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Report: U.S. Public Pension Funding Up 6 Percent in 2013

Funding ratios of the largest public pension plans across the country have improved since last year to the tune of 6 percent, according to report by Wilshire Consulting released Monday morning. From Reuters:

In the study provided to Reuters, Wilshire estimated 109 state retirement systems had enough assets to cover 73 percent of their obligations in the year ended June 30, 2013, up 5.7 percent from 69 percent in 2012. Still, 90 percent of those plans were considered under funded.

Russ Walker, vice president at Wilshire Associates and an author of the report, attributed the rise to the strong rally of global stock markets over the 12 months, offsetting “weaker performance by global fixed income and allowing pension asset growth to outdistance the growth in pension liabilities over fiscal 2013.”

For years, many states short-changed their public pensions, putting in far less than recommended by actuaries. The 2007-2009 recession further cut revenues, while plans’ investments, which provide two-thirds of revenues, went into a downward spiral.

[…]

Pension assets totaled $428.9 billion, while liabilities were $589.7 billion, reported Wilshire, a Santa Monica, California-based independent investment consulting firm. Of the retirement systems studied by Wilshire, 34 had equity allocations that equal or exceed 70 percent, while 14 systems were below 50 percent.

As the report notes, the vast majority of plans (90 percent) are still considered underfunded despite 2013’s improvement.

Experts generally consider an 80 percent funding ratio the lower limit of a “healthy” pension plan.

Video: Pennsylvania’s Pension Predicament

The 2014 CSG National Conference was held last month, but videos of the presentations are just beginning to surface.

This presentation, on public pensions in Pensylvania, was given by state Senator Pat Browne (R).

Sen. Browne has previously proposed and supported legislation to shift workers into a 401(k)-style plan. In 2012, he said:

“Significant policy decisions regarding Pennsylvania’s pension system must be made soon,” Senator Browne said. “Without significant changes in the design of Pennsylvania’s pension system, including a switch to a defined contribution system, the long-term costs will be unaffordable to Pennsylvania taxpayers.”

“Over the past few decades, virtually all of the private sector has shifted to defined contribution retirement plans,” Senator Pileggi said. “It’s time for Pennsylvania government to do the same.”

“A switch to a defined contribution plan will benefit Pennsylvania taxpayers by forcing fiscal discipline,” Senator Corman said. “Retiree benefits will become predictable and sustainable, costs will be easily defined, and future liabilities will be fully funded; it’s an excellent choice prospectively.”

Browne is a board member on the Public Employee Retirement Commission and the Public School Employees’ Retirement System board

Chicago’s Emanuel Raises Retiree Health Premiums By 40 Percent

In July, the Illinois Supreme Court ruled that subsidized health care premiums for state retirees were protected under the Illinois Constitution.

But Chicago Mayor Rahm Emanuel challenged that ruling Friday when he increased health insurance premiums for city retirees by 40 percent. The move is part of an ongoing effort to decrease the numerous retirement-related costs that weigh heavily on Chicago’s finances.

Reported by the Chicago Sun-Times:

Mayor Rahm Emanuel on Friday dropped another financial bombshell on Chicago’s 25,000 retired city workers and their dependents: their monthly health insurance premiums will be going up by a whopping 40 percent — in spite of a pending lawsuit and a precedent-setting Illinois Supreme Court ruling.

Last year, Emanuel announced plans to save $108.7 million a year by phasing out the city’s 55 percent subsidy for retiree health care and forcing retirees to make the switch to Obamacare.

For the city, the Year One savings was $25 million. For retirees, that translated into an increase in monthly health insurance premiums in the 20 percent and 30 percent-range.

On Friday, city retirees and their dependents got hit again — only this time, even harder. The city notified them of a 30-percent to 40-percent increase that will cost most of the retirees between another $300 to $400 a month.

Retirees and other observers expressed genuine surprise at the move, especially because it comes on the heels of a court ruling that appeared to protect against such policy actions. From the Sun-Times:

The [40 percent] increase stunned Clinton Krislov, an attorney representing retirees in a marathon legal battle against the city and not only because health care costs appear to be “flattening,” as he put it.

What’s even more surprising is the fact that Emanuel is forging full-speed ahead with his phase-out of the 55 percent city subsidy, in spite of a July court ruling that could tip the scales against the city.

