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Kentucky To Disclose More Details About Alternative Investments, But Some Data Will Remain Secret

About 30 percent of the Kentucky Retirement System’s investment portfolio is allocated towards alternative investments. That kind of investment strategy leads to significant fees and expenses. But much of the data surrounding the fees the System paid to firms to manage those alternative investments were hidden under lock and key…until now.

Yesterday, the KRS Board of Trustees approved a measure designed to increase transparency surrounding the fees the System pays to individual firms to handle its investments. From WFPL:

Kentucky Retirement Systems, which runs the $16 billion pension and health care funds for state, city and county workers and retirees, will be providing more detail about the fees it pays to the managers of its so-called “alternative” investments.

[Interim investment director David Peden] said KRS’ investment committee and the full board warmed to the idea after articles by the Kentucky Center for Investigative Reporting and the Lexington Herald-Leader on the level of transparency about fees paid to hedge funds and private equity firms.

Until now, KRS had disclosed the total amount of fees paid to investment firms — $53.6 million in the year that ended June 30, 2013 — but did not report the fee rates charged by individual firms. That practice will change in coming weeks, Peden said, as KRS staff posts fees for all current holdings on the agency’s website.

So, interested observers will be able to find the fee rates that KRS pays to individual firms.

But KRS still isn’t going to tell the public everything.

Among the information that will still be inaccessible to the public: the total dollar amount of fees paid to individual firms; the fee rates paid to “fund of funds”; and the specific make-up of the alternative funds, which are protected by confidentiality agreements between KRS and the fund managers.

Judge: San Bernardino Can Cut Firefighter Benefits

A judge ruled on Thursday that the bankrupt city of San Bernardino, California, could cut firefighter pension benefits as part of its bankruptcy plan.

The cuts would be in the form of higher pension contributions from firefighters and fewer hours of overtime. From Reuters:

In a tentative ruling, federal U.S. Bankruptcy Judge Meredith Jury said San Bernardino was entitled to unilaterally impose benefit cuts on the city’s firefighters, something their union had fiercely opposed.

Jury conceded that the cuts, which involve greater pension contributions by firefighters and reduction in overtime, were a hardship on the firefighters.

But she said the city had also been persuasive in showing that what it had been paying in terms of benefits to the firefighters was a financial burden, and being able to reject the firefighters’ collective bargaining agreement was a key step to forming a bankruptcy exit plan.

[…]

Last month the city reached an undisclosed deal with its police union. In June, it also reached a deal – subject to a judicial gag order – with its largest creditor, the California Public Employees’ Retirement System (Calpers).

The city only began face-to-face negotiations with some of its other large creditors – bondholders and insurers including Ambac Assurance Corp – last month.

The judge has made clear that it will not be before next year that she expects the city to produce a bankruptcy exit plan, known as a plan of adjustment.

San Bernardino filed for bankruptcy in 2012. It’s 2012 budget deficit was $45 million.

Canada Pension Funds Invest $700 Million in XPO Logistics

Canada’s Public Sector Pension Investment Board (PSP Investments) and the Ontario Teachers’ Pension Plan have joined together with one other firm (GIC, Singapore’s sovereign wealth fund) to invest a combined $700 million in XPO Logistics, a transportation logistics firm.

More details from Market Watch:

The transaction, which is complete and scheduled to settle on September 17, 2014, provides for the sale of newly issued common stock and preferred stock to the Investors. Upon approval by the company’s shareholders, the preferred stock will be converted into common stock and the Investors will hold approximately 22% of XPO’s common stock on a fully diluted basis. The $30.66 price per share of common stock issuable to the Investors represents a 5% discount to the trailing 20-day volume weighted average price. Bradley Jacobs and Jacobs Private Equity, LLC intend to vote in favor of the stock issuance. Jacobs Private Equity, LLC will remain the company’s largest shareholder.

Bradley Jacobs, chairman and chief executive officer of XPO Logistics, said, “We’re delighted to welcome PSP Investments, GIC and Ontario Teachers’ Pension Plan as significant shareholders in XPO. This strategic investment by three blue chip institutions is a strong endorsement of our plan for value creation. With the benefit of $700 million of additional equity to accelerate our growth, we can capitalize on an acquisition pipeline that’s livelier than expected. We’re now targeting approximately $9 billion of revenue and $575 million of EBITDA for 2017.”

