Ted Ballantine | Pension360

New Jersey Senate Fails to Overturn Christie Veto of Bill Changing State Pension Contribution Schedule; Would Have Made Cutting Payments More Difficult

The New Jersey Senate attempted but ultimately failed on Thursday to override Gov. Christie’s veto of a bill that would have altered the schedule on which the state pays its annual pension payments.

The amended schedule would have made it more difficult for the state to cut its pension contributions in the future. The bill was proposed after Gov. Christie cut the state’s pension payments by over $2 billion to plug revenue shortfalls in the general budget.

From NJ.com:

The bill (S2265) would have required the governor to make pension payments quarterly in July, October, January and April, instead of at the end of the fiscal year in June.

Sen. Robert Gordon (D-Bergen) said that spreading the payments out could have increased the likelihood the state would make its contribution.

Legislators introduced the measure following Christie’s move to balance the budgets ending in June and beginning in July by withholding $2.4 billion from planned pension payments when gross income tax collections came up short.

In his veto of the bill, Christie called it “an improper and unwarranted intrusion upon the longstanding executive prerogative to determine the appropriate timing of payments” so those expenditures line up with tax collection cycles.

“Simply wishing in a law that sufficient funds will be available on specific future dates does not change the fiscal realities of revenue collection during the course of a 12-month year,” he said.

While the bill easily passed in both houses — 36-3 in the Senate and 62-13 in the Assembly — Republicans weren’t expected to go along for the override.

The Democratic-controlled state Legislature has never won a veto override, in part because the Republicans who vote with the Democrats decline to override and risk crossing Christie.

The vote failed 25-12.

Read the bill here.

Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons

Emanuel Confident Pension Plan Will Survive Lawsuit

Four unions on Tuesday filed a lawsuit challenging Chicago Mayor Rahm Emanuel’s plan to increase pension contributions for city employees and reduce COLAs.

But Emanuel said Thursday he thinks the plan will pass legal muster, in part because he worked with dozens of unions to formulate it.

From the Chicago Sun-Times:

Two days after four unions followed through on their threat to challenge the mayor’s plan, citing the same constitutional guarantee at the core of the state case, Emanuel argued that he had no choice but to raise employee contributions by 29 percent and sharply reduce cost-of-living benefits.

“We have to do the tough things, the necessary things so people can know that they’re gonna have a retirement, which they didn’t know before because we weren’t doing and they weren’t doing the tough, necessary things to get the pension systems right,” the mayor said.

“We are both preserving and protecting the pension and doing it in a responsible way that brings both reform and revenue together to solve the problem . . . They’re challenging it, but I know we took on the challenge of under-funded pensions and addressed it head-on in a responsible way.”

Emanuel has argued repeatedly that the Chicago pension reform bill is different from the state legislation because the city changes were negotiated with and agreed to by city unions.

On Thursday, he hammered away at that point.

“Twenty-eight of 31 unions agreed to work with us . . . and 11 of them stood up and said they don’t agree with the lawsuit,” the mayor said.

“I think we were actually preserving [their pensions]. And I know the union leaders who worked with us agree because that’s why they agreed to it.”

The four unions that filed the lawsuit: Teamsters Local 700, AFSCME Council 31, the Chicago Teachers Union, and the Illinois Nurses Association.

Photo by Pete Souza

Major Creditor Comes Out Against San Bernardino Bankruptcy Plan That Fully Pays CalPERS

A major creditor of bankrupt San Bernardino told Reuters Thursday that it would oppose a bankruptcy plan that mandates the city keep paying CalPERS in full.

San Bernardino’s current plan doesn’t disrupt payments to CalPERS and keeps pensions intact.

The creditor has not been identified.

From Reuters:

A major capital markets creditor of bankrupt San Bernardino, California, will oppose any exit plan that is more favorable to Calpers, California’s public pension fund, a source familiar with the creditor’s strategy said on Thursday.

