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Former Illinois Governor Jim Edgar Weighs In On State’s Pension Problems; Calls Pension Reform Law A “Huge Mistake”

Jim Edgar, former Illinois governor from 1991 to 1999, sat down with Reboot Illinois this week to discuss the state’s pension crisis and the court ruling that deemed Illinois’ pension reform law unconstitutional.

Edgar talked about the ruling and placed fault on lawmakers for not drafting a bill that would pass the scrutiny of the courts. From Reboot Illinois:

I thought they made a huge mistake passing a clearly unconstitutional proposal. It just delayed trying to figure out something that we can do for three years and we went through a lot of anguish we didn’t need to go through that scared a lot of people. I’m not a lawyer, but it’s pretty plain if you read the constitution, if you read the debates of the convention, they put that language in exactly to keep the Legislature from doing what they did two years ago. I expect courts will throw it out and we’re going to have to start over.

Then, I don’t think there’s any silver bullet. It’s obvious you can’t say we’re going to solve this on the backs of the retirees or the employees. I don’t think it’s going to get done overnight. Whatever plan gets put in place will be like the plan we put in place back in the mid ‘90s and, unfortunately, they got away from it.

He talked about the funding ratio Illinois should be shooting for:

I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.

Edgar also touched on Bruce Rauner’s stated plan of moving new hires into a 401(k)-style plan:

That’s something they’re going to have to work out with the Legislature and if they do that, they have enough money to take care of the commitments. The constitution says the pension benefits already granted have to be honored. You can’t cut those. You’re going to have to balance those two things off.

[….]

unfortunately we won’t have that much growth in the number of new people coming in and if they’re not paying into the system, it’s like Social Security. Same thing with state workers. You had a growth in state workers that occurred from about ’68 and a lot of those people are now retiring, so I doubt if we’re going to keep seeing the growth in state government, so you’ve got to be careful on that.

That’s all his suggestion. I don’t think he’s said it’s this way or no way. I think he knows he’s going to have to negotiate it.

Read the entire interview here.

Texas Teachers Pension Invests $200 Million in Automotive Real Estate

The Teacher Retirement System of Texas (TRS Texas) has committed $200 million to a fund that invests in car dealership properties.

From IPE Real Estate:

The pension fund is investing in the $651m BSREP CARS Co-Invest Pooling, a vehicle set up by Brookfield to invest in Capital Automotive, which provides real estate financing for car dealerships.

The commitment by Texas Teachers was one of several from institutional investors and will amount to 30.5% of invested capital in the vehicle.

Brookfield Strategic Real Estate Partners Fund provided most of the capital for the joint venture. Brookfield declined to comment on how much capital it has invested. Additional capital came from BSREP CARS.

Capital Automotive, which has invested $4.3bn in 440 US facilities and has a 16.3m sqft portfolio in 35 US states, typically provides real estate financing for automotive dealers to either acquire new locations or upgrade existing operations. The firm was previously owned by DRA Advisors.

Texas Teachers made the investment for its ‘special situations’ portfolio, a new category it created within its real assets portfolio for investments outside traditional core, value-added and opportunistic classifications.

TRS Texas manages $124 billion in assets and is the sixth-largest public pension fund in the United States.

Photo by Billy Wilson 2010 via Flickr CC License

Kolivakis Weighs In On Restructuring of CalSTRS Investment Staff

CalSTRS recently completed a restructuring of its investment staff, which including appointing its first chief operating investment officer.

The restructuring had a purpose: the fund is planning to move a significant portion of investment management duties in-house.

CalSTRS currently manages 45 percent of its portfolio internally. The fund wants to bring that number up to 60 percent, according to a CalSTRS press release.

Leo Kolivakis, who runs the blog Pension Pulse, weighed in on the changes in a recent post, which is printed, in part, below:

_____________________

By Leo Kolivakis

The shift toward internal management is a smart move and I like the way they restructured their senior staff to implement this shift.

According to Reuters, Debra Smith, the new chief operating investment officer, will oversee the fund’s Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. And as stated in the WSJ article above, Smith will report to the investment committee twice a year, giving her a direct line to board members.

