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Group of Retirees To Appeal Detroit’s Pension Cuts

The judge overseeing Detroit’s bankruptcy, Judge Steven Rhodes, said this month there was a 25 percent chance his ruling allowing pension cuts could be overturned if appealed.

That was enough to give a small group of retirees hope. The group, consisting of 133 working and retired city employees, is appealing the city’s pension cuts and asked Rhodes on Monday to delay the cuts until after an appeal can be heard.

From the Detroit News:

In a court filing, the group of retirees, survivors and city workers cited the 4-to-1 odds the Denver Broncos will win Super Bowl XLIX on Feb. 1 as part of their justification for time to appeal.

“Therefore, there is a reasonable likelihood of prevailing on the merits,” retired Detroit police officer and attorney Jamie S. Fields wrote in court motion for a limited stay of Rhodes’ ruling.

The appellants asked for a limited stay that wouldn’t impact other settlements tied to Detroit’s plan to fix city services and shed $7 billion in debt.

Fields, who retired in 2010 as a deputy police chief, argued Detroit should not be able “to avoid any meaningful appellate review of the unprecedented approach” used to forge settlements with labor unions, retiree groups, the city’s pension funds and financial creditors.

[…]

In his Nov. 7 ruling from the bench, Rhodes acknowledged the pension reductions could be a “real hardship” for some retirees.

“The pension reductions in the pension settlement are minor compared to any reasonably foreseeable outcome for these creditors without the pension settlement and the grand bargain,” Rhodes said.

The pension cuts were voted on and approved by city workers over the summer. They include a 4.5 percent benefit cut for general city retirees, and a reduced COLA (from 2.25 percent to 1 percent annually) for public safety retirees.

Photo by TaxRebate.org.uk via Flickr CC License

CalPERS Reviews Timber Allocation After Poor Performance

CalPERS was among the first pension funds to invest in timber, and now is one of the largest timber owners in the country.

But the asset class has performed poorly in recent years, and performance (2.5 percent) came in below benchmarks again in fiscal year 2013-14.

As a result, the pension fund is reviewing its commitment to timber.

From the Wall Street Journal:

The California Public Employees Retirement System is reviewing its timber holdings following a period of poor performance and questions about whether the investments are large enough to impact overall returns for the nation’s largest public pension fund.

Top investment officers and consultants to the system known by its abbreviation Calpers discussed the $2.3 billion commitment at a board meeting Monday. One consultant, Wilshire Associates managing director Andrew Junkin, hinted at the review in an Oct. 22 letter to Calpers investment committee chair Henry Jones that cited the portfolio’s “structural weaknesses” and an evaluation of its “efficacy.”

A Calpers spokesman said no decisions have been made about the future of the timber portfolio. “This process has just begun,” he said via email.

Forests valued for their timber are Calpers’ worst-performing asset since the financial crisis, with returns down .8% over the last five years and 1% over the past three years. The portfolio gained 2.5% during the 2014 fiscal year but that was well below internal goals and industry averages.

Calpers is one of the largest holders of timber in the U.S. and owns 1.46 million acres, according to Forisk Consulting LLC. But one problem identified by Mr. Junkin is that these holdings are entirely concentrated in one part of the country — the U.S. Southeast. Outside the U.S. Calpers also owns properties in Brazil, Guatemala and Australia. The forests are also struggling due to the “timing of the original purchases,” according to the letter.

Chief among the CalPERS’ concerns are that its timber allocation isn’t large enough to make an impact on its portfolio. If that sounds familiar, it’s because CalPERS used the same logic as part of the rationale for exiting hedge funds. More details from the Wall Street Journal:

The size of the program presents another challenge. The holdings represent roughly 1% of total assets at Calpers…

“It could be argued” the current allocation “is not large enough to have a significant impact,” Mr. Junkin said in his letter. At the same time, “it would be massive challenge” to increase the size of the timberland holdings “to something more impactful, say 5%.”

[…]

Any decisions about those holdings will be closely watched within the industry, said Tom Harris, a University of Georgia professor of forest business management. “When they first got involved there was a lot of ‘wow, Calpers is in, we have come of age, this is a big deal,’” said Mr. Harris, who also publishes Timber Mart-South, a not for profit publication charting timber prices for 11 Southeastern states.

CalPERS is the country’s largest pension fund.

