Here’s an interview with New York City Comptroller Scott Stringer. Stringer is trustee of the City’s five pension funds.
During the course of the interview, Stringer talks about his push for pension funds to have more control over corporate boardrooms. He also defends the city pension system’s hedge fund allocations.
The Canada Pension Plan (CPP) has teamed up with Blackstone Group and Cinven to bid on $10 billion of cement assets that are being sold as a result of a pending merger between two major building material suppliers.
The CPP is one of 60 parties who have placed bids.
From the Wall Street Journal:
Private-equity firms are jostling to acquire more than $10 billion of cement facilities being sold as part of the merger of two large European companies, reflecting the dearth of buyout deals available in the region.
The sale of the cement assets in Europe, Canada, Brazil and the Philippines are a precondition to winning antitrust approval of a $50-billion merger between French cement giant Lafarge SA and Swiss rival Holcim Ltd.
The assets have attracted interest among cash-flush private-equity firms. Some 60 parties, a mixture of buyout firms and building-materials companies, have submitted bids for all or some of the assets, said Holcim finance chief Thomas Aebischer. Private-equity bidders include Blackstone Group, KKR & Co. and other top firms, according to people familiar with the matter.
[…]
The cement deals are “sort of classic private-equity assets,” said Josh Lerner, a professor at Harvard Business School, of the Holcim and Lafarge sales. “The idea of a transaction that has the classic PE kind of recipe, where this is a mature industry, is a good thing for them.”
The deal is also attractive because it could create an entirely new cement rival overnight. Some argue creating a new company with the assets could be a challenge for buyers, since the facilities are spread across the globe and aren’t independent companies at this stage.
The $10 billion price-tag on the for-sale assets is too big for many private-equity firms to digest on their own. Many are forming groups to bid for the assets, a practice they have moved away from in recent years since investors prefer to spread their money among several funds invested in different assets.
Among the private-equity bidders are: a group consisting of Blackstone Group, Cinven and the Canada Pension Plan; BC Partners and Advent International; Bain Capital and Onex Partners; and KKR., according to the people familiar with the matter. Industry bidders include Irish cement maker CRH PLC, according to people familiar with the matter. The structure of the consortia could still change, said one person familiar with the deal.
The Canada Pension Plan has $227 billion in assets, which are managed by the Canada Pension Plan Investment Board.
Photo by Parée via Flickr CC License
CalPERS announced this summer it was looking to exit the Health Evolution Partners (HEP) Growth Fund, a private equity fund specializing in healthcare companies.
HEP is run by David Brailer, a world-renowned physician who had no previous private equity experience before starting the firm.
The fund promised returns of 20 percent. But its IRR as of March 31 was just 2 percent.
According to Reuters PE Hub, HarbourVest Partners is interested in buying CalPERS’ stake in the fund. From Reuters PE Hub:
HarbourVest Partners appears to be the last bidder interested in buying CalPERS’ stake in a healthcare fund run by a former Bush Administration official, according to two sources.
The California Public Employees’ Retirement System since summer has been trying to sell its stake in a growth fund managed by Health Evolution Partners (HEP). Evercore Partners is running the sales process, sources said.
Landmark Partners was also a bidder until recently, a secondary market professional said.
CalPERS is the sole limited partner in the fund and committed $505 million at its inception in 2008. So far, the GP has drawn down just over $430 million, as of March 31, according to CalPERS.
The fund’s performance has not been stellar. It produced an internal rate of return of 2 percent and a 1x multiple as of March 31, according to CalPERS.
One secondary market professional said bad blood between CalPERs and HEP likely drove away some potential buyers.
Real Desrochers, senior investment officer for CalPERS’ Private Equity Program, recommended the retirement system get out of the investment because he didn’t believe HEP would achieve its goal of a 20 percent IRR, Pensions & Investments reported in August. CalPERS investment staff earlier this year refused to allow HEP to use already-committed capital and told the firm to find a new partner or face liquidation, P&I reported.
[…]
Besides the growth fund, CalPERS committed $200 million to an HEP fund-of-funds in 2007. The sales process has not included the FoF, which had produced a negative 3 percent IRR and a 0.9x multiple as of March 31.
Read more coverage of the HEP Growth Fund here.
Photo by Hobvias Sudoneighm
Last week, Phoenix voters shot down Proposition 487, the ballot measure that would have shifted the city’s non-public safety new hires into a 401(k)-style retirement plan.
Many public workers, and the city’s mayor, were happy with the result. But one credit rating agency was not.