The Illinois Supreme Court ruled then that subsidized health care premiums for state employees are protected under the Illinois Constitution and that the General Assembly was “precluded from diminishing or impairing that benefit.”

City retirees have a similar lawsuit pending that Krislov expects to result in a similar outcome.

“Restraint might have been called for until the case is over, but restraint doesn’t seem to be the plan here. The plan is to wean retirees off the city subsidy and have them off entirely by Jan. 1, 2017,” Krislov said late Friday.

The city released a statement Friday, saying the increased premiums would help to “right the city’s financial ship.”

Emanuel has promised to avoid raising taxes, particularly property taxes, before this year’s election.

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

Winnipeg’s Pension Reserves Quickly Depleting; Budget Pains Likely Coming

For years, Winnipeg has had a “rainy day fund”, worth hundreds of millions of dollars, that was used to pay pension expenses. It was advantageous for the city because the general budget could be insulated from rising pension costs.

But that may not last much longer. The rainy day fund is drying up, and pension costs are still rising: the city expects to use $16 million to pay down pension expenses in 2014, and for the first time that money might have to come straight from the general budget.

From the Winnipeg Sun:

The [rainy day] fund has dipped from $130 million in 2006 to $60 million in 2012.

“Once the fund is dry the city will likely be left scrambling to find $16 million (or more) each year to fulfil its pension obligations,” said CTF prairie director Colin Craig. “That’s the equivalent of about a 3% property tax increase each year.”

Craig said the city has indicated it withdrew $16.3 million in 2013 and expects to withdraw about the same in 2014.

“Candidates are currently having trouble finding $20 million annually for the proposed rapid transit expansion,” continued Craig. “Well, surprise! They’re likely going to have no choice but to start finding $16 million each year to pay for the city’s pension plan too. It’s pretty clear the taxpayer can’t afford everything that council candidates are promising.”

The city’s 2013 annual report states, “Until recently the Winnipeg Civic Employees’ Benefits Program’s special-purpose reserves have been used to subsidize the cost of benefits. … the Program’s reserve position is currently insufficient to continue to subsidize the cost of benefits on a sustainable basis.”

If the fund contained $60 million in 2012, it will likely contain less than $28 million when 2015 begins. By the time 2016 rolls around, the general budget will become exposed to the city’s pension expenses.

Is New Jersey Fudging Its Pension Fund Results to Defuse a Christie Scandal?

Over at Naked Capitalism, Yves Smith has written a great post looking deeper into New Jersey’s pension fund return data, which was revised upward last week. Yves asks the question: Did New Jersey artificially increase the value of its pension fund’s alternative investments to ward off mounting criticism of the fund?

This article was originally posted at NakedCapitalism.com

Is New Jersey Fudging Its Pension Fund Results to Defuse a Christie Scandal?

By Yves Smith

You cannot make stuff like this up. New Jersey, in its attempt to diffuse a pension fund scandal that implicates Chris Christie (it roused him to respond in public), looks to have committed the classic crisis management blunder of a cover-up worse than the original crime.

International Business Times reporter David Sirota has been putting questionable relationships between state pension funds and Wall Street under the hot lights. One of the objects of his scrutiny has been the New Jersey pension fund, which is seriously underfunded. A recent tally puts it at number 43 out of 50 states in the level of its pension funding, with only 60% of its commitments funded. The New Jersey shortfall is the result of a series of classic blunders, starting with a decision to starve the pension system in the 1990s under governor Christine Todd Whitman.

New Jersey dug its hole even deeper during the crisis, by taking risky bets right before the markets unraveled, including investing in Lehman shortly before its collapse.

This bad situation was made worse under Christie. As we wrote in 2011:

A more accurate rendition would be that, at least in New Jersey, the state has been raiding the pension kitty for over 15 years. This is not news to anyone who has been paying attention, any more than underfunding of corporate pensions. In the Garden State’s case, Governor Chris Christie skipped the required $3.1 billion pension fund contribution last year. He claimed this move was to force reform, but what impact does another $3.1 billion failure to pay have on an unfunded liability that was already over $50 billion?

