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Audit Rips Into Connecticut Pension Board

A state audit released this week ripped into Connecticut’s Teacher’s Retirement Board, accusing the Board of “severe” management problems and revealing that the board has failed to keep tabs on millions of dollars.

Reported by NBC Connecticut:

A recent state audit says the people in charge of the funds need to do their homework and learn better accounting procedures.

The state auditor’s findings report that the TRB had a “severe lack of management oversight” of its retiree health fund less than a year ago, resulting in a multimillion-dollar discrepancy.

Auditors also criticized the TRB for failing to tell beneficiaries of deceased retirees that they were due the remaining portion of the retirees’ pensions, in one case amounting to $200,000.

The TRB also admitted to auditors it was doing a poor job of keeping track of accounts payable and receivable, and in some cases retirees who died received pension benefits after their death, according to the report.

The TRB responded in the audit saying it is understaffed, but trying to solve these issues.

It now has subscribed to a people finding service to locate the survivors of retirees who have passed, among other moves.

The board controls $14 billion of assets. Read the entire audit here.

What Would Adam Smith Say About CalPERS’ Hedge Fund Pullback?

Tim Worstall has written an interesting piece for Forbes in the wake of CalPERS’ decision to remove $4 billion from 30 different hedge funds. The premise: What would Adam Smith think about the pension fund’s decision to end its investments with hedge funds?

Worstall writes:

We can look back all the way to 1776 and the foundation text of modern economics, Adam Smith’s “Wealth of Nations” and find a reasonable explanation of what’s happening here. Essentially, hedge funds were a great idea but the innate structure of free market capitalism means that no idea stays great over time.

[…]

When the capitalists (investors) spot someone making those above average profits then they’ll move their investments over into that sector so that they can get them some of those excess returns. All of which is entirely fine and is a reasonable enough description of what happened to hedge funds from their small start in the 60s and 70s up to recent times. They were making higher (risk-adjusted) profits and people were moving more of their capital into them in order to get those higher returns.

However, Smith goes on to point out what happens next. That increased capital in that sector introduces more competition into that sector. Such competition, umm, competes away those excess profits and it’s thus, in the end, the very movement of capital (or investment) in chase of higher returns that leads to the higher returns disappearing. This would be a reasonable description of the hedge fund industry in more recent times.

Certainly, some funds have done very well indeed, but others have tanked. The average return from the industry (after fees, a vital point to consider) is now lower than many if not most other investment strategies. At which point we should see capital flowing out of the industry and that’s just what Calpers is doing.

Worstall is a senior fellow at the Adam Smith Institute. Read the rest of his piece here.

Photo credit: “AdamSmith” by Etching created by Cadell and Davies (1811), John Horsburgh (1828) or R.C. Bell (1872). Licensed under Public domain via Wikimedia Commons

New York Police Unions Lobby For Higher Disability Pensions

Public safety unions in New York have renewed lobbying for a bill that would increase pensions for less experienced police officers that are injured on the job.

More details on the bill and how it would change current law, from Capital New York:

To determine the size of their pensions, police officers, like most municipal employees, are grouped into a tier system based upon their date of hire. The Albany bill, which has been introduced in both houses of the State Legislature, would afford all police officers the same disability benefit of three-quarters of their salary.

Currently those hired after July, 2009 receive less than their colleagues with more seniority.

The bill received added attention after NYPD officer Rosa Rodriguez suffered severe lung damage after responding to a Brooklyn fire in April. Her partner, Denis Guerra, died from injuries he sustained at the high-rise arson fire in Coney Island.

A memo attached to the Albany bill notes that Rodriguez’s disability benefits would currently total $22,000 annually, compared to roughly $39,000 if she had been hired earlier.

Mayor Bill de Blasio does not support the bill, although his support isn’t needed to pass the measure. De Blasio says the bill would cost the city $35 million in the first year alone, but union officials dispute that number.

Moody’s: Undoing Retiree Cuts Would Spell Bankruptcy For Flint

Detroit isn’t the only Michigan city having a hard time financially. Flint, a smaller but similarly distressed city, has toyed with the idea of bankruptcy for months.

The city cut retiree benefits in an attempt to improve its fiscal condition, but a lawsuit over those cuts is waiting in the wings.

Moody’s has now said that the city is unlikely to face bankruptcy – but if retirees win their lawsuit against the city, that outlook could change. From Michigan Live:

Flint and Detroit have many similarities, but bankruptcy isn’t likely to be among them, according to an analyst with Moody’s Investors Service.

David Levett, writing in the Sept. 11 issue of U.S. Public Finance Weekly Credit Outlook, says Flint is unlikely to follow Detroit’s path into bankruptcy in the near term, especially if the courts allow the city to keep benefit cuts to retirees in place.

[…]

Earlier this year, Earley himself raised the possibility of bankruptcy for Flint if it loses a lawsuit filed by city retirees, which seeks to maintain the health benefits that workers retired with.