The vice-presidents of PSP and the OTPP both released statement regarding the investment. From Market Watch:

Daniel Garant, senior vice-president, public markets for PSP Investments, said, “We are pleased to become a meaningful shareholder of XPO and support its board and management as it pursues its growth strategy. This investment in XPO is consistent with our Value Opportunities Portfolio’s mandate, which includes making strategic investments in publicly-listed companies that we believe have the capability of generating above average risk-adjusted returns over time and where PSP Investments can leverage its permanent and growing capital base over a long-term investment horizon.”

[…]

Michael Wissell, senior vice-president, public equities for Ontario Teachers’ Pension Plan, said, “Teachers’ believes in partnering with world-class entrepreneurs. We are pleased to invest alongside Brad Jacobs and his team. Their plans for XPO align with our approach to long-term value creation.”

The OTPP is the largest single-profession retirement fund in Canada and manages over $140 billion in assets.

PSP Investments manages $93 billion of assets.

Urban Institute Endorses Bill That Would Turn Over Pension Assets To Insurance Companies

A bill that’s spend the last year gathering dust in Congress has been given new life this week after the Urban Institute gave the bill it’s top grade, saying the proposal “really addresses the retirement security issue”.

The bill, authored by Sen. Orrin Hatch (R-Utah), would let local governments turn over the assets of their pension plans to insurance companies. The insurance companies would then make payments to retirees. More details from Wonkblog:

On Wednesday, Hatch’s proposal, aimed at getting local governments and states off the hook for future pension liabilities, got a big thumbs-up from the non-partisan Urban Institute.

After reviewing the plan, the research organization gave the idea its top grade, saying it eliminates a troublesome financial risk for state and local governments, protects workers who change jobs frequently, and rewards young workers–all while providing a steady stream of income for retirees.

“Unlike any other plan I have seen, it really addresses the retirement security issue, the funding problem, and it provides incentives to allow employers to attract and retain a productive workforce,” said Richard Johnson, director of the Urban Institute’s Retirement Policy Center. “It is hard to balance those three objectives.”

The Hatch bill is similar to a financial maneuver taken by several big corporations, from General Motors and Ford to Heinz and Verizon, which have moved to shed pension liabilities in recent years. For local governments and states, the unfunded liabilities are huge, ranging anywhere from $1.4 trillion to more than $4 trillion, depending on the assumptions plugged in by actuaries.

As it stands, a study of 150 plans by the Center for Retirement Research at Boston College found that the plans have just 72 percent of the assets on hand needed to cover future liabilities, a figure that drops to just under 65 percent if new accounting standards are used.

Insurance companies love the bill. But not everyone thinks it’s a good idea, writes Michael Fletcher:

It has been panned by municipal employee unions and their allies, who worry that payments will not be as generous as current pension schemes, particularly for long-tenured workers. Johnson noted, however, that many pension plans tend to shortchange workers who stay on the job fewer than 20 years, and he said Hatch’s plan would address that, although workers who stayed on the job longer would get smaller payments than their predecessors.

Still, some critics have called it “a solution in search of a problem,” a characterization that has left Hatch incredulous.

“My bill is not a solution in search of a problem, and it is certainly not meant to be an attack on anyone or anything,” Hatch said during a Capitol Hill event Wednesday. “It is meant to offer and alternative path to employers who want to continue delivering lifetime retirement income for their workers in a world where that is becoming increasingly difficult.”

The bill wouldn’t force the hand of state and local funds; governments would have the choice of handing over their assets to insurance companies, but it would be voluntary.

Photo by: “US Capitol dome Jan 2006″ by Diliff. Licensed under Creative Commons Attribution 2.5 via Wikimedia Commons

Louisiana Fund Gives First Cost-of-Living Increase in 12 Years

The Municipal Police Employees Retirement System of Louisiana this week approved the first permanent cost-of-living increase for its members since January of 2002.

Members of the system will get a 3 percent COLA starting November 1, 2014. More details from KATC:

Retirees, surviving spouses and disabled employees will receive a three percent increase beginning November 1, 2014. Eligible members will receive a minimum increase of $20 per month.

The Board of Trustees voted unanimously to approve the increase at its monthly meeting. Members include Commissioner of Administration Kristy Nichols, Treasurer John Kennedy, and elected members of the municipal police community.