Photo by Rick Payette via Flickr CC License

Video: CalSTRS CIO Talks Passive Investing and the “Upside Potential” of the Japanese Market

Christopher Ailman, chief investment officer of CalSTRS, sat down with CNBC on Tuesday and talked about the “upside potential” of the Japanese market. He also discusses index investing and when to actively manage investments.

Chart: Illinois Pension Debt Has Nearly Doubled Since 2009

Yesterday we brought you the numbers on Chicago’s per-capita pension debt, which ranks as the highest among the country’s 25 largest cities.

Today, we zoom out to look at Illinois’ unfunded pension liabilities, which have ballooned to $111 billion this year and nearly doubled since 2009.

Below, you can find a breakdown of where the liabilities are coming from, by system:

Chart credit: Illinois Policy

Rhode Island Pension Reform Law Sits in Legal Limbo on Three Year Anniversary – But Raimondo, Other Lawmakers Open To Settlement

It’s been three years since Rhode Island passed into law a sweeping pension reform measure. But the law still sits in legal limbo after being challenged by labor groups.

A settlement has been hard to come by. But incoming Rhode Island governor Gina Raimondo said Monday she is open to a settlement. From WPRI:

Raimondo – who initially resisted efforts to mediate, but ended up supporting the failed settlement after a judge ordered talks – suggested Monday she remains open to settling but only if she can preserve the lion’s share of the savings from the original 2011 law. The previous settlement reduced the state’s pension shortfall by $3.86 billion, about 94% of the $4.09 billion the law saved.

“As I have said numerous times, I supported the settlement agreement,” Raimondo told WPRI.com in a statement. “I would like to see that back on the table and enacted to put the lawsuits behind us. I am open to making that happen.”

But Raimondo added: “What I am not interested in is going backwards from what was agreed upon in the settlement.” The state is already projecting a budget deficit of nearly $200 million next year; it would be more than twice as high if the old pension system were still in place.

She isn’t the only Rhode Island lawmaker eager to settle and put the legal challenge behind them. From WPRI:

Seth Magaziner – the Democrat newly elected to succeed Raimondo as treasurer, who will therefore become a lead defendant in the pension suit – has long backed seeking a deal.

“I continue to be supportive of renewing settlement talks, and am hopeful that a resolution can be reached that will keep the retirement system on a secure footing and avoid lengthy and expensive litigation,” Magaziner told WPRI.com in a statement Monday.

Legislative leaders are also open to the possibility.

House Speaker Nicholas Mattiello and Senate President M. Teresa Paiva Weed have both signaled in recent days they want to reduce or eliminate taxes on retirement income, such as Social Security and pension benefits – a new perk for older residents that could help smooth the way for settling the pension suit.

“The speaker will work with all parties to help facilitate a settlement of the pension lawsuit that is in the best interests of the citizens of our state,” Larry Berman, a spokesman for Mattiello, told WPRI.com in an email Monday.

Paiva Weed spokesman Greg Pare sounded a similar note. “The Senate worked closely with Treasurer Raimondo to develop the Rhode Island Retirement Security Act, and will continue to work with her as governor,” Pare told WPRI.com in an email Monday.

The pension reform law froze COLAs and moved most employees into a hybrid system with 401(k) qualities. An actuarial analysis stated the reforms improved the funding level of the state’s pension system from 42 percent to 56 percent.

2nd Largest UK Pension Shifting Investment Powers Away From Trustees, Towards Experts

The Universities Superannuation Scheme (USS) is making some major governance changes, as a plan is well underway to shift investment responsibilities away from trustees and towards experts.

Investment decisions that were previously made by trustees – such as strategic asset allocation – will now be the responsibility of investment staff.

However, trustees will still oversee the process.

From Investments & Pensions Europe:

The Universities Superannuation Scheme’s (USS) aim to remove the role of strategic asset allocation from trustees’ responsibilities is nearing completion, as its internal manager looks to more delegated responsibilities.

[…]

USS, with £41.6bn (€51.2bn) in assets, has been looking to amend its investment governance structure to shift more execution to experts and away from its trustee board.

Speaking at a National Association of Pension Funds (NAPF) conference on governance, USS chief executive Bill Galvin said the fund had taken some investment governance ideas from Canadian and New Zealand pension funds.

[…]

“What we have been working really hard on is delegation to the right level of the organisation, where experts are making decisions within clearly defined parameters.”