Levett’s analysis credits Flint’s emergency managers with having “substantially improved financial operations with dramatic changes, including restructuring pension benefits, outsourcing services, eliminating 20 percent of the city’s workforce and reducing total employee compensation equivalent to 20 percent of wages.”

He says Flint’s financial progress “would be derailed” if cuts to retiree benefits are overturned.

“The city would face substantial financial pressure should the benefit cuts not stand, increasing the likelihood of a bankruptcy filing … If the city ultimately loses the challenge, annual expenditures would increase by $5 million, equivalent to 8 percent of 2013 revenues,” the report says.

Flint Councilman Joshua Freeman was not so optimistic. In an email to Michigan Live, he said he sees “no clear path forward that does not include bankruptcy”.

CalPERS To Ditch Hedge Funds Entirely

CalPERS has been reviewing its hedge fund strategy for months, and that review initially led to a 40 percent pullback from hedge funds.

But now the California pension fund has announced plans to cut the cord from hedge funds entirely, pulling out $4 billion from 30 hedge funds. From Reuters:

Calpers, the largest U.S. pension system, said on Monday it has scrapped its hedge fund program and will pull about $4 billion in its investments from 30 such funds.

The $300 billion California Public Employees’ Retirement System said it would exit the program, known internally at Calpers as the Absolute Return Strategies (ARS) program, to reduce “complexity and costs.”

“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale … the ARS program doesn’t merit a continued role,” Ted Eliopoulos, Calpers interim chief investment officer, said in a statement.

Calpers said it will spend the next year exiting 24 hedge funds and six hedge fund-of-funds, “in a manner that best serves the interests of the portfolio”.

The decision to exit the hedge fund program culminates a search, Calpers says, that began after the 2008 financial crisis to ensure it was “less susceptible to future large drawdowns.”

Calpers has signaled waning enthusiasm for the asset class for some time. It started a review of its hedge fund program this year and has said for months it would cuts its allocation to hedge funds.

CalPERS overall portfolio returned 18.4 percent last year. But it’s hedge fund portfolio earned only 7.1 percent, while racking up $135 million in fees and expenses.

UK Study: Pension Funds Losing Money on Active Investment Strategies

A UK investment firm has released a study measuring the effectiveness of active versus passive investment strategies over the last five years. Their verdict: passive strategies outperform their active counterparts. From Every Investor:

Research from Charles Stanley Pan Asset (CSPA), a specialist fiduciary and multi-asset investment manager, has found that a passive strategy could give large pension schemes an additional £3.8m return per year.

It revealed that over five years to the end of April 2014, passive funds in 14 liquid asset classes have outperformed median active funds by 4.73% on average.

Indeed, in one instance, Emerging Market Bonds, this difference was 12% over the five year period.

The same analysis to the end of June 2013 produced an outperformance of 6.5%. This additional revenue has been coined the ‘Passive Fund Premium’, which is the return to be expected from a portfolio of passive funds over an equivalent portfolio of active funds.

In 2013, CSPA published ‘The Governance Revolution’, which proposed that UK institutional pension schemes, particularly smaller schemes with around £50m of assets, should consider adopting a 100% passive approach, and in doing so could save £3m over five years.

The study comes with a big caveat: The firm that conducted the study, CSPA, isn’t quite a neutral observer in all this. The firm specializes in helping pension funds make passive investments, so they certainly have an interest in promoting passive strategies.

Pennsylvania Lawmakers Return From Break, But Pension Reform Remains On Backburner

Pennsylvania lawmakers returned to the capitol this week to convene for the fall legislative session. While they were out, Gov. Tom Corbett traveled around the state and continued to try to drum up public support for pension reform and his re-election.

But the pension reform bill currently in the House seems unlikely to go anywhere; lawmakers now have other bills on their mind. Reported by the Pittsburgh Post-Gazette:

Legislators returning today to the Capitol are expected to take up several bills during their month-long stint before the election, but there is little sign yet that the pension overhaul promoted by Gov. Tom Corbett will be among those headed to his desk.

House Republicans’ efforts to pass the legislation remaking retirement benefits for future state and public school workers consumed significant energy in the lead-up to the signing of the state budget in July. Mr. Corbett urged legislators to send him the bill, which would limit the defined pension benefit while adding a 401(k)-style plan, but with Democrats opposed, Republicans in the House were unable to rally enough votes from their own ranks.

The Republican governor embarked on a statewide tour to emphasize the costs of the existing systems, while House Republicans say they met to discuss pensions throughout the summer.

“We’re still within striking distance,” Steve Miskin, a spokesman for House Majority Leader Mike Turzai, R-Marshall, said last week.

If the bill were to clear the House, it would face another hurdle in the Senate, where members instead approved a bill to move elected officials from the traditional pensions systems to 401(k)-style defined contribution plans.

The bills that are taking precedence over pension reform include a proposal to increase taxes on cigarettes and legislation surrounding ride-sharing programs such as Uber and Lyft.

Democrats are also working on raising the state’s minimum wage and securing more education funding.

