego County Employees Retirement Association (SDCERA) has amended its media policy to allow its trustees to talk to media outlets. Previously, all media requests were re-directed to the fund’s CEO, Brian White.

Trustees called the policy “too controlling” and equated it to “communist Russia”.

Reported by the San Diego Union-Tribune:

County pension trustees are now free to talk to reporters, bloggers and anyone else without running afoul of their media policy.

The San Diego County Employees Retirement Association policy previously prohibited board members from commenting to the media, instructing them to direct all media requests to the CEO or his spokesman.

The board voted 7-1 to remove the prohibition.

Trustee Samantha Begovich said the old policy violated her First Amendment right.

“That’s communist Russia right there,” she said. “I see no basis for that.”

She said one problem with CEO Brian White as the sole arbiter of agency comments is that he’s too quick to defend investment consultant Salient Partners of Texas.

“We are not the PR arm of Salient,” Begovich said.

[…]

Supervisor Dianne Jacob, who represents the county Board of Supervisors on the pension board, suggested at one point that having a media policy was unnecessary.

“It’s understood that the board president or the CEO would speak on behalf of the board or the board position,” she said. “But in no way should it preclude a board member from expressing their opinion.”

County Treasurer Dan McAllister cast the only vote against the change, saying he wanted to rescind the policy entirely.

“It’s too controlling,” he said. “It’s too overlording.”

One trustee, David Myers, thought the previous policy was “fine”, although he ended up voting to amend it. From the San Diego UT:

Trustee David Myers said the policy was correct to direct board members to refer media requests to the CEO or board chair.

“The policy is fine the way it is, despite the conspiracy hysteria by one trustee to what the policy is,” Myers said, although he then went along with the board majority in supporting the change.

SDCERA manages $10.5 billion in assets.

Photo by Gene Han via Flickr CC License

Video: CalSTRS CIO On Pros and Cons of Activist Investing

CalSTRS Chief Investment Officer Chris Ailman sat down with Bloomberg TV this week to talk about the pros and cons of activist investing and the difference between “white hat” and “black hat” activist investors.

Also appearing is Columbia Business School Adjunct Professor Fabio Savoldelli.

General Partners Gain Upper Hand Over Pension Funds As Raising Capital Becomes Easier

Pensions & Investments released an interesting report yesterday outlining the balance of power in the private equity world between general partners and pension funds.

In the last few years, the balance of power has shifted dramatically towards GP’s, according to the report.

From Pensions & Investments:

Until the 2008 financial crisis, general partners pretty much set the rules, leaving most limited partners little say on terms, including on fees and expenses, when they committed to funds. Then fundraising got harder, and even the most popular private equity managers had to accept investors’ demands for lower fees and expenses and a greater degree of transparency.

Now, the highest-returning general partners are regaining the upper hand.

“Certainly, the pendulum has swung more toward the GP compared to 2009,” said Kevin Campbell, managing director and portfolio manager in the private markets group at fund-of-funds manager DuPont Capital Management, Wilmington, Del. The firm was spun out from the pension management division of DuPont’s pension plan in 1993.

[…]

Said DuPont’s Mr. Campbell: “I’ve seen the pendulum of power change positions several different times during the last 15 years,” where private equity fund terms are determined by the GP and sometimes they are more influenced by the LP.

Strong-performing managers that retain the same team and the same investment strategy used when they earned their strong returns have the most influence over fund terms, Mr. Campbell said. These managers also are raising a fund that is similar in size to their last fund and they have a “good investor base,” meaning investors who routinely commit to their funds, he said.

[…]

Some are increasing their negotiating clout by getting large capital commitments from sovereign wealth funds before the first close, enabling them to give other interested institutional investors a take-it-or-leave-it deal, said Stephen L. Nesbitt, chief executive officer of Marina del Rey, Calif.-based alternative investment consulting firm Cliffwater LLC.

Part of the reason GPs have power over LPs has to do with fundraising. GPs are having an easy time raising capital, which means they don’t have any incentive to negotiate terms with LPs. From P&I:

It’s easier to raise capital now; funds are raised more quickly and general partners have more influence on terms, he added.

Indeed, some private equity funds are closing very quickly, with access to much more capital than they need. Instead of holding several fund closings — giving general partners the ability to invest the capital commitments before the final close — a number of firms are having “one-and-done” closings. Because there are asset owners willing to invest on those terms, the GPs have little reason to give in to limited partners demanding changes to fund terms.

For example, Veritas Fund Management in August held a first and final close at $1.875 billion for its latest middle-market private equity fund, after just three months of fundraising. And private equity real estate manager Iron Point Partners LLC in November closed the Iron Point Real Estate Partners III LP at $750 million, well above its $450 million target.

And KPS Capital Partners LP held a first and final closing last year of its $3.5 billion KPS Special Situations Fund IV, above its $3 billion target. It was KPS’ third oversubscribed institutional private equity fund, according to a statement from the firm at the time.

Read the full report here.

Pennsylvania Pension Contribution To Rise By $466 Million in 2015

Pennsylvania’s required annual contributions to its two pension systems are set to grow by $466 million next year – bringing the state’s tab in 2015 to over $2 billion.

The information was revealed by the state’s budget secretary during an annual update on the state’s fiscal condition.

From the PA Independent:

State-level contributions to Pennsylvania’s two pension plans will have to climb by an estimated $466 million in the next budget, after an increase of about $520 million this year. Next year could be considered the mid-point of a decade-long “pension spike” that sees retirement costs consuming larger and larger shares of the state’s spending each year.

Budget Secretary Charles Zogby of Gov. Tom Corbett’s outgoing administration outlined the bad news this week in an annual mid-year update on the state’s fiscal situation.

After four years of seeing pension costs grow — the state spent about $500 million on pensions in the last budget before Corbett took office, compared to more than $1.7 billion this year — and making limited headway on any changes to how the state pays for its employees’ retirement, the governor’s team will soon hand responsibility to Wolf.

[…]

The pension crisis has its roots in a series of decisions made by three different governors and state legislatures between 2001 and 2003. A series of changes to the pension plans increased benefits without asking state workers to contribute more towards retirement, boosted retirement benefits for those who were no longer working at all and allowed the state to take a decade-long “pension holiday” without paying for those increased costs.

That pension holiday ended in 2011, leaving first Corbett and now Wolf holding the bag.

It was also revealed that pension payments could rise above $3 billion annually by 2019.

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