Author: Ted Ballantine

CalPERS’ pays billions of dollars in fees to external investment managers each year.

But an official admitted last week that the fees are sufficiently complex that staff “can’t track” them by themselves.

It was revealed at last week’s board meeting that the pension fund uses an algorithm — part of software built for the pension fund by a third party – to track investment fees.

From the Wall Street Journal:

As the nation’s largest public pension funds plunge deeper into complicated investments as a way of chasing returns, they are becoming more reliant on machines to make sense of it all. Some executives worry that a greater reliance on databases, coding and other quantitative tools creates the false impression that they have a better handle on their investments than they actually do.

[…]

In California, Calpers turned to computer models to understand its private-equity costs. Calpers has roughly $26 billion invested with private-equity firms, which buy companies with the goal of earning more in a later sale or public offering. They typically charge pension-fund clients a management fee of 1% to 2% of assets and a performance fee of as much as 20% of the gains when they sell companies for a profit.

Calpers was long unable to separate one set of fees from the other, relying in part on a set of spreadsheets to keep track of the data. The information was also stored in a range of different formats, making it difficult to aggregate and analyze.

It took five years to develop a new data-collection system that relies on private-equity managers to fill out new templates describing their various fees. A data and accounting firm then compiles the information and feeds it into the software program.

The new quantification is changing the way Calpers operates, one official said. It is “motivating us to explore alternative ways of investing in private equity that might have less of a fee burden,” Mr. Tollette said in an interview.

Of course, the algorithms are only as good as the data you give them. And a continuing problem for CalPERS is the fact that many private equity managers hesitate to turn over all relevant data, if any.

New Jersey Gov. Chris Christie last week unveiled a plan that would use lottery proceeds to pay down the state’s mounting pension obligations.

The plan would make the state lottery an asset of the pension fund, generating an estimated $37 billion over the next 30 years, according to the state Treasury.

However, some lawmakers — particularly Democrats — balked at the proposal, calling it a distraction and an excuse for Christie to continue to short the pension fund’s annual required contribution. Christie will be shorting the pension system roughly $2.5 billion in required contributions in 2018, according to the state budget.

Additionally, the lottery is essentially a regressive tax — meaning the state’s poor/working class families who are playing the lottery would now be a source of funding for the pension fund.

More from NJ Spotlight:

On paper, the pension system would benefit for the next 30 years by having the Lottery – which generates nearly $1 billion in annual revenue and was recently valued at $13.5 billion – effectively transferred onto its balance sheet.

That shift would create a new and dedicated source of revenue for the pension system. In fact, the Christie administration expects the Lottery transfer will improve the state pension system’s overall funded ratio from a disastrous 45 percent to near 60 percent.

The fiscal maneuver should also have little immediate impact on the state budget because it will reduce an unfunded pension liability that right now measures close to $50 billion, and that figure is used by actuaries each year to determine how much the state should be putting into the pension system out of the budget to help maintain its solvency.

The view of Democrats, via NJ Spotlight:

Phil Murphy, Democratic frontrunner for his party’s gubernatorial nomination, compared it to the boardwalk-arcade game Whac-A-Mole during a gubernatorial debate that was held in Newark last week.

“That’s what this is,” said Murphy, a former Goldman Sachs executive. “You’re going to pile down some source of funding over here, and you’re going to expose another source of expense required over there.”

Democratic hopeful Jim Johnson, a lawyer and former U.S. Treasury official from Montclair, dismissed the scheme as a gimmick intended to distract from Christie’s decision to once again short the full payment.

Other lawmakers and union leaders have not taken positions on the bill.

Legislation was unanimously passed by the Texas House of Representatives on Thursday that would require significantly larger pension contributions from Dallas to its severely underfunded pension system.

Additionally, the bill would require higher contributions from workers while also slashing benefits.

The legislation is aimed at improving the funding of the Dallas Police and Fire pension fund, one of the most dangerously underfunded plans in the country.

But officials have disagreed on a solution, and this bill also has its detractors.

More from the Dallas Business Journal:

The city paid $118.5 million in contributions to the pension in the last fiscal year, and the bill would require $151 million from the city by 2018. Rawlings has asked for a floor to be extended for the city for seven years before having to pitch in 34.5 percent of employee pay each year. Rawlings has also asked for more city oversight of the pension’s decisions.

There is still the chance for possible tweaks as the proposal makes its way to the next chamber. Rawlings and other city council members have said that some services may have to be cut to make the higher payments, but he indicated he would stop short of going further.

The bill would also nearly double the contributions from current pension members by $1.2 billion over the next 30 years, while also cutting benefits by $1.4 billion, according to pension officials.

The bill heads to the state Senate.

It was the Supreme Court’s first full day with new Justice Neil Gorsuch, and the case they heard: California Public Employees’ Retirement System v. ANZ Securities.

CalPERS on Monday argued in favor of loosening the deadlines for investors to file securities lawsuits.

More from the National Law Review:

The case before the court, California Public Employees’ Retirement System v. ANZ Securities, dealt with a narrow issue of deadlines for initiating litigation. But it comes up when investors seek to opt out of settlements and sue issuers individually for false information in registrations.

The Securities Act of 1933 states that lawsuits cannot be filed more than three years after the securities offering. But citing a 1974 Supreme Court precedent American Pipe & Construction v. Utah, CalPERS claims that deadline can be tolled or delayed while class actions are under way.

“All manner of satellite litigation” could proliferate if statutory deadlines are interpreted too strictly, Tom Goldstein of Goldstein & Russell told the justices on behalf of the California pension fund, the largest in the nation. Because of the complexity of securities litigation, a three-year “statute of repose” limit advocated by defendants is too short, Goldstein argued, and would compel investor groups to file separate litigation early to protect their rights to opt out of class actions.

