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Are Phoenix Pension Costs Really Rising by $18 Million a Year?

Phoenix voters struck down a pension reform measure, Prop. 487, on Election Day. But in the weeks since the defeat, several local lawmakers have vocally called for a renewed discussion of pension reform.

Perhaps the most prominent of those voices is Phoenix City Councilman Sal DiCiccio, who supported Proposition 487 and wants the conversation about pension reform to continue.

The Councilman has claimed that the city’s pension costs rise by $18 million every year—and those costs will have a major impact on the funding of other public services.

Eighteen million dollars is a lot of money. But is that claim true? The Arizona Republic fact-checked the figure:

In 2011, state pension-reform laws raised the employee contribution to 11.05 percent, and it will continue increasing until it hits 11.65 percent in 2015-16. The city contributes whatever is needed to completely fund the pensions.

Poorer-than-expected investment returns on both pension funds during the recession raised the city’s contribution in recent years. In 2010-11, Phoenix spent approximately $93.9 million on general pensions, $60.4 million on police pensions and $30 million on fire pensions.

By the 2014-15 budget, the city’s planned contributions had risen to $129 million for general pensions, $91 million for police pensions and $46 million for fire pensions.

DiCiccio’s $18 million figure comes from a projection made before the city approved its budget. It forecast Phoenix would spend $271 million on pensions, $18 million more than it budgeted in 2013.

However, when the city finalized its budget, the numbers had changed. Phoenix set aside $266 million for pension contributions, $13 million more than in 2013.

So, the $18 million figure isn’t exactly right. But the sentiment of the statement is generally correct – the city’s pension costs have risen by millions of dollar each year.

The Arizona Republic also checked DiCiccio’s statement on pension costs hurting funding for public services:

Overall city spending on fire, parks and police has increased in recent years, but the city has also hired fewer police officers and firefighters. The Phoenix Law Enforcement Association estimates that the city has 550 fewer police officers now than it did at its peak employment in 2009.

The United Phoenix Fire Fighters didn’t have similar numbers available, but Phoenix went from 1,671 firefighters in 2009 to 1,578 in 2012.

Staffing cuts caused Phoenix police officers to expand their patrol areas, DiCiccio said.

Phoenix also delayed more than $200 million in capital bond projects in 2010. Voter-approved bond projects allow construction of new public facilities, such as parks or libraries, or renovating existing buildings.

Phoenix’s pension payments have grown at a steeper rate than funding for such services.

Overall, the Arizona Republic said DiCiccio’s statement were “mostly true.”

Video: Entitlement Reform and the Future of Pensions

The above talk was given by Gene Steuerle (Urban Institute) at the 2014 Pension Research Council Conference; Steuerle spoke about his research into the inevitability of entitlement reform and what it means for the future of pensions.

Mr. Steuerle’s biography:

Eugene Steuerle is Richard B. Fisher chair and Institute Fellow at the Urban Institute, and a columnist under the title The Government We Deserve. Among past positions, he has served as Deputy Assistant Secretary of the Treasury for Tax Analysis (1987-1989), President of the National Tax Association (2001-2002), chair of the 1999 Technical Panel advising Social Security on its methods and assumptions, Economic Coordinator and original organizer of the 1984 Treasury study that led to the Tax Reform Act of 1986, President of the National Economists Club Educational Foundation, Resident Fellow at the American Enterprise Institute, Federal Executive Fellow at the Brookings Institution, and a columnist for the Financial Times.

Dr. Steuerle is the author, co-author or co-editor of fifteen books and close to one thousand articles, briefs, and Congressional testimonies. Books include Contemporary U.S. Tax Policy (2nd edition), Retooling Social Security for the 21st Century, and Nonprofits and Government. He serves on advisory panels or boards for the Congressional Budget Office, the Government Accountability Office, the Joint Committee on Taxation, the Committee for a Responsible Federal Budget, the Independent Sector, the Aspen Institute Initiative on Financial Security, the National Committee on Vital and Health Statistics, and the Partnership for America’s Economic Success.

Canada Pension Chief Talks About “One of the Best Investments We’ve Ever Made”: Investing in Alibaba in 2011

The chief executive of the Canada Pension Plan Investment Board (CPPIB) talked with the Financial Post on Thursday about the Board’s investment in Alibaba in 2011.

At the time, Alibaba was an unknown tech company in China. A few years later, the company’s initial public offering was the largest in history.

