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CalPERS: Think Tank “Needs A Lesson In Fact Checking” After Tax Claims

When Californians get their ballots, they will notice 140 different proposed tax increases. One think tank last week said they knew the reason behind the surge—high pension costs.

Mark Bucher, president of the California Policy Center, wrote a column for the Sacramento Bee earlier this week claiming the influx of potential tax increases stemmed from ballooning pension obligations.

Bucher wrote:

Tax-weary Californians looking to explain this paradox need look only to former Vernon (population 114) city administrator Bruce Malkenhorst for an answer.

Malkenhorst received a $552,000 pension in 2013, according to just-released 2013 CalPERS pension data on TransparentCalifornia.com.

[…]

Malkenhorst is part of a growing number of 99 California retirees who received at least half-million-dollar pension payouts in 2013, up from four in 2012. Such lucrative pensions mean that in 2014, California will spend approximately $45 billion on pensions, equaling total state and local welfare spending for the first time. And in the zero-sum game of government spending, an extra dollar spent on pensions means one less spent on welfare, infrastructure or safety – or returned to the taxpayer.

Though Malkenhorst and his ilk personify California’s pension profligacy, they do not drive it. That distinction goes to the 40,000 California retirees who took home pensions greater than $100,000 in 2013.

CalPERS has now responded to the California Policy Center with the following statement, titled “CPC Needs a Lesson in Fact Checking”:

The California Policy Center (CPC) used stale data from 2013 in its Sacramento Bee commentary “Big pensions drive proposed tax increases on CA ballots” and never bothered to check with CalPERS (or even media coverage) to learn that the pension data was no longer accurate. Bruce Malkenhorst, former City Manager of Vernon, no longer receives his half-million dollar pension. Earlier this year CalPERS slashed his benefit to approximately $10,000 a month in April from its peak of more than $45,000 a month, concluding he derived the benefit improperly from the salary set by his employer the City of Vernon. CalPERS is also seeking to recover overpaid assets from Malkenhorst.

While members earning more than $100,000 per year in pensions receive high publicity, the fact is they only represent 2.6 percent of CalPERS retiree payments. It would be helpful if the CPC and others would more carefully check the facts and report on the full picture instead of just painting all public employees with the brush of the likes of Malkenhorst.

Read the statement here and the original article from the California Policy Center here.

Judge Approves Stockton Bankruptcy Plan; Pensions To Be Protected

A bankruptcy judge on Thursday afternoon approved the bankruptcy plan of Stockton, California. As part of the plan, the pensions of city workers will remain intact.

Creditors, on the other hand, will not be so lucky. From the LA Times:

A federal bankruptcy judge approved the city of Stockton’s bankruptcy recovery plan, allowing the city to continue with planned pension payments to retired workers.

The case was being closely watched after the judge ruled this month that the city’s payments to the California Public Employees’ Retirement System could be cut in bankruptcy just like any other obligation.

If Judge Christopher M. Klein had rejected Stockton’s plan and forced the city to slash its payments to CalPERS, it could have opened the door for other cities struggling with escalating pension costs to follow suit.

Stockton officials had argued that they couldn’t afford to cut pensions or to create another retirement plan for city employees. They said employees would leave Stockton for other cities offering retirement benefits through CalPERS.

CalPERS had said that if Stockton left the state retirement system, the city would immediately owe it $1.6 billion — far more than the city’s current bill to the pension plan.

On Thursday, Klein said that workers had already taken hits in the bankruptcy. He said Stockton’s salaries and benefits for workers had been higher than those at other cities, but that workers had agreed after the bankruptcy filing to take big cuts, including eliminating the free medical care they received in retirement.

“It would be no simple task to go back and redo the pensions,” Klein said Thursday.

He added, “This plan, I’m persuaded, is the best that can be done.”

Klein said that rejecting the plan after two years in court and tens of millions of dollars in legal and other fees would have put the case back to “square one.”

The city’s plan slashes payments to other creditors, including Franklin Templeton, an investment firm that holds more than $36 million in bonds the city used to borrow money. Franklin had asked Klein to reject the city’s plan so that it could get more of its money back.

CalPERS Chief Executive Anne Stausboll said of the decision:

“The City has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future…We will continue to champion the integrity and soundness of public pensions – to protect the benefits that were promised to the active and retired public employees who participate in the CalPERS pension plan.”

Chart: Distribution of Assumed Rates of Return

The Los Angeles City Employee Retirement System (LACERS) announced this week it was lowering its assumed rate of return from 7.75 percent to 7.5 percent. For some context, here’s a graphic that charts the discount rates of 150 public pension funds as of 2013.

Two District of Columbia funds use among the lowest rates in the country: the Police and Fire fund and the Teachers’ fund both assume a 6.5 percent rate of return on investments.

On the other end of the spectrum are funds like the Houston Firefighters’ fund and the Connecticut Teachers’ system. Those funds assume an 8.5 percent rate of return.

Chart credit: The Center for Retirement Research

Ohio PERS Invests $75 Million In Shopping Centers

The Ohio Public Employees Retirement System (PERS) is giving $75 million to FCA Partners to invest in retail real estate – specifically, large shopping centers and grocery stores.

