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New Mexico Pension Reaches Settlement With Ex-Chairman Marred By Scandal

Bruce Malott, the ex-chairman of the $11 billion New Mexico Educational Retirement Board, is currently the defendant in five separate lawsuits stemming his handling of pension investments, which were allegedly marred by conflicts of interest.

Mallot resigned from the pension fund as a result of the controversy. But he claimed that the Retirement Board should pay his attorney fees accrued during those lawsuits. The Board initially refused, but Mallot sued the board over the fees, and today the Board has agreed to pay $125,000 worth of his attorney costs.

Reported by the Albuquerque Journal:

The Educational Retirement Board has paid its former chairman, Bruce Malott, $125,000 to settle a civil lawsuit he filed to recover money for legal representation in lawsuits arising from a state investment scandal.

Malott filed the lawsuit two years ago when the board refused to pay for his personal attorney fees based on an attorney general’s opinion and because he was also represented by lawyers hired by the state.

“The attorney general’s opinion stated clearly that I should not be reimbursed for my legal fees if I had done anything wrong, so this payment only demonstrates what I have said all along – that I have acted with integrity throughout my tenure at the ERB,” Malott said.

ERB Executive Director Jan Goodwin said in a statement, “Consistent with a ruling issued by U.S. District Court Judge Martha Vázquez earlier this year, the agency determined that a settlement was in the best interest of ERB members and beneficiaries. Continued litigation held the risk of escalating costs and an uncertain outcome.

“The settlement allows ERB to focus its attention on its mission of serving its members,” she said.

The ERB was represented by the Attorney General’s Office in the lawsuit.

More details on Malott’s conflicts of interest during his tenure at the pension fund, from the Albuquerque Journal:

Malott was named as a defendant in five separate civil lawsuits that claimed investments by the State Investment Council and the Educational Retirement Board were steered to investment firms by placement agents with close ties to then-Gov. Bill Richardson’s administration. The main placement agent, Marc Correra, shared in more than $22 million in fees for steering state investments from the SIC and the ERB to firms that paid him.

Correra’s father, Anthony Correra, was part of Richardson’s inner circle, and raised money for his campaigns for governor and president.

While serving on the ERB, Malott received a $340,000 loan from the elder Correra through a trust.

Malott resigned as chairman of the ERB following an interview with the Journal about the loan, which had not been disclosed to the ERB, the public or to Richardson, who had appointed Malott to the ERB.

The New Mexico Educational Retirement Board is the pension fund for 90,000 of the state’s teachers. It oversees $11 billion of assets.

Europe Launches Cross-Border Pension Plan For Scientists, Researchers

European scientists and researchers often move between countries for their work. That poses logistical problems for their pension plans, but the European Union is moving to end those troubles.

The European Commission announced this week a new, cross-border pension system for scientists and researchers who are frequently on the move. From Science Direct:

Under the new system, which is called Retirement Savings Vehicle for European Research Institutions (RESAVER) and will be launched next year, employees will stay affiliated to a single pension plan, keeping their benefits as they move between countries and institutions. “RESAVER’s size will also ensure very competitive costs,” says Théodore Economou, CEO of the pension fund at CERN, Europe’s particle physics laboratory near Geneva, Switzerland.

The fund will not substitute state-run pension systems (also known as first pillar pensions), but will provide supplementary benefits financed through employer contributions and private pension plans for individuals (so-called second and third pillar pensions).

But for now, the plan is limited to the handful of institutions that have signed up, including the Vienna University of Technology; the Elettra Synchrotron in Trieste, Italy; and the Association of Universities in the Netherlands. (CERN and the University of Cambridge were part of the task force that helped set up the system, but have not joined RESAVER.)

But where old logistical hurdles are removed, new ones come in their place. From Science Direct:

“RESAVER is not possible or attractive in a number of countries” including France, Germany, and the United Kingdom,” says Katrien Maes, chief policy officer at the League of European Research Universities (LERU), which supports the fund’s idea and also took part in the task force. For example, “Public sector employees [in France] are unable to opt out of their mandatory pension plan which already provides a relatively high level of benefit,” according to a 2010 feasibility study ordered by the European Commission.

The European Commission is awarding a 4-year, €4 million contract to kick-start the system.

Photo by go.usa.gov/dj0

Montreal Fires Six Firefighters, Suspends Dozens After Pension Protests

Montreal city hall pension protest — The scene in Montreal’s city hall during the pension protests.