Pay attention here folks because this is a great move from a pension governance perspective. I’ve always argued that the head of risk and head of operations at public and private pension funds should report directly to the board of directors, not the CEO or CIO. If there is a disagreement on operational or investment risks being taken, the board can listen to the arguments and decide if the risks are worth taking.

I’ve also long argued that whistleblowers need to be protected and whistleblower policies need to be beefed up at all public pension funds so that employees who witness shady activity can safely report it without worrying about being fired. If some senior manager is accepting bribes from an external fund manager or from a big vendor peddling the latest most expensive software, there should be a way to detect and report this fraud.

Finally, go back to read my comment on why U.S. pension funds are going Canadian. The reason is simple. It makes sense to manage assets internally, saving on fees and having more control over your investments. CalSTRS isn’t the first big state pension fund to do this (Wisconsin is) and it won’t be the last.

Of course, to really go Canadian, U.S. public pensions have to pay their senior investment staff big bucks and they have to separate politics from their entire governance process. When I read articles on how John Buck Co., a real-estate investment firm whose executives contributed substantially to the campaign of Chicago Mayor Rahm Emanuel, has earned more than $1 million in fees for managing city pension money, I shake my head in disbelief. This is Chicago-style politics at its worst. No wonder Illinois is a pension hell hole!

Photo by Stephen Curtin

San Diego Pension Board Votes to Move CIO In-House; Approves Other Governance Changes

The San Diego County Employees Retirement Association formally voted on Friday to begin searching for an in-house chief investment officer to replace Salient Partners, the firm currently serving as the fund’s outsourced CIO.

The board also made several changes in governance structure. From the San Diego Union-Tribune:

Near the end of a two-day board retreat this week, trustees voted 8-1 to return to an in-house chief investment officer rather than rely on an outsourced portfolio strategist.

Trustee David Myers was sole opponent to the reversal.

The board is likely to start the recruiting process for a CIO as soon as next month.

Pension officials also reversed course on their unusual governance structure, a model that had both CEO Brian White and Salient principal Lee Partridge reporting to the board.

Under the new organizational chart, the in-house chief investment officer will report to the CEO, who in turn will report to the board.

Consultants invited to the two-day retreat told trustees that retaining the dual-reporting model was not among the best practices for public pension systems.

One area of concern for trustees: could the pension fund offer a high enough salary to attract a talented CIO? More from ai-cio.com:

Board members aired their views on Friday about how much the county would be willing to pay. The matter concerned Dick Vortmann, who said he did not want SDCERA to end up with “the best of the rest” if the fund was not allowed sufficient budget to hire someone with the requisite skillset to manage investments.

Jacob said the annual salary would be in the $200,000 to $300,000 a year range. She referenced the $4.5 million that was agreed for the four year contract with Salient and said the county “would probably baulk at that.”

[…]

Board Chairman “Skip” Murphy voted with the motion, but said if the county did not agree to a pay package that would attract the right candidate, he was “in a world of hurt”.

Read more coverage of the decision here and here.

Moody’s: Deals With CalPERS Will Further “Weaken” Bankrupt California Cities

Three California cities – Stockton, San Bernardino, and Vallejo – have declared bankruptcy in recent years. But all three have struck deals with CalPERS to keep its citizens’ pension benefits intact.

That’s a win for pensioners, but Moody’s says the deals may not be healthy for the cities: they will have to pay large, rising contributions to CalPERS, and risk “weakening” their financial profiles in the process.

From Chief Investment Officer:

Moody’s said [San Bernardino] would face rising bills from CalPERS in the years ahead.

“San Bernardino’s choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS will likely increase to the point where they weaken the city’s financial profile, even after the relief provided by the bankruptcy adjustments,” said report authors Gregory Lipitz and Thomas Aaron.

The pair added that they expect similar “weakening” in both Stockton and Vallejo, two other Californian cities that have reached funding agreements with CalPERS following bankruptcy. CalPERS and the California State Teachers’ Retirement System have both been increasing employer contribution rates to deal with funding gaps and improvements in longevity.

“CalPERS’ latest actuarial valuations for each city forecast unrelenting increases to required contributions, despite the very strong investment performance of CalPERS in 2013 and 2014,” Moody’s said.

Actuarial projections indicate that by 2021, the three cities’ contributions could rise to between 30 percent and 40 percent of payroll.