The creditor intends to pursue a new approach when hearings resume next year, in light of a deal the city reached with Calpers in November that will see the pension fund paid in full under a bankruptcy plan. The city has been ordered to produce a plan by May.

“We will strongly resist a plan that treats its pension claims substantially better than our claim,” the source involved in the creditor’s San Bernardino strategy said, who spoke on the condition of anonymity because negotiations with San Bernardino are subject to a judicial gag order.

The move is significant because all the capital market creditors have so far supported the bankruptcy and it signals a change in course, speaking to the wider fight between Wall Street and pension funds over how they are treated in municipal bankruptcies.

San Bernardino declared bankruptcy in July of 2012.

Arizona Pension CIO Counters Claims of Being States Worst-Performing System

Ryan Parham, chief investment officer of the Arizona Public Safety Personnel Retirement System (PSPRS), penned a piece in the Arizona Capitol Times on Thursday defending his fund against claims of being Arizona’s “worst-performing pension plan.”

But Parham says the raw return numbers don’t tell the whole story. Here’s what Parham has to say:

All too often, fiction and gossip move faster than truth and reason. As such, it is often stated by our detractors that our $8 billion portfolio is the state’s “worst-performing pension plan,” which gives the impression that our investment staff is incompetent and responsible for the trust’s sagging pension funding levels.

The truth is: the Arizona Public Safety Personnel Retirement System has an enviable investment record. Prominent industry consultants rank PSPRS among the top 4 percent of all U.S. pension funds in risk-adjusted returns for the past three years. We also join the top 11 percent of all U.S. pension funds for the past five years. While these facts might not make for a provocative headline, they matter to our beneficiaries, our contributors, our staff and our elected officials.

[…]

Last fiscal year, PSPRS outperformed national risk-adjusted averages by one half of 1 percent. It sounds miniscule, but it meant an additional $380 million in value to the trust. Our actively managed strategy is simple: Diversify assets and reduce exposure to publicly traded equities, the greatest driver of market volatility. High-risk strategies and lack of diversification have proven disastrous for PSPRS, as evidenced by $1 billion losses suffered in the 2000-2001 “dot-com” market crash.

While it is true that in recent years PSPRS’ returns have been less than its sister plan, the Arizona State Retirement System (ASRS), it is important to remember our innovative, low-risk, moderate return strategy is by conscious design, due to a pension benefit that PSPRS alone must pay to pensioners. This benefit, called the Permanent Benefit Increase, or “PBI,” siphons and distributes half of all returns in excess of 9 percent to eligible retirees. Not only are these increased payment levels made permanent, the investment gains only serve to increase – not decrease – unfunded future liabilities.

Read the entire column here.

Photo: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under CC BY-SA 2.5 via Wikimedia Commons

Fitch: Lawsuit Against Chicago Pension Cuts Expected; Emblematic of Reform Difficulty

Chicago unions and public employees filed a lawsuit Tuesday to block pension changes coming in 2015 that would reduce future COLA increases and require workers to pay more toward their retirement.

In a newly released commentary, rating agency Fitch says the lawsuit was expected. But it also demonstrates the difficulty of making changes to pension benefits in a state that protects them fiercely.

From Fitch:

Tuesday’s legal challenge to Chicago’s recent pension reform plan was expected and underscores the difficulty the city faces in its efforts to put its pension plans on firmer footing. Illinois affords particularly strong legal protection to pension benefits.

If the litigation succeeds and changes to the cost of living adjustments (COLAs) and employee contributions are struck down (and no replacement legislation is passed), the city would likely revert back to the lower, statutorily based payments, as annual payments on an actuarially sound basis would rise dramatically. These increases would occur in the context of a statutorily required $538 million increase in contributions for the city’s other two pension systems (police and fire) in 2016. The city has not yet said how the increased pension costs will be accommodated, but Fitch Ratings believes they threaten to crowd out other governmental priorities and remain a formidable challenge to the city’s financial equilibrium.