“It’s important that we continue to support the men and women who spent their careers protecting the people of Louisiana,” said Commissioner Nichols. “A permanent increase means they can better plan for the future.”

The last permanent cost of living adjustment (COLA) was a 2.7 percent increase in January 2002.

Act 113 of the 2008 Regular Session gave the board the authority to grant a three percent COLA to eligible retirees, survivors (widows and widowers), and beneficiaries. The Act was effective on July 1, 2008 and is a one-time only COLA.

According to the Act, the board cannot give another COLA until 2018.

Photo credit: “2002 LA Proof” by United States Mint. Licensed under Public domain via Wikimedia Commons

Pittsburgh Comprehensive Fund Returns 16 Percent For Year

Pittsburgh’s Comprehensive Municipal Trust Fund reports that it returned 16 percent on its investments from September 1, 2013 to August 31, 2014 (the fund’s fiscal year). Reported by TribLive:

The pension system earned 16 percent on its invested portfolio during the 12 months ending Aug. 31, Executive Director Paul Leger said.

“It’s a very good value,” Leger said. “It’s actually something I tell my friends about.”

Funds for police, firefighters and municipal employees totaled $670 million in August, about 58 percent of the money needed for $1.15 billion in pension obligations for current and future retirees. Invested funds totaled $648 million in December, about 64 percent of their obligations.

The system earned 17.5 percent on investments in 2013, 15.8 percent in 2012, 9.3 percent in 2011, 8.4 percent in 2010 and 11.2 percent in 2009, according to reports from Chicago-based Marquette Associates, the Comprehensive Trust Fund’s investment adviser.

Pennsylvania state law mandates that any local-level pension fund with over $1 billion in obligations is subject to a state takeover if funding levels fall below 50 percent. Pittsburgh’s fund nearly fell below that level in 2010, but it avoided the state takeover scenario by re-directing over $700 million worth of parking taxes into the fund.

Photo credit: “PittsburghSkyline with WarholBridge” by TheZachMorrisExperience. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

Illinois Gov. Quinn Accuses Challenger Bruce Rauner Of Paying Off Lawmakers To Vote Against Pension Reform Bill

Things got heated on Tuesday when Illinois Gov. Pat Quinn and challenger Bruce Rauner met for a face-to-face debate in front of the Chicago Tribune editorial board.

[Watch the full video here.]

The session lasted 80 minutes but arguably the most interesting point came when Quinn dropped an intriguing allegation: that Bruce Rauner had offered to pay off lawmakers to vote against the pension reform bill passed by Illinois last December. From the Chicago Tribune:

Quinn said that in December, during the heat of negotiations over a measure to drastically change public employee pension benefits, House Republican leader Jim Durkin told him that Rauner was offering campaign cash to GOP lawmakers to vote against the bill.

Rauner acknowledged working against the pension bill, which Quinn signed into law, but denied the governor’s allegation. Durkin aides referred calls to the state Republican Party, which did not directly address Quinn’s allegation in an emailed statement.

Bruce Rauner has proposed a plan to freeze the pensions of all current state employees and switch them into a 401(k)-style plan.

But Rauner has softened his stance in recent days, perhaps because he doesn’t want to alienate voters in what’s shaping out to be a close race.

During a public appearance Wednesday, Rauner said the following, according to WUIS:

“I’m a believer that we need to protect the pensions for the police officers, and give them a special retirement beyond what’s standardly done in other pensions.”

He didn’t clarify exactly what he meant by the statement.

Photo by Chris Eaves via Flickr CC License

San Diego Pension Board Sues For Control Over Pay Raises

The San Diego County Employees Retirement Association (SDCERA) is suing the county for full control over how much it pays its employees. Currently, the salaries of pension fund employees are capped by local government regulations. Reported by the San Diego Union-Tribune:

The seven-page lawsuit asks a judge to award sole discretion for compensation to the Board of Retirement, a nine-member group of current and former county employees and public officials. That duty now rests with the five elected members of the Board of Supervisors.

“The Board of Retirement cannot effectively administer the system and perform its fiduciary duties without this authority,” the complaint states.

Under county regulations, pension-fund employees are subject to a salary ordinance that limits what every position in county government may pay.

The pension fund has in the past publicly complained that salary limitations make it hard to hire and retain top talent. From the San Diego Union-Tribune:

Several times in recent years, the county refused to approve raises or bonuses to pension CEO Brian White, who is at the top of his salary range. White earned just over $250,000 in base pay and $125,000 in benefits last year.