But Paul Clement of Kirkland & Ellis disputed Goldstein’s “parade of horribles,” noting that the three-year statute of repose has been in place for several years in the Second Circuit, without an avalanche of new litigation.

Justices Neil Gorsuch and Anthony Kennedy asked several pointed questions suggesting they weren’t very sympathetic towards CalPERS.

More background on the case, from the NLR:

The case before the court stems from the financial crisis of 2008. CalPERS sued the bankrupt Lehman Brothers and ANZ Securities, one of its underwriters, claiming false statements in registration documents. The pension fund had been part of a class action, but it opted out after a settlement was reached.

The timeline resulted in a conflict between statutory provisions that impose a deadline on when such lawsuits must be filed. The U.S. Court of Appeals for the Second Circuit ruled that the three-year deadline could not be put off. But the Second Circuit ruling also said the issue was “ripe for resolution by the Supreme Court” because of a circuit split over the issue.

President Trump last week signed a resolution that nixes a rule, implemented by Obama, that allowed cities to require small businesses without any retirement plan options to offer employees a 401k.

No city had yet created such a rule, but several major cities — including New York City and Seattle — were considering it.

From the Society for Human Resource Management:

Cities and counties will now be barred from requiring small businesses without 401(k)-type retirement plans to enroll workers into a government-run individual retirement account (IRA).

Meanwhile, a measure to block a requirement for similar small businesses to participate in auto-enroll IRAs run by the state still awaits a Senate vote.

On April 13, President Donald Trump signed Congressional Review Act (CRA) resolution H.J. Res 67, which blocks an Obama-administration Department of Labor rule to push local governments to create auto-IRAs. The House and Senate had voted in favor of the resolution to nix the rule by party-line votes in March.

No municipalities had launched their own IRAs for nongovernment workers, although New York City, Philadelphia and Seattle all have considered doing so under the Labor Department rule, the New York Times reported.

The House also passed a resolution, H.J. Res 66, to roll back a DOL rule allowing state governments to set up mandatory auto-IRA programs for small employers that don’t provide retirement plans for their employees. A Senate vote is expected when Congress returns later in April from its Easter recess, as May 9 is the deadline for passing a CRA resolution to block the rule.

Business groups support the rollback, but other groups and states strongly supported the rules.

CalPERS is conducting an internal review on its private equity portfolio and considering changes to the program, according to the Wall Street Journal.

The pension fund is looking to cut costs — although it’s not necessarily looking to cut its private equity allocation — and it’s weighing a variety of options. From Reuters:

It is considering moves that would give it greater latitude in selecting and managing its private equity investments in an attempt to reduce costs, the Journal reported.

Some of the options under consideration include buying a private equity firm or creating a private equity fund outside of CalPERS, the Journal said, or it could also choose to act as sole investor in more customized accounts with outside managers.

CalPERS has even considered asking its staff members to make private equity investments directly, the Journal added.

CalPERS’ private equity portfolio has returned 12.3 percent annually for the last 20 years, but would have achieved much greater return had it not been for fees.

Corporate DB plans could soon be going on a bond buying spree, according to a report released on Friday by Morgan Stanley.

Years of steady stock gains have pushed many corporate DB plans close to 80 percent funding; when plans get to that funding level, it’s typical to ramp up bond holdings, according to the report.

High-grade, long-term corporate bonds are the most likely to be scooped up by these pension plans.

From Bloomberg:

The biggest gainers may be corporate bonds maturing in around 30 years. Longer-term corporate bonds have risen 1.9 percent this year, including interest payments, compared with around 1.6 percent for the broader investment-grade universe, according to Bloomberg Barclays indexes.

“Pension funds’ sweet spot is out at the long end of the curve,” said Vincent Murray, who heads U.S. fixed income syndicate at Mizuho Securities USA in New York. Investors in some deals he’s worked on this year have placed orders for five times as much 30-year debt as was for sale, he said. “We’ve seen good demand.”

[…]

For long-term corporate bonds, it’s unlikely that new-issue supply will be able to meet demand in the near term. Until supply catches up, yields — particularly on 30-year debt — will likely sink, according to Hans Mikkelsen, head of high-grade credit strategy at Bank of America Corp.

“Pensions have a natural bias toward buying long-duration bonds,” Mikkelsen said. “The initial move is going to be lower long-term yields, and selling equities.”

Texas officials, both in the statehouse and in Dallas’ mayoral office, are weighing how to address the severe underfunding of the city’s public safety pension system.

So far, it seems the only thing they can agree on is that the latest proposed bill – one that suggests increasing city contributions and giving more board positions to city employees, among other things — stinks.

From the Dallas Observer:

As amended by the committee, [Texas State Representative Dan] Flynn’s bill would take control of the Dallas Police and Fire Pension System’s board out of the hands of the city and hand it to retired police and firefighters. As written by Flynn, the bill would’ve given city employees a clear majority of spots on the board. The committee version of the bill gives the city five seats, police and firefighters five seats and allocates one seat on the board to be chosen by consent of both groups.

[Dallas Mayor] Rawlings said that taking control of the fund away from the city will make it vulnerable to the types of risky investing that have led to the current threats against the DPFP’s solvency.

[…]

The mayors also criticized the financial component of Flynn’s bill, which would require the city to make escalating payments to help the fund based on proposed new officer hires by the Dallas Police Department, regardless of whether or not the department actually hires the new officers, eventually increasing the city’s annual contribution from 27.5 percent of DPFP members’ annual salaries to 34.5 percent. Rawlings called the bill a “taxpayer bailout” of the fund.

The bill is still a ways away from getting a vote in the Texas House.