The city benefits from a strong local economy and enjoys broad home rule authority to raise revenues. However, increasing pension costs are a common problem among Chicago-area governments and funding these increases will likely place a considerable stacked burden on the area’s resource base.

[…]

If the new plan is upheld, it would require significant payment increases from the city, approximately half of which are expected to be funded by increased property taxes and half by budgetary savings. The city plans to gradually increase its revenues for pension payments, which may include property taxes, by $50 million (approximately 6%) annually for five years before reaching the target increment of $250 million in the fifth year.

According to Fitch, Chicago’s pension plans carry a collective funding ratio of 35 percent.

Photo by bitsorf via Flickr CC LIcense

Kansas Treasurer Considers Pension Obligation Bonds Amidst State Plans to Cut Annual Pension Payment

Kansas Gov. Sam Brownback announced plans this week to cut nearly $60 million from the state’s annual pension contribution and use the money to plug budget holes elsewhere.

In light of that news, Kansas Treasurer Ron Estes is considering issuing bonds to help fund the state’s pension system.

From Bloomberg:

Brownback, a Republican who starts his second term in January, last week proposed shortchanging the state’s pension contributions by $58 million to close a $280 million budget hole caused in part by tax cuts the governor championed. Kansas, with the fifth-weakest pension system among U.S. states, had its issuer ratings downgraded by Standard & Poor’s and Moody’s Investors Service this year.

To close a $7.35 billion funding shortfall, the state needs to keep commitments that were part of a 2012 pension overhaul, said Estes, a Republican who also won re-election last month. The plan called for more funding from the state, including revenue from casinos it owns, and raised the amount employees pay.

“We need to keep working on our pension reforms passed two years ago or we’ll fall further behind,” Estes said in an interview from Topeka.

Kansas can take advantage of interest rates close to five-decade lows to raise cash, increase the funding level and create fixed payments, Estes said. The state issued $500 million of pension bonds in 2004; a proposal to sell another round stalled in the legislature last year.

[…]

The [Kansas PERS] system supports issuing bonds or any measure that boosts its funding, said Kristen Basso, a spokeswoman.

“Pension bonds would reduce our unfunded liability and improve our funded ratio,” she said in an e-mail.

But the bonds aren’t a problem-free solution. From Bloomberg:

The debt, which is typically taxable, carries risk. The strategy is to invest the proceeds, usually in stocks, and earn more than it costs to repay bond investors. The approach can backfire if issuers borrow when equities are at historic highs, said Jean-Pierre Aubry, assistant director of state and local research at the Center for Retirement Research at Boston College. The S&P 500 Index this week posted its best two-day gain in more than three years.

“There are instances where they can work, but they can be risky financial tools for cash-strapped borrowers,” Aubry said in a phone interview. “They’re gambling on the market and should be undertaken by those with the appetite for the risk and the ability to absorb the risk.”

Kansas’ state pension systems were collectively 56.4 percent funded as of 2013.

Photo credit: “Seal of Kansas” by [[User:Sagredo|. Licensed under Public Domain via Wikimedia Commons

Rhode Island Pension Payments to Total Over $400 Million in FY 2016, 2017 As New Contribution Rates Approved

Rhode Island’s Retirement Board approved employer contribution rates for fiscal years 2016 and 2017 on Wednesday.

Total state and local pension payments are projected to top $400 million in those years, just as they did in 2015.

From the Providence Journal:

New contribution rates approved by the state Retirement Board on Wednesday will require state and local payments into the pension fund of a projected $171.2 million for state employees, and $237.3 million for teachers during the budget year that begins on July 1, 2016.

At those projected payment levels, state and local taxpayers will pay a total of $408.5 million in fiscal year 2017, compared with a potential $411.6 million during the budget year beginning July 1, 2015, according to information the state’s actuary provided the Retirement Board chaired by General Treasurer and Governor-elect Gina Raimondo.