From IPE Real Estate:

The new allocation will be invested over the remainder of this year and the beginning of next year.

Capital will be invested in a mixture of grocery-anchored shopping centres and power shopping centres across the US, with a value-add approach.

As a separate-account structure, FCA will have investment discretion within agreed investment guidelines, giving the manager the authority to make final investment decisions without approval from Ohio PERS.

The manager will invest in both debt and equity investments.

Although the relationship between Ohio PERS and FCA Partners is a new one, the manager is a spin-off of Faison & Associates, in which the fund first invested in 1995.

Since inception, the pension fund has invested $932m with the manager.

The death of Henry Faison in 2012 saw the creation of FCA Partners; Ohio PERS has therefore transferred the separate account previously managed by Faison to FCA.

The pension fund is looking to place more capital with separate account managers in value-add retail, industrial and hotel property as part of its $1.26bn allocations to separate-account managers this year.

Ohio PERS manages $88.6 billion in assets, of which 10.3 percent is allocated towards real estate.

Report: 1 In 4 Australian Retirees Will Outlive Their Savings By 11 Years

A new report from Mercer indicates that 25 percent of Australians could outlive their retirement savings by over 10 years, and calls the situation a “very real economic and social dilemma”.

From Business Insider:

New research by financial services consultancy firm Mercer shows one in four Australian retirees will outlive their savings by 11 years.

It also found that as many as 10% of the population who live even longer may be forced to rely solely on the age pension for 15 years or more, with 54% of Australians expecting to have less money than they need for retirement – falling short by as much as $500,000.

The Financial System Inquiry interim report calls out the lack of effective longevity risk management as a major weakness of Australia’s retirement income system, with Mercer’s managing director David Anderson saying, “Australia is facing a very real economic and social dilemma due to a lack of protection against longevity risk up until now.”

Anderson says longevity risk is a huge threat to Australians’ quality of life and healthcare in retirement, which he says has ultimately put pressure on the public purse and our own personal finances.

Senior partner and senior actuary at Mercer, Dr David Knox, said:

“It’s time to leverage the scale of the superannuation industry to provide longevity risk pooling; the sharing of risk will lead to improved outcomes for everyone.

“Longevity risk is a problem in Australia that demands urgent action… The proverbial certainties in life are of course death and taxes, the uncertainties are when and how much.”

In what is almost certainly not a coincidence, Mercer recently rolled out its LifetimePlus plan, a longevity insurance product that “behaves like a lifetime annuity, creating a ‘pool of lives’ and paying out an income until death”.

Illinois Teachers’ Fund To Stick With PIMCO, But Backup Plan Remains in Place

In the weeks since Bill Gross’ departure from PIMCO, dozens of public pension funds around the country have carefully considered whether to stay with the firm or move on.

In late September, one of the largest plans in the country, the Florida Retirement Systems, announced it was cutting PIMCO in favor of BlackRock.

The Illinois Teachers’ Retirement System announced Thursday it would keep its assets with PIMCO, but would still be watching the firm closely. From Pensions & Investments:

Illinois Teachers’ Retirement System, Springfield, will not terminate any of the nine strategies managed for it by Pacific Investment Management Co., but likely will keep the company on its watchlist.

The $45.3 billion pension fund’s investment staff has had “backup portfolio managers” lined up since rumors started swirling earlier this year of the departure of William H. Gross, co-founder and former chief investment officer, said Scottie Bevill, senior investment officer for fixed income and real assets, to trustees at an investment committee meeting on Wednesday.

[…]

PIMCO manages a total of about $3 billion for the pension fund — all fixed-income, credit or global tactical asset allocation approaches — representing about 6.6% of total fund assets.

PIMCO has been on the pension fund’s watchlist for personnel changes since February, when Mohamed El-Erian, PIMCO’s former co-chief investment officer, announced he would leave the firm.

Trustees approved the proposed watchlist, with PIMCO on it, during the investment committee meeting. The full board must approve the committee’s recommendation at its Friday meeting.

Pension funds that have PIMCO on their watchlists include: the Texas Municipal Retirement System, Indiana Public Retirement System, New York City Employee Retirement System, and the Hawaii Employees’ Retirement System.

New California Pension Data Now Online

California’s financial transparency website now features pension data on its state, county, and city-level pension systems.

The site includes data on assets, liabilities, funding ratios, membership statistics and actuarially required contributions, among other things.

Video: The Differences Between Tom Corbett And Tom Wolf On Pensions

News 8 recently interviewed both Pennsylvania gubernatorial candidates. Here’s the resulting segment — Corbett and Wolf talk about pension reform, benefit cuts and how they plan to address pension funding if elected.

A quick summary of where the candidates stand on pensions, from the Associated Press:

-Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

-Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

-Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

Pensions Make For Interesting Politics In Rhode Island Gubernatorial Race As Unions Pick Sides

In Rhode Island’s gubernatorial race, pensions have muddied the waters of union politics. Gina Raimondo (D) is the one wielding union endorsements. But her opponent, Allan Fung (R), might have union voters on his side regardless.