NYC Pension Appoints New Heads of Private Equity, Hedge Fund Investments

The New York City Bureau of Asset Management – the entity that manages assets for the city’s retirement systems—has appointed two staffers to head its private equity and hedge fund investments, respectively.

The backgrounds of the appointees, from Chief Investment Officer:

Effective immediately, NYC’s comptroller appointed Alex Doñé as head of private equity and Neil Messing to take over the hedge fund portfolio.

Doñé has worked at the bureau, investing the city’s five pension funds, since 2012. Prior to the promotion, he served as the fund’s executive director of private equity and oversaw its $5.6 billion emerging managers program.

He spent the bulk of his earlier career in the private sector, with 16 years of experience in investment banking and private equity. Doñé has worked at Clearlake Capital Group, KPMG Corporate Finance, and Merrill Lynch. For two years, he served as a presidential appointee at the US Department of Commerce’s Minority Business Development Agency.

The NYC pensions’ new head of hedge funds likewise built his background in the private sector before becoming an asset owner in 2011. Messing most recently served as the fund’s senior investment officer responsible for hedge funds. According to the NYC comptroller’s office, he “built and managed a diversified $4 billion portfolio of direct hedge fund investments and a fund-of-hedge funds” for the pensions.

The CIO of the city’s pension system commented on the appointments:

“The appointment of Alex and Neil will strengthen the investment operations of the Bureau of Asset Management,” said Scott Evans, CIO of the New York City Pension Funds. “Alex and Neil are ethical and sophisticated investment managers and I am excited to see them take on new roles as part of senior leadership.”

The New York City Bureau of Asset Management manages $160 billion in assets for the city’s pension systems.

Chart: How Much Are CalPERS’ Board Members Paid?

The above graphic comes from a new Sacramento Bee investigation into CalPERS’ compensation policies, which at least one expert called “highly irregular”. The full investigation can be read here, but the above graphic gives an overview of the how much the pension fund’s board members get paid.

NYC Pensions Paid Record Fees in 2014; Former Pension Official Says Comptroller “Dragging His Feet” On Cutting Expenses

New York City Comptroller Scott Stringer serves as investment advisor to the boards of the city’s five pension funds, which together manage $144 billion in assets.

Last year, Stringer’s office said the city’s pension systems needed to “limit costs” and “negotiate lower fees”.

One year later, the pension systems have paid a record number of investment fees – $530 million – and a former director of the city’s largest pension fund is accusing Stringer of “dragging his feet” on bringing expenses down.

The city’s pension system paid more fees in 2014 than it had in any previous year. From the New York Post:

The city paid a record $530.2 million in fees to pension investment firms last fiscal year, despite Comptroller Scott Stringer’s vow to rein in the escalating costs.

The fat fees forked out to private advisers and consultants skyrocketed from $472.5 million in fiscal year 2013. The half-billion dollars in fiscal year 2014 is five times the $97.9 million paid in 2003.

In the last 15 years, the city has paid $4 billion to advisers.

A year ago, Stringer reacted sternly to reports that his predecessor, John Liu, had paid investment firms 28 percent more than the year before.

“We need to limit costs, ensure payments are commensurate with performance and . . . negotiate lower fees,” a Stringer spokesman said at the time.

Last week, Stringer’s office said he “has made lowering fees a top priority,” but did not give any examples of lowered fees or firms fired for lackluster performance.

One former pension official questioned Stringer’s commitment to lowering investment fees. The official said that Stringer has voted for fees in the past, and hasn’t done anything to bring them down. From the NY Post:

John Murphy, former executive director of NYCERS, the city’s largest pension fund, said Stringer sat on the NYCERS board of trustees as Manhattan borough president.

“He voted for these fees for eight years. Now he’s dragging his feet on doing something about it as a comptroller,” Murphy said.

Besides putting money into stocks and bonds, the comptroller pays dozens of outside advisers to manage investments in riskier private-equity, real-estate and hedge funds.

Murphy called on Stringer to make public his contracts with investment managers, especially private-equity firms, which take payments from the funds they oversee.

“There’s no way to know how much money they’re making” for the pension funds or taking in compensation, Murphy said.