If the pension board prevails in court, trustees would be free to pay their 80 or so employees whatever the retirement board thinks is fair.

[…]

The county salary cap was a problem for trustees when they sought to replace former chief investment officer David Deutsch in 2009.

After months of searching, they offered the position to Lee Partridge, who was then a top investment officer at the Teachers Retirement System of Texas.

Partridge turned down the job, in part due to salary limitations. He was subsequently hired as a consultant earning about $1.4 million a year. Deutsch was paid $209,000 annually.

The SDCERA made headlines this summer for it’s risk-heavy investment strategy, which involves heavy use of leverage and derivatives.

Court: CalPERS Can Sue Credit Rating Agencies Over Investment Losses

CalPERS lost over $10 billion during the financial crisis, and many of those losses stemmed from financial instruments given top-notch ratings by ratings agencies Moody’s and Standard & Poor’s.

CalPERS filed a lawsuit against the agencies for assigning ratings that misrepresented the quality of the failed investments, but the lawsuit had been held up for months as the agencies appealed the suit’s legitimacy in the lower courts.

But on Wednesday, the California Supreme Court ruled that CalPERS could indeed sue the agencies. From the San Francisco Chronicle:

The lawsuit involved its $1.3 billion investment in 2006 in three financial products – Cheyne Finance, Stanfield Victoria Funding and Sigma Finance – that had gotten the highest ratings from Moody’s and Standard & Poor’s. They were securities issued by banks and management companies and available only in private offerings to a limited number of institutional investors, including the pension system.

Only after all three went bankrupt in 2007 and 2008, CalPERS said, did investors learn that the products’ assets consisted largely of high-risk subprime mortgages. The suit also alleged that the rating agencies’ fee agreements had a built-in bias, entitling them to full fees only if they issued passing grades.

The ratings agencies had argued that their ratings were a form of free speech. The court agreed, but pointed out an important qualifier:

While investment ratings are a form of free expression, said the First District Court of Appeal in San Francisco, they are not mere expressions of opinion or predictions of success, which are immune from negligence suits. Instead, the court said, the ratings are factual assertions, issued “from a position of superior knowledge” about the investments’ financial health, and thus can be challenged if made falsely and carelessly.

And while federal law prohibits states from regulating credit-rating agencies, damage claims for misrepresentation are “within a field traditionally occupied by the states,” Justice Martin Jenkins said in the 3-0 appellate ruling.

Both ratings agencies appealed the decision Wednesday, but the court denied their appeals.

Pennsylvania Gov. Corbett, Trailing in Polls, Says He Will “Force Action” on Pension Reform

There’s less than two months until Pennsylvania residents will decide who becomes their next governor, and incumbent Tom Corbett finds himself trailing in polls by 15 points to Democratic challenger Tom Wolf.

Pension reform has been a central facet of Corbett’s campaign, and he doubled down on that stance Wednesday when he said he would “force action” on pension reform if he is re-elected. From the Philadelphia Inquirer:

“If I don’t get reelected for four more years, there will be nothing done about this, because Mr. [Tom] Wolf says there is not a pension problem,” Corbett said.

If he wins a second term, Corbett said, he would call a special session of the legislature early next year to force action on pensions, including for municipal workers. He said Scranton is distressed because of unaffordable pension obligations and predicted some school districts in Pennsylvania will come “doggone close to bankruptcy” without a solution.

Pension360 has previously covered polling data suggesting Pennsylvania voters are much less engaged on pension issues than they are on other topics, such as education. Corbett acknowledged as much on Wednesday in a chat with the Philadelphia Inquirer’s editorial board:

In the governor’s view, he is hurting politically because he has taken on issues “no one else will touch.” He mentioned his efforts to cut future pension costs, to end the system of state-controlled liquor stores, and to privatize management of the state lottery. The legislature, controlled by fellow Republicans, has stymied Corbett on all three priorities.

“If I had been looking toward reelection, do you think I would have taken on pensions, when all it does is get everyone upset?” Corbett asked. He added that he hoped voters would give him credit for trying.

Tom Wolf does not support Tom Corbett’s pension reform plan. In a statement Wednesday night, a Wolf spokesman characterized Corbett’s plan as “kicking the can down the road”.

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