Fast forward to the Sirota investigation. Sirota showed how Christie shifted fund allocations to managers of “alternative assets” like hedge funds and private equity funds, which charge vastly more in the way of fees than simple stock and bond funds. It should be no surprise that hedge and private fund managers are heavyweight political donors. The result was more fees to the managers and underperformance for New Jersey. As Sirota wrote:

Gov. Chris Christie’s administration openly acknowledged that more New Jersey taxpayer dollars were going to land in the coffers of major financial institutions. It was 2010, and Christie had just installed a longtime private equity executive, Robert Grady, to manage the state’s pension money. Grady promoted a plan to put more of those funds into riskier investments managed by Wall Street firms. Though this would entail higher fees, Grady said the strategy would “maximize returns while appropriately managing risk.”

Four years later, New Jersey has secured only half the promised results. The state has sent more pension money to big-name Wall Street firms like Blackstone, Third Point, Omega Advisors, Elliott Associates and Grady’s old firm, The Carlyle Group. Additionally, the amount of fees the state pays financial managers has more than tripled since Christie assumed office. New Jersey is now one of America’s largest investors in hedge funds.

The “maximized returns” have yet to materialize… Had New Jersey’s pension system simply matched the median rate of return, the state would have reaped roughly $3.8 billion more than it did between fiscal years 2011 and 2014, says pension consultant Chris Tobe.

Unfortunately, it is all too common for pension fund systems to swing for the fences when they are in trouble and commit even more money to supposedly higher return investment approaches like private equity. In fact, due to too much money flooding into these strategies, returns for both hedge funds and private equity funds have generally lagged stock market returns in the post-crisis period.

On top of that, New Jersey’s authorized allocation to alternative investments is a full one third, a stunningly high level. Even CalPERS, a long-standing investor in alternatives, has less than half that level committed to these strategies.

But in New Jersey’s case, there’s even more reason than usual to doubt that the motivation for the shift to riskier investments was due to desperation to catch up, as opposed to rank corruption. After all, Christie’s professed strategy has been to worsen the crisis at the pension fund. What better way to achieve that result than to invest the money indifferently in high fee strategies, and get the side benefit of currying favor with extremely well-heeled donors?

Now, under heat for the suspicious-looking shift to Wall Street firms combined with embarrassing underperformance, New Jersey is suddenly reporting higher results as if no one would notice the change. On Friday, Sirota published a new scoop: New Jersey is now saying its pension fund returns for 2013 are a full 1% higher than previously announced. As Sirota writes:

Facing an ethics complaint after disclosures of the state’s below-market pension investment returns, Gov. Chris Christie’s top economic officials defended themselves by declaring that they delivered 16.9 percent returns in fiscal year 2014. Yet only weeks ago, the Christie administration reported the returns were 15.9 percent — lower by more than $700 million.

The discrepancy surfaces amid intensifying criticism of the Christie administration’s decision to triple the amount of pension money invested in high-fee private equity, venture capital, hedge fund, real estate and other “alternative investment” firms — many of whose employees have made financial contributions to Republican organizations backing Christie’s election campaigns.

In an op-ed published in the Newark Star-Ledger on Friday, the two top officials of New Jersey’s State Investment Council, Robert Grady and Thomas Byrne, criticized the investment strategy proposed by investors such as Warren Buffett, who say pension money should be primarily in stock index funds, not in alternative investments. Defending New Jersey’s $20 billion bet on alternatives, Grady and Byrne declared that “in the fiscal year ended June 30, 2014, the pension fund achieved a return of 16.9%.”

A return of 16.9 percent would still trail median public pension returns.

“The July 22 release says the fund produced returns of 15.9, according to preliminary data compiled as of June 30, 2014. Now final audited results showed the fund returned 16.9 percent,” Christopher Santarelli, from the New Jersey Department of Treasury, told International Business Times in response to a request for comment about the differing numbers.

This sort of revision is unheard of. Remember, even with New Jersey, over 2/3 of pension fund assets are invested in stocks and bonds. Those valuations are unambiguous. Similarly, hedge funds are required to provide valuations (so-called “net asset values”) monthly, with those figures verified by third party appraisal firms. The stock, bond, and hedge fund results come in shortly after month-end; there’s no basis for revision after the fact (put it another way: a change in valuation for any of these types of funds, even if favorable, would warrant withdrawing funds as soon as possible, because it would be proof of serious deficiencies in controls and accounting at the fund manager).

So the only types of investments where results are less clear-cut are in private equity, venture capital, and other illiquid strategies where the fund managers rather than third parties provide the valuations for their investments.