[Stringer spokesman Eric] Sumberg said, “We are reviewing ways to provide transparency on the general terms of our contracts.”

NYC’s five pension systems control $144 billion in assets. They assume a 7 percent return on investment annually.

Pittsburgh Pensions Prepare for Audit as Liabilities Increase

An August report by Pennsylvania’s Public Employee Retirement Commission revealed that the funding level of Pittsburgh’s pension systems have declined since 2012, from 62 percent to 58 percent funded.

That led the State Auditor this month to announce an audit of the city’s pension system. From WESA News:

In an effort to ensure the pension plans for police, firefighters and municipal employees do not become a financial liability, Pennsylvania Auditor General Eugene DePasquale has launched an audit of those plans. Peduto joined the auditor general for the announcement, saying it’s time to dig deep into Pittsburgh’s numbers.

“Get a true and accurate accounting of where we are, make it available so the public can see it, then do what we do in Pittsburgh — solve the problem,” Peduto said.

The overall goal of the audit is to determine if the pension fund is administered in compliance with applicable state laws, regulations, contracts and local ordinances and policies and to determine if municipal officials took appropriate corrective action to address the findings contained in a prior audit report. The prior audit report, covering 2010 and 2011 made several recommendations to address the underfunding of municipal pension plans.

More on the system’s rising liabilities, from Watchdog.org:

It’s estimated Pittsburgh has $485 million in unfunded pension liabilities, out of the total estimated $1.2 billion pension debt. That means many of the promised obligations to current and future retirees aren’t budgeted.

Part of the blame lies with unrealistic discount rates, the assumed rate of return for investments of pension funds. By using unrealistic expected rates of return, the amount Pittsburgh needed to contribute appeared smaller, and the city contributed less.

During the 1990s, the city used a 10 percent discount rate, said James McAneny, executive director of PERC. Those high levels of expected return were never realized, and the plans lost 40 percent of their value within a decade.

Even after that, former mayor Luke Ravenstahl’s administration insisted on not using a rate below 8 percent — with the same results.

McAneny said that as Ravenstahl was leaving office, he knocked the assumed rate of return down to 7.5 percent. This created an instant increase in the unfunded liability. While this makes things more difficult for the current administration, it’s the wise thing to do, McAneny said.

Read more coverage of the coming audit here.

How Pension Trustees Can Ensure Compliance With SEC Pay-to-Play Rules

Raymond M. Sarola, an attorney and former trustee of New York City’s pension systems, has penned a column explaining how trustees can ensure they don’t violate the SEC’s pay-to-play rules, and how they can handle a violation if one does occurs.

The column, published in Pensions & Investments, begins with an overview of the rule in question:

The rule — Securities and Exchange Commission Rule 206(4)-5…prohibits investment advisers from receiving compensation for advisory services to a government entity for two years after the advisory firm or any covered employee makes a political contribution to a public official or candidate who is or would be in a position to influence the award of investment advisory business by public retirement funds. The rule allows covered employees to make contributions up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Contributions by investment firms in any amount would trigger a violation of the rule.

Sarola then lays out options for how trustees can ensure compliance, and what steps to take if a violation has occurred:

Public retirement plan executives should become familiar with the options available if a violation of the SEC rule occurs.

The rule provides for advisory firms that violated the rule to give the public plan sufficient time to redeem or transfer its assets on an uncompensated basis. This provision is particularly important with alternative investment vehicles that invest in illiquid assets and typically restrict the ability of limited partners to redeem committed capital.

Public retirement plans should develop and implement written policies that confirm compliance with this rule by investment advisers. These policies may include a requirement that advisers make a certification of compliance before an initial investment is made, with an ongoing obligation to recertify throughout the life of the investment.

Public plans might also wish to include in their policies a ban on future investment transactions with investment managers who fail to comply with the procedural or substantive requirements of the rule. And public plans should consider including in investment advisory contracts or side letters provisions that address remedial actions if a violation of the rule occurs. For instance, a contract might specify that if a violation occurs, the adviser will continue to provide services under the contract without compensation for up to two years while the pension fund seeks efficient means to transfer its assets. Other remedial measures might require the investment manager to repay the amount paid or promised to a placement agent involved in winning the business.

The full column can be read here.

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