From the Financial Post:

[Wiseman] said the reason the Canadian pension fund manager was able to make a “very sizeable investment” in what was then “an obscure Internet company” in a city in China few had heard of is because executives had opened an office in Hong Kong back in 2008.

“That investment story which everybody is touting as one of the best investments we’ve ever made, it didn’t happen overnight. That investment started in many respects almost seven year ago,” Mr. Wiseman said.

“It started with a view towards that market, a view that we need to build capabilities in the region, that we need to deepen our understanding of the region, and that we had a long-term view around the Chinese consumer, the importance of the Chinese consumer.”

Mr. Wiseman said the route to the Alibaba investment, which is worth “substantially more” than the fund’s cost base thanks in part to a large investment in the successful IPO last month, illustrates the long-term strategy and the “on the ground” investing style.

“We didn’t get brilliant in four weeks, right? … We had people on the ground in Hangzhou [the city in China where Alibaba is based] before people knew where Hangzhou was,” he said.

“We were there soon after opening our office in Hong Kong, developing those relationships with people who speak the language and who understand the market… To me, this is exactly what we’re trying to do as an organization.”

After the initial investment in 2011, CPPIB increased its stake the following year and then again through the IPO, Mr. Wiseman said.

The CPPIB has a total of $314.5 invested in Alibaba.

Photo by Charles Chan via Flickr CC License

Pension Official: Here’s How Congress Could Make Investing in Environmental Projects More Appealing to Pension Funds

Girard Miller, CIO of the Orange County Employees Retirement System, sat down with Governing magazine yesterday to talk about what’s holding many public pension funds back from taking on “green” investments.

Miller first explains the concept of “green bonds”. From the Governing interview:

These are bonds issued to finance environmentally friendly capital projects. One use of the concept applies very narrowly to tax-exempt bonds for what are called brownfields development. Then there is also an international working group promoting “climate bonds,” which are sometimes called green bonds. CalSTRS, the large state teachers pension fund here in California, is part of that working group. The central idea is to reduce the carbon footprint globally through infrastructure projects that can be funded through big bond issues. I use the term green bonds very broadly to include essential environmental projects that might be funded by states and localities through bond financing. Beyond carbon reduction and water conservation in drought areas, I’ll leave it to the policy geeks and public finance guys to haggle over the definition. It’s a big tent.

Miller goes on to talk about the problem with “green bonds”: they are tax-exempt, and, in his words, pension funds “don’t want tax-exempt paper in their portfolios.”

But he says Congress can fix that problem, and in the process make the bonds more appealing to some of the world’s largest institutional investors. From the interview:

The problem is that pension plans don’t want tax-exempt income. We’re not the only ones. Sovereign investment funds from abroad, such as those in China and the Middle East, and endowment funds don’t care about taxes either.

[…]

What we need is a taxable option to be approved by Congress and limited to green bonds, not to every conceivable capital project, which is typically what happens when politics gets involved. A taxable bond option (TBO) is a concept that has been kicking around in public finance circles for four decades. As far back as the 1970s, economists like John Petersen were saying there is a smarter way to do this stuff. Build America Bonds, which were authorized in 2009-2010 at the bottom of the Great Recession, were a taxable option. A TBO allows, but does not require, a muni bond issuer to elect to pay taxable interest and receive a direct interest-cost reimbursement from the U.S. Treasury rather than the indirect subsidy of tax exemption. In most cases, that would mean a lower borrowing cost — net-net — than issuing tax-exempt bonds. For pension plans, a TBO-yield will compare favorably with corporate credit and foreign sovereign bonds, plus the bonds would be a diversifier for our bond portfolios. Foreign investors and endowment funds, as well as ordinary investors with incomes below $200,000, would prefer taxable municipals.

Read the whole interview here.

Photo by penagate via Flickr CC

Illinois Teachers’ Pension Official Praises Asian Private Equity

Speaking at the AVCJ Private Equity & Venture Forum last week, Illinois Teachers Retirement System investment officer Kenyatta Matheny expressed his bullishness on Asian private equity. Recapped by Asian Investor:

Matheny is very positive on the region. “If you’re building a global private equity portfolio, you would be remiss to not earnestly look to having an allocation to Asia and, quite frankly, with China as the anchor,” he said.

The Illinois fund last month struck a partnership with Asia Alternatives, one of the biggest Asia-focused PE fund-of-funds managers with $3 billion in AUM. At the end of October it approved a $200 million commitment to the manager. This followed a period of 18 months to two years spent developing the relationship, Matheny noted.