Photo: Chesapeake Bay Program via Flickr CC License

New Jersey Sheriff Race Turns Into Campaign Against “Double Dipping”

One candidate for a New Jersey sheriff position is promising to relinquish his state pension if he wins, and in the process is turning against the common practice of sheriff “double dipping” – that is, the practice of drawing a state pension while also being employed at another public-sector job.

The candidate, David Jones, is running under the campaign slogan “One Sheriff, One Paycheck”. More from New Jersey Spotlight:

17 of the state’s 21 county sheriffs double dip by collecting public pensions averaging $78,000 on top of their sheriff’s salaries, jacking up their average compensation to almost $204,000. That’s almost $29,000 more than Chris Christie earns as governor.

But now, David Jones, a recently retired state police major, is trying to turn his campaign for Mercer County sheriff into a referendum on double dipping by pledging to suspend his own pension if he is elected sheriff and to refuse to employ any undersheriffs who do not agree to do the same.

Running on the slogan “One Sheriff, One Paycheck,” Jones said his victory would not only save $300,000 a year in pension payments now going to Mercer County Sheriff Jack Kemler and two of his top deputies, but could inspire voters in other counties to take a stand on double dipping by refusing to vote for anyone who does not take a similar pledge.

Double-dipping is well known, but efforts to discontinue the practice haven’t gone anywhere. From NJ Spotlight:

Legislation sponsored by Sen. Jennifer Beck (R-Monmouth) and Assemblywoman Allison Littell McHose (R-Sussex) to require retired public employees who take public jobs paying more than $15,000 to forgo collecting their pensions until they leave public service has gone nowhere.

That’s because Christie and legislative leaders have been reluctant to put an end to a practice that benefits loyalists in both parties. They include Essex County Executive Joseph DiVincenzo, a Democrat who filed his retirement papers when elected to his existing job. He now collects a $68,861 pension for a job he currently holds while continuing to be paid his full $153,831 salary. Louis Goetting, a Republican, collects an $88,860 annual pension from his years in the Treasury Department on top of his $140,000 salary as Christie’s deputy chief of staff.

William Schluter, a long-time Republican lawmaker, said outlawing double-dipping could save the state tens of millions of dollars on an annual basis.

Scranton Levies Commuter Tax, Considers Selling Sewer System to Cover Pension Debt

The Pennsylvania city of Scranton is scrambling to avoid bankruptcy brought on by its mounting pension costs, and in the process is turning to some less-than-conventional sources of revenue.

The city has already levied a commuter tax on non-residents who drive into Scranton for work. Now, the city is considering selling its sewer authority. From Bloomberg:

The former manufacturing community will tax commuters starting next month and may sell its sewer system to buttress its retirement funds. The city has 23 cents for every dollar in retiree obligations, down from 47 cents in 2009, according to state data. Without a fix, Scranton may go bankrupt in less than five years, said Pennsylvania Auditor General Eugene DePasquale.

[…]

Scranton’s pension costs are rising. The city’s contribution next year will reach $15.8 million, from $3.4 million in 2008, data from the city and the auditor general show. Pension expenses will take up 16 percent of the budget in 2018, from 9 percent in 2006, according to a July presentation by Hackensack, New Jersey-based financial consultant HJA Strategies LLC.

The seat of Lackawanna County, Scranton passed a 0.75 percent income tax on nonresident commuters effective Oct. 1. The measure would generate at least $5 million annually, based on county data on tax collections, and the funds would go toward pensions, [city business administrator David] Bulzoni said.

[…]

Another option is to sell the sewer authority, which has started a review of the proposal, Bulzoni said. In addition, municipal officials this month met with union representatives to discuss contract features that are depleting pension assets, Bulzoni said. He declined to elaborate because he said some solutions will involve bargaining.

The city’s pension funds were collectively 23 percent funded in 2013.

BNY Mellon Launches Service To Aid Pension Funds’ Compliance With New GASB Rules

BNY Mellon has announced a new “regulatory support group” to help its pension fund clients to prepare for and comply with new GASB accounting standards, which went into effect last June. From a BNY Mellon press release:

BNY Mellon has developed reports that will enable plan sponsors to seamlessly compile Statements of Net Assets and Net Changes, new requirements called for under GASB 67. The reports are easily customized and available to clients through Workbench™, BNY Mellon’s technology portal. Additional solutions are designed to help clients meet their GASB 67 performance reporting requirements, with capabilities that feature:

–       Annual money-weighted returns integrated into existing standard and interactive reporting

–       Money-weighted returns available across all return types, including net-of-plan expenses

–       Returns reported by calendar or fiscal periods, as well as customized time periods

–       Extended time-period returns reported on an annualized or cumulative basis back to inception date.

“As new standards like GASB 67 continue to impact plan sponsors, they need investment servicers with a solid understanding of the financial regulatory landscape,” said George Gilmer, BNY Mellon head of Asset Servicing for the Americas.

The new GASB rules are designed to improve transparency and accountability in the financial reporting of public pension funds.

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