Six firefighters have been fired and 46 have been suspended in Montreal after those employee’s participated in last month’s raucous protests against pension cuts. From the Montreal Gazette:

This was the fallout announced Thursday by the city of Montreal following an investigation by its human resources and comptroller’s departments into the Aug. 18 ransacking of city hall. More than 100 municipal workers, most of them firefighters, stormed in, tossing reams of paper throughout the building, chasing the mayor and councillors out of council chambers and up to offices, and flinging water and water glasses from elevated viewing galleries down toward councillors.

[…]

Calling the acts disgraceful, Montreal executive committee chair Pierre Desrochers said video and witness testimony had implicated 63 individuals, and that more individuals were being investigated. Implicated individuals were invited to give their version, he said. Most did not.

The level of punishment was based on the gravity of the offences, which ranged from raucous protesting to vandalism and outright intimidation, Desrochers said. Asked what constituted a firing offence, he referred to workers who ran up to Mayor Denis Coderre’s office and broke windows trying to get in.

“This direct attack on democracy included acts of intimidation of a gravity without precedent in a free and democratic society,” Desrochers said. “Never will our administration cede to intimidation, and never will it accept that citizens be taken hostage by tactics that go too far.”

One union leader was angry with the “brutal” punishments. From the Montreal Gazette:

The head of Montreal’s firefighters’ union, Ronald Martin, promised to fight the firings and suspensions. He said he has not been fired although he heard the rumours of his firing in the wind. “Maybe there is a bailiff’s letter waiting for me at home. As far as I know I have not been fired,” he said during an afternoon news conference.

Martin called the city’s action brutal and disappointing, and a political act that is an attempt at “union busting.”

“These are dark days for labour relations,” Martin said.

The union leader appealed to members to stay calm in the face of firings, which he called the city’s provocation to the “family of firefighters.”

“They want to make us angry, don’t fall into the trap,” Martin said.

All the workers will be able to appeal their suspensions and firings.

Report: New York Common Fund Picks Above Average Hedge Fund Managers

Some observers have openly questioned the manager selection habits of pension funds. But a recent analysis shows that at least one fund, the New York Common Retirement Fund, picks “above average” hedge fund managers. From Pensions & Investments:

An analysis of public holdings shows that equity hedge fund managers in the New York State Common Retirement Fund‘s absolute-return strategy exhibit “above average” skill as stock pickers, but are outside the top 25th percentile of the fund universe as a whole.

Symmetric Information Technologies analyzes 13F filings of hedge funds and calculates security selection skill based on funds’ long positions, and their relative performance to overall sector returns. The most recent analysis notes the “accomplishment is still impressive given the restrictions pension funds operate under and shows they are able to pick managers that produced for them better than average skill compared to what is available in the HF universe. This is no easy task.”

Symmetric says three New York State Common Retirement Fund managers – HighFields Capital, ValueAct Capital and Viking Global Advisors – ranked in the top 25th percentile in terms of stock selection.

The Common Fund makes investments for the New York State and Local Retirement System (NYSLRS) as well as other major systems.

The Common fund allocated 3.2% of its assets or $5.6 billion, toward hedge funds.

The Case For Long-Termism in Pension Investments

Pension funds, more so than other investors, operate on a particularly long time horizon.

But that doesn’t mean funds can’t succumb to short-term thinking.

Keith Ambachtsheer, Director Emeritus of the International Centre for Pension Management at the University of Toronto, makes the case for more long-term thinking at pension funds in a recent paper published in the Rotman International Journal of Pension Management.

He lays the groundwork of short-term thinking at pension funds by presenting this statistic:

My 2011 survey of 37 major pension funds found that only 8 (22%) based performance-related compensation on measures over four years or more.

In other words, pension funds aren’t rewarding long-term thinking. But how can that be changed? From the paper:

A good start is to insist that the representatives of asset owners become true fiduciaries, legally required to act in the sole best interest of the people (e.g., shareholders, pension beneficiaries) to whom they owe a fiduciary duty….the resulting message for the governing boards of pension and other long-horizon investment organizations (e.g., endowments) is that they must stretch out the time horizon in which they frame their duties, as well as recognizing the interconnected impact of their decisions on multiple constituents to whom they owe loyalty (e.g., not just current pension beneficiaries but also future ones).

Increasingly, fiduciary behavior and decisions will be judged not by a cookie-cutter off-the-shelf “prudent person” standard by a much broader “reasonable expectations” standard.

A logical implication of these developments is that the individual and collective actions of the world’s leading pension funds are our best hope to transform investing into more functional, wealth-creating processes.