But even here, those managers have other investors in their funds besides New Jersey. They calculate the net asset value across the entire fund and then give valuations to investors based on their percent participation. So if New Jersey was getting revised valuations for such a large portion of its funds, you’d expect some other public pension funds to report significant upticks as well. But New Jersey seems to be suspiciously unique in this regard.

To understand how implausible this miraculous 1% performance improvement is, let’s look at New Jersey’s current asset allocation, as of June 30:

We will charitably include “Commodities and Other Real Assets,” “Real Estate Debt,” and “Real Estate” in the not-independently-valued funds for the purpose of this back-of-the-envelope calculation.
If you total Debt Related Private Equity, Real Estate Debt, Police and Fire Mortgage Program, Commodities and Other Real Assets, Real Estate, and Buyouts/Venture Capital, you get 17.13%. Remember, the total that is not independently valued is almost certainly lower.
The 1% miraculous improvement in performance is attributable to at most 17.13% of the portfolio. That is tantamount to that portion of the portfolio producing returns that were at least 5.8% higher than initially reported. That is simply not plausible.
We have to believe either that New Jersey is utterly incompetent at record-keeping,which would be a violation of its fiduciary duty, or something stinks to high heaven. It’s not hard to guess which is more likely.

Chicago Suburb To Scrap Fire Department Due To Pension Costs

The town of North Riverside, a small suburb west of Chicago, is moving to terminate its contract with all village firefighters and hire new firefighters from a private service. The village claims it is facing a $2 million budget deficit and it cannot handle the costs of the salaries and benefits of the firefighters.

From A North Riverside press release:

Mayor Hubert Hermanek, Jr. of west suburban North Riverside, after yesterday announcing an impasse after six “good faith” negotiating sessions with Firefighters Union Local 2714, instructed the village’s attorneys to file suit today in Cook County Circuit Court asking that court to affirm North Riverside’s right to legally terminate the firefighters’ contract, which expired on April 30, 2014.

North Riverside, with a population of 6,672 in 2,827 households, derives most of its revenue from sales tax, thanks in large part to North Riverside Park Mall. However, the village is facing a proposed fiscal year 2014-2015 operating budget deficit of $1.9 million, with $1.8 million of this deficit being a direct result of the Village’s growing annual public pension obligation. All of this and more is evidence that supports the Village’s inability to sustain salary and benefits of over $200,000 per fireman and $230,000 per Lt. anymore.

Contracting firefighter services from Paramedic Services of Illinois (PSI), which has provided paramedic services to North Riverside for the past 28 years, would save the village more than $700,000 annually and vastly reduce the adverse impact of future pension obligations imposed by the state. All PSI paramedics are certified as firefighters, as well.

According to Hermanek, the village presented multiple compromise proposals to the union, including a progressive privatization plan based on an 11-year contract, during which 10 of North Riverside’s 14 current firefighters would reach retirement age and 25+ years of service. As they retired or normal attrition occurred, firefighters would be replaced with firefighters/paramedics from PSI. As a result, by the end of the 11-year contract, village fire and emergency protection services would be almost fully privatized, maintaining safe and reliable service, while achieving cost-savings necessary if North Riverside is to remain solvent.

As noted in the above paragraph, the village had previously tried to strike a deal with the firefighters’ union where the village would phase out the old firefighters and slowly phase in the private force.

The union (Firefighters Union Local 2714) then brought three of its own proposals to the table. Ultimately, however, the village and the union couldn’t agree on any deal.

Russia May Compensate For U.S. Sanctions By Pulling Money From Pension Fund

Russia’s Economy Minister said Friday that the country would consider pulling money from its national pension fund and using the money to aid firms damaged by Western sanctions.

Other options are on the table as well, including pulling money from Russia’s National Wealth Fund.

From Reuters:

Russia will support companies affected by Western sanctions and it may divert funds from its National Wealth Fund (NWF) or from pensions to do so, local news agencies cited Economy Minister Alexei Ulyukayev as saying on Friday.

“Of course we will show support to our companies hit by sanctions … There are different forms of support including various custom tariff regimes, possibly direct budget support (and) the possibility of using pension funds or the National Wealth Fund,” RIA quoted Ulyukayev as saying in Brussels.

The move wouldn’t be surprising; Pension360 has previously covered Russia’s willingness to take money from its pension fund to plug budget shortfalls elsewhere.

Since 2013, Russia has frozen more than $30 billion of its pension payments.