A Moody’s report released Tuesday said the measure would have improved the city’s finances, and the results of the vote are a “credit negative” for Phoenix.
From the Arizona Republic:
“The vote is a credit negative for the city,” which is grappling with a $4.4 billion adjusted net pension liability, said Moody’s Investors Service. Phoenix has the sixth-highest adjusted pension shortfall relative to revenues among 50 large cities tracked by Moody’s.
[…]
According to the update by Moody’s analysts Tom Aaron and Don Steed, Phoenix actuaries projected the new plan would have increased city contributions by $358 million over 20 years but with savings that would have exceeded those outlays, especially if the underlying investments didn’t perform well.
The ballot measure could have saved the city up to $1.9 billion over 20 years, according to Moody’s, citing a city-council analysis. Cost savings would have derived from limiting the types of pay used to calculate benefits — which leads to the costly practice of “pension spiking” — eliminating supplemental retirement plans offered by the city and calculating pension benefits by spreading them over more years of employee salary, which tends to lower the payout.
But Moody’s admitted the measure would have incurred some extra costs if it had passed. Among the costs: legal expenses. From the Arizona Republic:
On the other hand, Moody’s noted that the measure, had it passed, likely would have triggered costly legal challenges. For example, one part of the proposition would have required only one retirement plan to be offered to newly hired employees, including those in public safety. That would have conflicted with a state law mandating participation in the Public Safety Personnel Retirement Plan, which covers police and fire employees throughout the state.
Moody’s didn’t change the city’s credit rating, however. It remains at Aa1.
A Kentucky teacher has filed a lawsuit against the Kentucky Teachers’ Retirement System (KTRS), claiming KTRS has “failed in their fiduciary duty” by letting the system become one of the worst funded teachers’ plans in the country.
From WFPL:
A Jefferson County Public Schools teacher filed a lawsuit Monday against the Kentucky Teachers’ Retirement System, which has been called one of the worst-funded pension systems for educators in the U.S.
The plaintiff, duPont Manual High School teacher Randolph “Randy” Wieck, told WFPL that the system supporting over 140,000 teachers in Kentucky is billions of dollars in debt; also that teachers pay about 12 percent of their paychecks into the retirement system.
“We have raced to the bottom and we’re neck and neck with the worst funded teachers plan in the country,” he said.
As WFPL reported, the General Assembly during this year’s legislative session funded KTRS at around 50 percent of what the retirement system requested.
The federal Government Accounting Office and Standard & Poor say Kentucky’s pension system is being funded at an unhealthy rate.
KTRS has “failed in their fiduciary duty by not aggressively and publicly demanding the full funding they need to stay solvent,” Wieck argues in a copy of the complaint he provided to WFPL. The complaint further alleges that KTRS has not been transparent enough in the “system’s dire funding status,” and that the investments made by KTRS are not responsible.
The teacher, Randy Wieck, is giving KTRS one year to become fully funded. After that, he says he will bring the lawsuit to the steps of Kentucky’s General Assembly; for many years, lawmakers have failed to pay the state’s actuarially-required contribution to the pension system – although they did make the full payment to the teachers’ system in 2011.
TRS’ attorney commented on the suit:
“I am very optimistic that we are going to find a solution for this,” said Beau Barnes, general counsel for KTRS.
There are positive signs among members of the General Assembly to come up with a plan, he said, adding that next week, KTRS will appear before the state’s Interim Joint Committee on State Government to discuss a financing plan for the pension fund. Wieck, who was joined by “Kentucky Fried Pensions” author Chris Tobe, seemed skeptical of previous conversations that seemed to excite Barnes.
The state legislature is not poised to discuss budget issues during the 2015 legislative session, but Wieck said Kentucky is violating its duty to keep the pension system solvent.
“You don’t actually have to wait for the bus to hit you to experience danger. And that is what is happening to Kentucky Teachers’ Retirement System. It is being damaged every year,” he said.
KTRS manages $17.5 billion in assets. The system is about 51 percent funded.
The Chicago suburb of North Riverside is straddled with pension debt, and it’s not about to get better – since the town hasn’t made its required pension payments, the state will likely withhold sales tax revenue from the suburb starting in 2016.
That’s why North Riverside is considering privatizing its fire department – a move that would rid the city of future pension costs.
From the Chicago Sun-Times:
North Riverside says its contract with firefighters expired in April and it seeks to privatize its fire protection services, turning current firefighters into employees of a private company, PSI, which has provided paramedic services to the village for decades.