It will take work, but a shift to long-termism will be worth it, according to the paper:

Institutional investors around the globe, led by the pension fund sector, are well placed to play a “lead wagon” fiduciary role as we set out to address these challenges. Indeed, the emerging view is that pension sector leaders have a legal obligation to look beyond tomorrow, and to focus the capital at their disposal on the long term.

Will the effort be worth it? Logic and history tell us that the answer is “yes.” Qualitatively, long-termism naturally fosters good citizenship; quantitatively, a 2011 study that calculates the combined impact of plugging the upstream and downstream “leakages” in conventional investment decision making with a short-term focus found that the resulting shift to long-termism could be worth as much as 150 basis points (1.5%) per annum in increased investment returns (Ambachtsheer, Fuller, and Hindocha 2013).

Read the entire paper, titled The Case for Long-Termism, here [subscription required].

Report Card Grades 151 Florida Pension Plans

The LeRoy Collins Institute, a non-partisan think tank at Florida State University, recently released a report grading 151 municipal pension plans across Florida.

A quick snapshot of some of the grades, from the Florida Times-Union:

Fernandina Beach general employees – F

Fernandina Beach police/firefighters – F

Jacksonville corrections officers – F

Jacksonville police/firefighters – D

Atlantic Beach police – D

Orange Park firefighters – D

Orange Park general employees – D

Orange Park police – D

Palatka firefighters – D

Palatka general employees – D

Atlantic Beach general employees – C

Jacksonville general employees – C

St. Augustine general employees – B

St. Augustine police – A

Palatka police – A

The author of the report told the Florida Times-Union:

“Many cities are in urgent need of reform that will help reverse this decline in healthy pension funds and get more plans headed toward the honor roll,” said David Matkin, assistant professor at University of Albany-SUNY, who wrote the report.

Jacksonville’s Mayor, Alvin Brown, said he considering putting pension reform ideas on the table for the Corrections Officers Fund, the General Employees Fund and the Police and Fire Fund.

Pension Funds, Asset Allocation and Bad Habits

All too often, investors can fall victim to recency bias and return chasing.

Pension funds, it turns out, are no exception.

Three researchers – Andrew Ang, Amit Goyal and Antti Ilmanen – analyzed 978 pension funds’ target allocations over a 22-year period to determine whether the funds were chasing returns, and the cost of such chasing.

The paper was published in the most recent issue of Rotman International Journal of Pension Management. An excerpt where the researchers summarize their findings:

Many pension funds rebalance their asset-class allocations regularly to specific target weights, such as the conventional 60% stocks and 40% bonds. But there is anecdotal evidence that funds may let their allocations drift with relative asset-class performance. This may reflect passive buy-and-hold policies, a desire to maintain asset-class allocations near market-cap weights, or more proactive return chasing. We focus on the last possibility.

[…]

Our key findings are easily summarized: pension funds, in the aggregate, do not recognize the shift from momentum to reversal tendencies in asset returns beyond the one-year horizon, and instead the typical pension fund keeps chasing returns over multi-year horizons, to the detriment of the institution’s long-run wealth.

We hope that this evidence will help at least some pension funds to reconsider their asset allocation practices.

Chief Investment Officer magazine further summarizes the paper’s findings:

Corporate and public pension funds alike tended to increase exposure to asset classes with strong returns in both the short and longer term, the paper noted. Even performance three years prior influenced allocation patterns. While the study split out pension funds by size and plan sponsors, they found no statistically significant variance in behavior.

The researchers then turned to a data set provided by AQR, covering global equity, bond, and commodity markets since 1900. Based on more than a century of market activity, the study found momentum patterns on a one-year time horizon. Beyond that, the only statistically significant result showed that two years following a given return, performance was likely to have moved in the opposite direction.

The entire paper, titled Asset Allocation and Bad Habits, can be read here [subscription required].

Photo by Andreas Poike via Flickr CC License

Judge: Scranton Can’t Tax Commuters To Fix Pensions

Scranton’s pension funds are around 23 percent funded and less than 5 years away from collapse, according to an audit released last month.

As such, the city had planned to start raising money from a new revenue source: a tax on commuters.

But a judge shot down that idea on Wednesday. From Reuters:

A Pennsylvania judge on Tuesday rejected the cash-strapped city of Scranton’s bid to solve its municipal pension woes with a new commuter tax.

The 0.75 percent tax on commuters’ earned income was supposed to have gone into effect on Wednesday. It would have affected about 23,000 people and raised about $5 million annually, according to city officials.