Almost two-dozen unions have publicly endorsed Raimondo even though she rubbed public workers the wrong way when she froze COLAs and made other changes to the pension system in 2011.

Her challenger, Allan Fung (R), has won no union endorsements. But he’s more popular among union voters. From the Wall Street Journal:

Anger over pension cuts for state employees is driving many union voters in Rhode Island to cross party lines and back a Republican for governor, one of several midterm races roiled by battles over public pensions.

Democrat Gina Raimondo, Rhode Island’s treasurer, spearheaded legislation in 2011 to rein in public-employee pension obligations. Rancor over the move was still strong among union voters in a poll earlier this month, in which they favored Republican candidate Allan Fung over Ms. Raimondo, 42% to 30%; among all those surveyed she led by six points. A poll out Tuesday by Brown University found the race essentially tied.

[…]

Ms. Raimondo in Rhode Island said she understands public employees have “hard feelings” over the 2011 pension changes, which halted annual cost-of-living raises for retirees and forced certain state workers and teachers to move a portion of their retirement savings into 401(k)-style accounts.

“We always knew there could be political consequences, but it was clearly the right thing to do,” she said in an interview. “The good news is the pension system is healthier than it’s ever been. For teachers and state employees, the pension will actually be there for them.”

Mr. Fung also pushed through pension changes as mayor of Cranston, R.I., though they were less aggressive. He said union members who back him aren’t doing so merely to oppose Ms. Raimondo. He has played down a prior comment that he supported right-to-work laws, which forbid labor contracts that require union membership by workers. “The unions are there, and under my administration they’ll always have a seat across the table,” Mr. Fung said in an interview.

Broad labor support for Mr. Fung is striking because he has won no endorsements from unions, while Ms. Raimondo has garnered about two dozen endorsements, mostly from private-sector unions not affected by the state pension changes.

A list of unions that have endorsed Raimondo, according to her campaign website:

Bricklayers’ and Allied Craftsmen Local 3

Ironworkers’ Local 37

Plumbers’ & Pipefitters’ Local 51

Plasterers’ and Cement Masons’ Local 40

Roofers’ and Waterproofers’ Local Union No. 33

Sprinkler Fitters Local 669

Operating Engineers’ Local 57

Sheet Metal Workers Local 17

United Steelworkers Local 12431

Elevator Constructors Local 39

United Food and Commercial Workers Local 328

SEIU 1199 NE

IUPAT District Council 11

IBEW Local 99

32BJ SEIU

UNITE HERE Local 217

Carpenters Local 94

UWUA Local 310

Amalgamated Transit Union, Local 618

Japan Pension To Double Down on Local Stocks; Other Portfolio Shifts Expected

Analysts and economists are expecting Japan’s Government Pension Investment Fund (GPIF) to double its allocation to domestic equities and reduce its bond holdings, according to a new Bloomberg poll.

The changes could come at any time in the next month or so; GPIF has been reviewing its portfolio since July and said the process would end sometime in the fall.

From Bloomberg:

Japan’s $1.2 trillion pension fund will double its allocation target for local stocks, according to analysts, who’ve ratcheted up expectations for equity buying while sticking with projections for a reduction in bonds.

The Government Pension Investment Fund will increase its domestic equity allocation to 24 percent of assets from 12 percent, according to the median estimate of 12 fund managers, strategists and economists polled by Bloomberg over the past two weeks. That’s up from 20 percent in a similar survey in May. The Topix index soared 4 percent on Oct. 20 on a Nikkei newspaper report that the fund would set a 25 percent local-share target.

Speculation about the behemoth’s new strategy has held Japan’s markets in sway since a government-picked panel said almost a year ago that GPIF was too reliant on domestic bonds. The fund will slash its local debt allocation to 40 percent from 60 percent, unchanged from May, the median survey prediction shows. Credit Agricole SA and Barclays Plc say anticipation for the shift is so high that equities are vulnerable to a sell-off on the announcement.

“I think investors will sell Japanese stocks on the fact after buying on the rumor,” said Kazuhiko Ogata, chief Japan economist at Credit Agricole. “Over the medium and longer term, the changes will buoy demand for shares and gradually support the market.”

The fund’s foreign holdings will likely undergo change as well, according to the analysts polled by Bloomberg:

The fund’s allocation to overseas equities will be 15 percent, up from the current 12 percent, while the goal for foreign debt will rise to 13.5 percent from 11 percent, according to the median projections in the Bloomberg survey, which was conducted Oct. 22 to Oct. 28.

“Back in May I thought they would allocate more to foreign assets to weaken the yen, but it seems they are more focused on Japanese stocks,” said Genji Tsukatani, a portfolio manager in Tokyo at JPMorgan Asset Management Inc. “They may want to keep the currency from falling too much with a weaker yen being criticized domestically.”

[…]

The fund had 17 percent of assets in domestic shares at the end of June, near the maximum 18 percent it can own under current rules. It also had 53 percent in domestic bonds, 16 percent in foreign equities, 11 percent in overseas debt and 2 percent in short-term assets.

GPIF is the world’s largest public pension fund. It manages $1.2 trillion in assets.

Photo by Ville Miettinen

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