Current North Riverside firefighters would work for PSI at their current salaries and with their current health insurance plan. They also would keep already-accrued pension benefits but would be folded into a 401-(k) program at PSI that would include an employer-matching contribution. Odelson says privatizing fire services will save the village in insurance, overtime, sick time and pension costs for firefighters who make more than $200,000 in yearly salary and benefits.
[…]
The state will begin garnishing sales tax revenue from North Riverside in 2016 if it doesn’t catch up on pension debt. The state can withhold all of that revenue in 2018, says Burt Odelson, North Riverside’s attorney. “When that happens,” he said, “North Riverside will no longer be able to pay their bills.”
North Riverside is a bedroom community without the home-rule power to raise taxes without voter approval. Most of its revenue is generated by sales taxes from the North Riverside Mall, but the village skipped pension payments for three years when the recession hit and tax revenue dropped.
The village now faces an operating budget deficit of $1.9 million, with $1.8 million due to pension obligations. The required payments to the firefighters’ pension fund have skyrocketed sevenfold in the last 10 years.
Unions say the idea would be a breach of contract:
J. Dale Berry, lawyer for North Riverside Professional Firefighters Local 2714 and counsel to the Associated Firefighters of Illinois, says North Riverside is obligated to keep the contract’s current provisions while it proceeds through arbitration, which he says the village is trying to circumvent. The contract, he notes, has a clause forbidding the kind of subcontracting privatization the village seeks.
“They presented this as a fait accompli,” Berry says, noting officials rejected union offers for cheaper health plans, cost cuts and an offer to help organize a consolidation with other departments. “This privatizing thing is another way to open the door to patronage, nepotism, non-merit hiring,” Berry said.
The North Riverside Firefighters Union Local 2714 has said it will sue if the fire department is privatized.
More coverage of the town’s pension funding crisis can be read here.
Over the summer, Jacksonville’s mayor put together a Retirement Reform Task Force. The Task Force’s job description, according to the city website, is to “review the proposed public safety pension reform agreement, seek input from stakeholders and other interested citizens, and make recommendations on how the City should proceed.”
On Monday, the leader of that task force, William E. Scheu, wrote a column for the Florida Times-Union urging the Jacksonville city council to approve the pension reform measure currently in front of them.
The reform measure aims to improve the funding of the city’s public safety pension system by forcing the city to make higher payments to the system – to the tune of an extra $40 million a year.
But city council members are worried because the mayor has not specified where he will get that extra money.
Scheu acknowledges that concern, but says this is the best chance to enact a pension reform measure built by compromise.
From the column:
Last year a broad-based, stakeholder-representative task force met 17 times and urged a comprehensive reform that recognized the interests of the various parties, acknowledged the legal conundrum in which the city was forced to operate and examined various alternatives for reform.
The solutions the task force proposed with the help of The Pew Charitable Trusts included significant governance reforms, benefit reductions for both future and existing employees, a reformed plan design and a funding source for accelerated pension contributions.
Task force members considered the fact that litigation was a present fact but an expensive and uncertain route for the future.
Its solution was a compromise that is not perfect, but is attainable and sustainable.
It was supported by the Times-Union and most business, civic and political leaders.
[…]
While the mayor has not provided good leadership in refusing to identify a dedicated funding source for the additional pension contributions recommended by the task force, the City Council should not abandon its own responsibilities and “kick the can” further down the road.
The City Council has an opportunity to move Jacksonville forward by adopting the proposal now before it. It is imperfect, but it is a responsible step toward ensuring that Jacksonville’s quality of life will improve and that the annual fights over funding the city’s core services will end.
The Fitch and Moody’s rating agencies have recognized that Jacksonville’s financial condition is sick.
It is time to enact pension reform.
It is time for Jacksonville to take its medicine for the harm inflicted on it by our leaders in earlier years.
Read the entire column here.
There has been a big shakeup at the top of the Chicago Teachers Pension Fund over the last two weeks.
First, the fund announced that its executive director would be resigning.
Now, the fund’s chief investment officer says she will be leaving for another job as director of investments for the W.K. Kellogg Foundation.
From Chief Investment Officer magazine:
Carmen Heredia-Lopez, current CIO of Chicago Teachers Pension Fund, has been tapped to lead the W.K. Kellogg Foundation’s $8.3 billion portfolio.
According to the foundation, Heredia-Lopez will begin her post on December 1, 2014. As director of investments, she will report to Vice President and CIO Joel Wittenberg.
At the Battle Creek, Michigan-based philanthropy, she will be responsible for “driving further development of the foundation’s mission-driven investment strategy and managing emerging diversity-owned firm work and diversified assets,” the foundation said.