Senior Judge John Braxton of Philadelphia, who heard the case in Lackawanna County Court of Common Pleas, said the city could not impose a commuter tax unless it levied the same tax on residents.

The lawsuit to stop the tax was brought by a group of aggrieved commuters who would have paid it. The city can appeal the ruling.

[…]

The funded level of its pension fund for firefighters sank to 16.7 percent as of Jan. 1, 2013, from 41.7 percent just four years earlier, the audit found. Scranton’s police pension fund is just 28.8 percent funded, and its municipal employees pension is at 23 percent. Above 80 percent is generally considered healthy.

Scranton’s pension and benefit costs have been growing by an average 15 percent annually since 2012, budget documents said.

In light of the judge’s decision, Scranton is considering other options. Those ideas include, according to the Scranton Times-Tribune:

Wait to see if the state amends Act 47:

Before deciding on a next step, Scranton leaders first want to see the outcome of changes to Act 47 pending in the state Legislature. These amendments would give financially-distressed cities more revenue alternatives, but also require an Act 205 wage tax to be imposed equally on residents and nonresidents.

Try again for Act 205 wage tax:

If the Act 205 equal-treatment provision dies, the city may consider imposing an Act 205 tax again — but this time with a relatively small increase for city residents and a larger increase for nonresidents, as other cities have done, said Mr. McGoff and city Business Administrator David Bulzoni.

Seek bankruptcy protection or a receiver:

Having the city seek Chapter 9 bankruptcy protection is not under consideration, Mr. McGoff said. It’s not clear the state would allow such a move, anyway, because Harrisburg’s attempt a few years ago was blocked and a receiver was installed there instead.

The city will reconsider the commuter tax in 2015, except this time they’ll consider levying it on everyone, including residents.

Pension Funds Lead “Enormous” New Class Action Lawsuit Against JP Morgan

It’s been less than a year since JP Morgan agreed to a $13 billion settlement to compensate homeowners and pension funds for losses stemming from failed investments.

Now, the bank has been told it will face another class action lawsuit centering on the same issue: the toxic mortgage-backed securities it sold investors in the years leading up to the financial crisis.

At the forefront of the lawsuit are two pension funds: the Laborers Pension Trust Fund for Northern California and Construction Laborers Pension Trust for Southern California, who are both lead plaintiffs.

Chicago’s Pension Hole Gets Deeper

A new report from the watchdog group Civic Federation reveals that Chicago’s unfunded pension obligations have tripled since 2003 and now stand at $37 billion.

Details from the report, summarized by the Chicago Sun-Times:

The report found the gap between current assets of the ten funds and pensions promised to retirees had risen to $37.3 billion.

The 10 funds had an average funding level of 45.5 percent in 2012, down from 74.5 percent a decade ago.

The firefighters pension fund is in the worst shape, with assets to cover just 24.4 percent of future liabilities. The CTA pension fund is in the best financial condition at 59 percent.

Government employees did their part by contributing the required portion of their paychecks to their future pensions. But the government contribution fell nearly $2 billion short of the $2.8 billion required to cover costs and reduce a portion of unfunded liabilities over a 30-year time frame, the report concludes.

Investment income didn’t help. And the future outlook is bleak, thanks to a “declining ratio” of active employees to beneficiaries.

In 2012, the 10 funds had 1.11 active employees for every retiree, down from a 1.55 ratio a decade ago. The police, laborers, Metropolitan Water Reclamation District, Forest Preserve and CTA funds all had more beneficiaries than active employees in 2012.

Counting statewide funds, the pension liability amounts to $19,579 for every Chicago resident.

Chicago is required by law to make a $550 million contribution in 2016 to two police and fire pension funds. Mayor Rahm Emanuel presumably needs to raise that money through various taxes. But he has repeatedly promised not to raise property taxes, and more recently said he won’t raise gas or sales taxes, either. From the Sun-Times:

Mayor Rahm Emanuel on Wednesday ruled out pre-election increases in property, sales or gasoline taxes but pointedly refused to say whether he would steer clear of any other taxes, fines or fees.

“We’ve balanced three budgets in a row holding the line on property, sales and gas taxes and finding efficiencies and reforms in the system. . . . We eliminated the per-employee head tax . . . and we put money back in the rainy day fund,” the mayor said.

“On my fourth budget, we will hold the line on property, sales and gas taxes and put money back in the rainy day fund and continue to look at the system as a whole to find efficiencies and reforms and things that were duplicative where you could do better.”

This past summer, Chicago hiked its telephone tax by 56 percent.

Photo: Pete Souza [Public domain], via Wikimedia Commons

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