He said the trustees’ investment sub-committee still owned the detailed strategic allocation but added that this would be passed on to USSIM, with the committee taking charge of the reference portfolio,

“The critical thing is complete transparency about decision-making in the in-house asset manager, and that is overseen by the investment committee,” he said. “But the decisions are delegated.”

USS chief executive Bill Galvin also vocally wondered whether UK trustee boards could adequately run pension systems. From IPE:

He criticised the current legal requirements for UK pension trustees as “inadequate” and said the Trustee Toolkit – TPR’s qualification to sit on a trustee board – was fairly minimal in the context of EU legislation for fit and proper persons.

The USS chief also questioned whether UK’s trustee boards had the range of capabilities required to run pension schemes in today’s environment.

He said schemes’ focus for member and employer representation on trustee boards was a strange concept, whereas other international models focused more on capability.

“I find the issue of representation really challenging,” he said.

“It must be very difficult for someone put on a trustee board [to assume] they will represent members. How do you do that? How do you know? Do you assume what you want is what they want?”

Galvin praised the Ontario Teachers’ fund, where trustee members all fit a jointly agreed job description between trade unions and sponsors.

The Universities Superannuation Scheme covers employees at many UK universities. It manages $63 billion in assets.

Louisiana Pension Borrowing Proposal Shot Down

Louisiana lawmakers were floating a plan to borrow money and buy out the pensions of thousands of “vested” retirees – paying them a lump sum payment up front in order to reduce the state’s future pension obligations.

But experts and stakeholders testified that the plan was not a good idea.

From the Advocate:

A proposal to borrow money to help reduce state pension system debts got shot down quickly Monday.

The idea was to borrow money that would be used to pay one lump sum and buy out the pensions of vested retirees who have not yet begun to draw their benefits. Waiting before drawing on a pension allows the retiree’s pension to increase in value. Paying off the benefits of those retirees would reduce the state’s $20 billion long-term debt obligations, called the unfunded accrued liability.

But a state treasury official, the Legislature’s actuary and two state retirement system chiefs all testified that the idea was plagued with problems.

Just how many vested retirees could take part in such a program, if approved, is unclear. However, the Teachers Retirement System of Louisiana has 6,336 vested but inactive members, and the value of their pensions is $283 million.

Maureen Westgard, executive director of the Teachers Retirement System, said her board “has viewed (the idea of borrowing) as highly risky” in the past.

According to testimony, the aspect of the plan that called for borrowing money was the most problematic. The option of issuing pension obligation bonds was floated. From the Advocate:

Goldman Sachs pitched the idea of “pension obligation bonds,” and he wanted to see if the idea was a viable one, said Pearson, R-Slidell.

“Pension obligation bond history has not been very favorable,” said legislative actuary Paul Richmond, who noted a disaster involving the New Orleans firefighters retirement system.

First Assistant State Treasurer Ron Henson said the state is restricted in its ability to issue debt by a limit on the money it can spend annually in debt payments.

Further, he said, borrowing is already planned for state and local projects that legislators and their constituents want. “Our debt capacity will not allow the luxury of issues like these,” Henson said.

Louisiana State Employees Retirement System Executive Director Cindy Rougeou said it’s uncertain whether the idea would produce a savings or a cost.

“The overall debt is not being reduced. It’s just restructuring part of the overall UAL debt for a hard bond debt,” she said. “It’s almost taking out a second mortgage.”

Louisiana’s pension systems were collectively 58 percent funded in 2013, according to a 2014 Bloomberg analysis. That ranked 8^th-worst in the country.

Video: The Promise of Defined-Ambition Plans, and Lessons for the United States

The above talk was given by Lans Bovenberg (Tilburg University) at the 2014 Pension Research Council Conference; Bovenberg spoke about his research into “defined-ambition plans”, and whether similar ideas could work in the United States.

Further explanation of defined-ambition plans, from the video description:

Firms no longer act as external risk sponsors but continue to provide a distributional platform for pensions, thereby addressing behavioral and agency issues as well as imperfections of insurance and financial markets. Pension entitlements are defined in terms of (deferred) annuities, and participants share the risks of assets and a joint liability pool on the basis of complete contracts. We investigate risk management and valuation of these plans, explore their strengths and weaknesses, and analyze whether such plans hold promise for the United States.