[…]
Heredia-Lopez has been at the helm of the $10.8 billion Chicago Teachers Pension Fund since January of 2013. Prior to taking over the CIO position, she served as the fund’s director of investments for two-and-a-half years.
She also worked as an investment analyst at the Illinois Municipal Retirement Fund for more than four years after spending a decade in asset management and investment banking.
The fund’s executive director, Kevin B. Huber, has resigned and his last day at the fund will be December 31.
A search for a new chief investment officer may not start until a new permanent executive director is found.
An interesting piece of information was tucked away in a new State Street Corp. regulatory filing.
In an SEC filing filed Monday, State Street said it was being subpoenaed by the SEC and the Department of Justice for information related to the way the bank solicits business from public pension funds.
State Street admits in the filing that “in at least one instance” a consultant employed by the firm made political contributions while bidding for pension business.
From the filing:
We are responding to subpoenas from the Department of Justice and the SEC for information regarding our solicitation of asset servicing business of public retirement plans. We have retained counsel to conduct a review of these matters, including our use of consultants and lobbyists in our solicitation of business of public retirement plans and, in at least one instance, political contributions by one of our consultants during and after a public bidding process. While we are unable to predict the outcome of these matters, adverse outcomes could have a material adverse effect on our business and reputation.
Depending on the nature of the political contribution, the action could violate SEC pay-to-play rules.
Under the SEC’s current rules, investment advisors can’t make donations to politicians that have any influence—direct or indirect—over the hiring of investment firms.
Specifics of Rule 206 (4)-5, as explained by law firm Bracewell & Giuliani:
Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.
Businessweek reached a State Street spokewoman for comment:
“We are cooperating with governmental authorities and have retained counsel to conduct an internal review of these matters,” said Alicia Curran Sweeney, a spokeswoman for State Street, while declining to comment further on confidential discussions with regulators.
Earlier this year, investment firm TL Ventures was busted when an employee was found to have made a political donation to Pennsylvania’s governor while the firm was working with the Philadelphia Board of Pensions. The consequences: the firm has to give up over $250,000 in fees it earned from the work, and pay a $35,000 fine.
The San Diego County Employees Retirement Association (SDCERA) is on the verge of firing its controversial outsourced CIO, Lee Partridge of Salient Partners.
Board members held a mock vote on the issue, and the firing was “approved” 7-0.
If Salient Partners is indeed fired, the SDCERA would move its investment management in-house.
More on the situation from the Union-Tribune:
The county retirement board has made an informal decision to end its five-year experiment with a Texas portfolio strategist and return oversight of the $10 billion pension fund to an in-house expert.
The vote came late Thursday toward the close of another marathon meeting of the San Diego County Employees Retirement Association board, which has been racked with discord in recent months over its leverage-heavy investment policy.
An hour into a late-afternoon discussion on governance models, Trustee Dick Vortmann suggested their time might be better spent if they knew whether the board majority still supported using an outsourced chief investment officer.
“Can we take a straw poll right now?” he asked. “For Christ’s sake, if it isn’t a close debate, why are we debating?”
Minutes later, all seven trustees in attendance raised their hand to show they are ready to hire an internal investment officer to manage the fund — a function that has been served by Salient Partners of Houston.
The 7-0 vote isn’t as clear cut as it sounds.
The vote wasn’t official – and it didn’t include all the trustees. Two trustees had left the meeting before the vote was held. At least one of those trustees, David Myers, is likely to vote to retain Salient Partners. From the Union-Tribune:
The nonbinding vote excluded board members David Myers, who was absent, and Mark Oemcke, who left the meeting earlier in the day. Myers has been a staunch supporter of Salient and its main representative in San Diego, Lee Partridge. Oemcke has not.
Three of the seven board members to vote — Vortmann, Kristina Maxwell and E.F. “Skip” Murphy — said they were raising “half a hand” to reflect concern over finding the right candidate for the job.
“It’s qualified on the assumption that we can find the requisite skills to match our desired level of sophistication on our investment philosophy,” Vortmann said.
No one from Salient was at the meeting.
While not yet formalized, the decision to abandon the outsourced CIO model prompted trustees to begin the process of recruiting an in-house investment expert.
They plan to hire an executive search firm in two weeks, when the board convenes a special two-day retreat. Installing a chief investment officer is expected to take between four and six months.
SDCERA pays Salient $10 million a year to perform CIO duties.
A consultant told the SDCERA board that they could likely hire a new, qualified CIO for less than $250,000.