Photo credit: “Flag-map of Russia” by Aivazovskycommons. Licensed under Public domain via Wikimedia Commons

U.S. Anticipates Influx of Latin American Pension Investments

Latin America’s pension funds are looking to invest beyond their borders, and that means billions of dollars of pension investments flowing into the U.S., according to new projections from research firm Cerulli Associates.

Latin American countries have seen major growth in retirement assets in recent years as more workers are subject to mandatory retirement contributions. Such countries – Brazil, Peru, Chile, Columbia and others – are now looking to invest those assets abroad.

Union Files Ethics Complaint Over New Jersey Pension Investments

New Jersey’s largest union, New Jersey AFL-CIO, has filed an ethics complaint with the state regarding the entity that oversees the state’s pension investments – the State Investment Council – and the man that chairs the Council – Robert Grady.

The union alleges that politics have played a large role in the state’s pension investments, which have increasingly included hedge funds and other alternative investments.

From NJ.com:

In an 11-page letter to the ethics commission, New Jersey AFL-CIO President Charles Wowkanech said that the chair of the State Investment Council, Robert Grady, “has violated the Division’s own rules barring politics in the selection and retention of such funds and investments, and has further created an appearance of impropriety.”

At issue is the state’s investment of hundreds of millions of dollars of pension money with Wall Street firms, including hedge funds and other types of “alternative investments” that charge higher fees than more traditional types of investments — a practice that started before Christie was governor but has increased under him.

Some “key executives” of the firms donated to state and national Republican organizations that helped Christie, according to Wowkanech, who said those donations potentially broke state pay-to-play laws, and at the least violated the state officials’ code of ethics. Wowkanech wants an investigation.

The complaint is based on a series of reports on the websites Pando Daily and International Business Times, written by the reporter David Sirota, that explain the pension fund’s increase in alternative investments since Christie took office.

The complaint also takes issue with Grady’s involvement with Chrisite’s re-election campaign as an adviser, in close contact with Christie and top staffers, while he was leading the council.

“It should not be seen as mere coincidence that the reports show Robert Grady was listed as a required attendee on a series of regular weekly phone conference calls held by high-level staff on the Governor’s re-election committee in or around September 2013,” Wowkanech’s letter reads.

The Christie administration and the state treasury department have responded to the complaint, according to the Associated Press:

Christie spokesman Kevin Roberts calls the filing “a cheap political stunt based on shoddy, distorted reporting.”

Christopher Santarelli, a spokeswoman for the state treasury department, said it is state employees who decide who will manage pension fund money, not the investment council.

He also said that the state’s use of alternative investments including hedge funds and bank plans is in line with peers. He said the strategy helped minimize losses in 2008 and 2009, when stock prices fell sharply.

Grady did not immediately return a message from The Associated Press, but he previously said in an email to the International Business Times that he was cleared by the state treasury department’s ethics officer before he participated as a policy adviser to Christie’s re-election campaign. He says that no pension investment decisions were discussed with campaign officials.

The Associated Press wasn’t able to contact Grady. But Grady has previously stated that pension investment decisions had nothing to do with campaign politics.

Photo by Truthout.org via Flickr CC License

Kentucky Pension Board Approves $325 Million In New Alternative Investments

The Kentucky Retirement Systems’ Board of Trustees met Thursday, and the meeting produced several interesting news items.

One development, which Pension360 covered earlier today, involved increasing the transparency around the investment fees paid to outside firms that handle the System’s alternative investments.

The other item of interest had to do with alternatives, as well. The KRS Board approved $325 million in new alternative investments, to be placed with five different funds. The funds and allocations, as reported by the Kentucky Center for Investigative Reporting:

A $100 million investment in the Deutsche Bank Secondary Opportunities Fund III will go toward limited partnership.

A $65 million investment in Taurus Mining Finance Fund will go toward precious and industrial metal mining ventures globally.

A $60 million investment in Crestview Partners III will go toward leveraged buyouts.

A $50 million investment in BTG Pactual Timberland Fund I will go toward timberland.

A $50 million investment in Oberland Capital Healthcare will go toward prescription drug royalties.

Under KRS’ new transparency rules, the fee rates paid to those individual funds will be public information.

But the public still won’t be able to see the dollar amounts paid in fees to those individual funds. And, as is common practice, the specific make-up of the funds will remain confidential.

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