Pension Transparency: Reform Rauner Can Make Alone

Illinois governor-elect Bruce Rauner will likely face opposition on many issues as he tries to work with the Democrat-controlled General Assembly.

But over at the Illinois blog Wire Points, Mark Glennon writes about one thing Rauner can accomplish without the help of the rest of the legislature: making the public pension system more transparent.

The post from Wire Points is printed below.

____________________________

By Mark Glennon, Wire Points founder

Public pension numbers are by far the murkiest part of Illinois’ fiscal crisis, and the biggest. Pension numbers have been deliberately obfuscated for years by politicians intent on hiding problems and by many actuaries hired by those politicians who are willing to play ball. They’ve succeeded.

Reform is long overdue, and Governor-elect Rauner can do it alone after he takes office.

Readers here, and anybody who follows public pensions closely, are well aware of the gap between the numbers reported by government and the real numbers calculated using better, more realistic methods, like new ones from the Governmental Accounting Standards Board. Absurdly, Illinois now keep two sets of books – the official ones (that are widely reported), and the new ones required by the those standards (that are rarely reported).

Additionally, irrespective of how pensions numbers are calculated, the form of typical actuary reports is impenetrable for all but serious pension students. A step forward on this problem was taken recently when the actuary for the Illinois teachers’ pension put its annual report in readable form, clearly flagging where major problems previously hid. That report, discussed here, might be a good starting point for a better model form. It ridiculed “Illinois Math” used by the state to calculate appropriate pension payments.

Finally, the Illinois Department of Insurance collects extensive numbers, much of which is not online, for all 675 public pensions in Illinois. One village trustee who is particularly conscientious about the municipal pension crisis (Jim Palermo of La Grange) had to file Freedom of Information Act requests on all 675 to get the data he wanted. That’s ridiculous. The Department of Insurance had the data in electronic form and it should be online.

All these problems can be corrected by a governor who wants pension transparency, and he can do it on its own. Rauner will be appointing many new trustees to the largest pensions and a new Director of the Department of Insurance. They can be selected based on a commitment to transparency. He could probably also implement reform by executive order, or by making his expectations clear to the state actuary that annually summarizes major pensions in a report certified by the Auditor General. (The most recent such report is discussed here.) One way or another, a governor can do it if he wants.

Pensions are immensely controversial for many reasons, but two of them are that the numbers are rigged and few people understand them. The cooperation needed to solve the pension crisis requires, initially, a shared understanding of what the real numbers are.

Fix it. No more “Illinois Math.” Report pension numbers honestly and transparently.

Photo By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Outgoing San Jose Mayor Chuck Reed Will Continue Pushing For Pension Reform After Leaving Office

Chuck Reed won’t be the mayor of San Jose much longer. But even as he leaves office, Reed doesn’t plan on leaving politics behind. The outgoing mayor says he will continue raising money and campaigning for pension reform in California.

His ultimate goal is to get a state-wide pension reform measure on the 2016 ballot.

From Fox & Hounds:

“For me, it’s unfinished business,” says Reed, the outgoing mayor of San Jose, California. “I’m stubborn, persistent, whatever you want to call it.”

He’s talking about his plans for a statewide pension reform initiative in 2016; the $25 million is the cost of taking the message to the streets. While some observers may have thought he’d abandoned reform after his abortive 2014 attempt, Reed says he’s just getting warmed up.

“The fight will continue,” he says. “I’m going to work on fiscal reform issues, on the state and national level.”

For Reed, it’s personal.

“The problem is still threatening my city,” he says. “Retirement costs continue to go up, and this year the costs ate up all my revenue.”

And this was after voters in San Jose passed pension reform.

[…]

“The legislature is not going to take action,” he says. “So the best approach is working at the local level to create political momentum with a statewide initiative, allowing voters to go over the head of the legislature.”

Details are sparse on what Reed’s initiative would look like, in part because he is still figuring it out himself. But he offered some details to Fox & Hounds:

[Reed] says the main thrust will be to give state and local governments authority to alter future pension formulas for current employees.

“The retirees are the last people who should be impacted because they’re already retired,” he says. “That’s why I focus on current employees, because they still have the capacity to earn. The younger employees understand that it’s something that’s not sustainable, and they are the ones who are going to get hurt.”

The next mayor of San Jose will be Sam Liccardo. He starts Jan. 1.

Photo by San Jose Rotary via Flickr CC License

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