Illinois Teachers had spent two or three years visiting the region to understand the landscape in the mid-2000s and subsequently made direct investments in PE funds and sought a local investment partner. It now has $5 billion of assets invested in private equity and another $3 billion of unfunded commitments, amounting to an $8 billion portfolio overseen by Matheny.

He was effusive about the benefits of the relationship with Asia Alternatives. “We think alike, we’re looking at the same managers, underwriting from the same perspective, but now you’ve got this piece that we don’t have: you can access small managers, you’ve helped fund a few start-ups” he said.

Matheny also spoke about an increased number of partnerships between U.S. and Asian private equity firms. From Asian Investor:

Kenyatta Matheny, who co-runs the PE portion of Illinois Teachers, has seen more cross-border partnering taking place between PE firms in Asia and the US, in both directions.

“This has been more recent, within the past 12 months, where there may be an Asia-specific PE fund with an asset that can continue to scale, but they’re looking to exit.” One route for them has been for an international PE firm taking on the asset and expanding it beyond China to other markets, such as Southeast Asia.

Matheny has also seen such deals originating outside Asia. “With an asset that has 5-10% exposure to China, we can pick up the phone and call counterparts in Asia. We’ve scaled the asset via acquisitions at home.”

The conference also featured a panel discussion on “Why Asia Still Matters for Private Equity.” The audio of the panel can be heard here.

Photo Credit: “Asia Globe NASA”. Licensed under Public domain via Wikimedia Commons

Canada Pension Teams With Hermes, Invests in Massive London Real Estate Project

The Canada Pension Plan Investment Board (CPPIB) has teamed up with Hermes Real Estate to invest in a 1.5 million square foot, partially developed London property.

The building, Wellington Place, will include offices, apartments and retail space.

Think Tank: Wisconsin Has Country’s Best Funded Pension System

The think tank State Budget Solutions has released a report which names Wisconsin’s pension system the most well funded in the nation.

It’s the second year in a row the think tank has given Wisconsin that title.

From the Wisconsin Reporter:

The Badger State once again has the most well-funded public pension system in the nation, according to a study released this week by State Budget Solutions, a fiscally conservative think tank based in Virginia.

The Wisconsin Retirement System also has the lowest percentage of unfunded liability as it pertains to the 2013 gross state product and the second lowest cost per capita, only behind Tennessee, the report says.

But don’t go ordering balloons, streamers and other party favors just yet. You’re going to need the extra cash.

Wisconsin’s estimated funding ratio of 67 percent is still below the 80 percent benchmark that’s considered healthy by industry standards, and each resident in the state would have to pay $6,720 to erase the pension system’s $38.6 billion in unfunded liabilities, the study says.

The SBS report lists Wisconsin’s funding ratio at 67 percent. But the state says its system is 99.9 percent funded – and it didn’t pull that number out of thin air; the number originated from a 2013 Morningstar analysis.

What accounts for the stark difference?

The SBS report measured liabilities using different methods that the state, including a much lower assumed rate of return on pension investments. More from the Wisconsin Reporter:

For its survey, State Budget Solutions used a discount rate of 2.73 percent, the approximate equivalent to the yield of a 15-year U.S. Treasury bond. The state uses a discount rate of 7.2 percent for active participants prior to their retirement and 5 percent for retired members and for active and inactive participants following retirement, according to the Department of Employee Trust Funds.

Although Wisconsin’s discount rates are among the lowest in the country, Luppino-Esposito doesn’t think they are low enough.

“We base our numbers on a discount rate that carries much less risk,” Luppino-Esposito said. “We would rather the pension plan make safer investments and ensure stability for pensioners and state residents who will lose out on vital services if the pension liability becomes too large.”

To validate his organization’s methods, Luppino-Esposito pointed to a Moody’s Investor Services report released in September that shows the unfunded liabilities of the 25 largest state pension plans — including Wisconsin’s — tripled to nearly $2 trillion between 2004 and 2012, despite coming close to meeting their “lofty investment return goals.”

“The most recent Moody’s report shows us that even if investment targets are met, high discount rates will cause the funds to come up short by trillions of dollars,” Luppino-Esposito says in his study.

Read the SBS report here.

Read Morningstar’s 2013 report here.

Panel Recommends Atlantic City Delay Payments to Pension System For Next Three Years

A task force has released its recommendations for staving off the financial collapse of Atlantic City, New Jersey.

Buried in the report is one recommendation that might sound familiar to residents of New Jersey: that the city should defer its payments into the pension system for the next three years.

From NorthJersey.com:

State officials and people outside government would take on a greater administrative role in Atlantic City under a plan for the economically troubled resort made public Thursday.

The proposal comes as the city struggles to right its budget and cover debt payments in the wake of four casino closures this year, and as a fifth casino is threatening to shut down.

To help offset financial losses brought on by the casino closings, Atlantic City would be permitted to defer payments into the public employee pension system and could qualify for more state education aid.

[…]

The details of the report were discussed Wednesday during a meeting Christie organized with local officials, casino executives and union leaders in Atlantic City. A bipartisan group of lawmakers also attended the meeting and has pledged to work cooperatively with the governor on legislation that may be required to help turn the city around.

John Bury gives his take on that part of the plan over at Bury Pensions:

New Jersey politicians and their enablers had a discussion today where they reviewed a secret report that kicked off with the suggestion:

To help ease the burden on city taxpayers, the recommendations include a three-year window for deferring the city’s employer contributions into the public employee pension system.

And that passes for a solution! How has this strategy worked out for the state which has been shortchanging the pension plans for a generation and is now in day 105 of awaiting more solutions from a study panel report that should have been released 45 days ago.

But the chilling paragraph of the northjersey.com story is:

The recommendations released Thursday were prepared by [Christie adviser Jon] Hanson, who also produced a report for Christie in 2010 that the governor used at the time to guide Atlantic City revitalization efforts.

The same adviser! Wasn’t there somebody in 2010 who looked at Hanson’s guide to AC revitalization then and saw it as a blueprint for closing half the casinos and mass layoffs?

More details of the plan can be read here.

Photo by Richard Feliciano via Flickr CC License

Report: CalPERS’ Strong Real Estate Returns Unlikely To Last

CalPERS has seen strong real estate returns since 2011. But a consultant for the pension fund warns in a new report that the consistent double-digit returns are unlikely to continue.

[The report, from Pension Consulting Alliance, can be read here, or at the bottom of this post.]

More details from Randy Diamond of Pensions & Investments:

The PCA report, which is contained in agenda materials for CalPERS’ Nov. 17 investment committee meeting, said sustaining those returns is unlikely because of a challenging and highly competitive investment market.

The report cites increased competition from sovereign wealth funds, high-net-worth investors and other large direct investors in real estate as among the reasons for the potentially declining results. It says persistently low interest rates are fueling the demand for income-producing assets.

In 2011, CalPERS changed the focus of its real estate program to focus on investing in income-producing properties — and away from opportunistic real estate — after suffering massive losses following the crash of the real estate market.

CalPERS spokesman Brad Pacheco said in an e-mail: “We recognize that recent high returns will be difficult to achieve in the current real estate market. Our goals now are to diversify portfolio risk and generate steady, modest gains.”

CalPERS manages $25.6 billion in real estate assets, and is planning to expand its real estate portfolio by 27 percent by 2016.

The report:

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Canada Pension Eyes Oil As Prices Drop

The head of the Canada Pension Plan Investment Board (CPPIB) said Thursday he sees “increasing opportunity” for investment in Canadian energy companies as oil prices continue their recent decline.

From a Bloomberg interview:

“We are seeing a period now where there may be increasing opportunity in the Western Canadian basin and Canadian energy companies as the market sort of reprices,” Mark Wiseman said in a telephone interview today.

Brent crude extended losses below $80 a barrel, dropping to a four-year low on speculation Saudi Arabia will not reduce output amid a glut of supply.

Wiseman said the resulting decline in oil prices will put pressure on some of the less financially sound energy companies, potentially creating some opportunities for acquisitions.

“Our attraction will be to those best-quality assets, best-quality management teams, and best-quality companies,” he said.

Wiseman, chief executive officer of the fund, pointed to Canada Pension’s investment in Seven Generations Energy Ltd. (VII) as an example. The pension fund is the largest shareholder, holding more than 15 percent of its common shares, according to data compiled by Bloomberg.

Canada Pension, which was an early investor in Seven Generations, didn’t sell shares in the company’s initial public offering last month because it sees long-term opportunities in the company. Seven Generations debuted in Toronto on Oct. 30 at C$18 a share and has since climbed to $22.50 today.

“It’s a great example of the long-term view we take,” Wiseman said. “We made a very conscious decision that we want to watch that value accrete and grow over the long term.”

The CPPIB manages $206 billion in assets for the Canada Pension Plan.

Photo by ezioman via Flickr CC License

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