[…]

While most state employees are now required to contribute 3.75 percent of their pay toward their reduced defined-benefit pensions, the actuaries recommended the state share go from 23.65 percent of payroll to 23.78 percent come July 1, 2016.

And while teachers also contribute 3.75 percent of their pay, the state — and the communities that employ them — would pay 22.76 percent of payroll, compared with 23.14 percent a year earlier. (The drop is a result of a lowering of earlier projections of potential teacher salaries.)

The net result: the required contribution to teachers’ pensions will drop from a projected $241,742,873 in the new budget year that begins on July 1, to $237,251,068 the following year, while rising for state employees from a projected $169,811,685 to $171,169,925.

Rhode Island’s pension system for general state employees was 57 percent funded as of June 30. The teachers’ system was 59.6 percent funded as of June 30.

Photo credit: “Flag-map of Rhode Island” by Darwinek – self-made using Image:Flag of Rhode Island.svg and Image:USA Rhode Island location map.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons

Wisconsin Supreme Court Affirms County’s Pension Cuts

In 2011, Wisconsin’s Milwaukee County reduced pension benefits for nurses by cutting the pension multiplier from 2 to 1.6.

In a 5-2 decision on Friday, the Wisconsin Supreme Court upheld the legality of the County’s decision to reduce the multiplier.

From the Milwaukee Journal-Sentinel:

The Wisconsin Supreme Court on Friday upheld Milwaukee County’s 2011 move to reduce pension benefits for nurses, which had been struck down by lower courts.

The high court’s ruling preserves millions of dollars in planned future savings by the county.

In a 5-2 decision, the court overturned a trial judge and the Court of Appeals, both of which had sided with Suzanne Stoker and her union, who claimed that enhanced pension benefits granted by the County Board in 2000 was a vested property right that even collective bargaining couldn’t undo.

“We conclude that the Legislature preserved Stoker’s rights and benefits already accrued but also gave Milwaukee County home rule authority with the flexibility to enact such prospective only changes,” Justice Annette Ziegler wrote for the majority.

In a dissent joined by Chief Justice Shirley Abrahamson, Justice Ann Bradley wrote, “It is only by repeatedly ignoring the language of the governing session laws that the majority is able to conclude that the county may reduce the pension multiplier, thereby dealing a blow to the rights of the employees.”

At issue was the county’s move to cut the pension multiplier — a key factor in determining pension payments — from 2.0 to 1.6 for pension credit earned starting in 2012. That amounted to a gradual 20% reduction in pensions.

Two lower courts had sided with unions on the issue and claimed the County could not reduce the pension multiplier because doing so amounted to the County taking away the pensioners’ property. The rationale of the lower court rulings:

Milwaukee County Circuit Judge William Pocan ruled in 2012 that the county nurses had an unconditional property right to their pension benefits. He cited the 1945 state law establishing pension rights for Milwaukee County employees, which says each worker “shall have a vested right to such annuities and other benefits and they shall not be diminished or impaired by subsequent legislation or by any other means without consent.”

The county and its Pension Board argued that the multiplier reduction didn’t violate that law because it applied to future pension service credit only and because the nurses’ union had approved the change. Pocan said, however, the benefit reduction could be done only with consent of individual employees.

The Court of Appeals affirmed Pocan in November 2013.

The Supreme Court opinion can be read here.

Photo credit: “Flag map of Wisconsin” by LGBT_flag_map_of_Wisconsin.svg: This file was derived from:LGBT_flag_map_of_Wisconsin.svgFlag_of_Wisconsin.svg. Licensed under Public Domain via Wikimedia Commons

CalSTRS Loses $125 Million on Florida Industrial Land

CalSTRS revealed Thursday it had lost $125 million on an investment – reportedly written off since 2009 – in a piece of industrial land in Florida that lost much of its value when land values went bust just over a half-decade ago.

CalSTRS had been waiting for the price of the land to recover a bit before selling – and the fund did recover some of its losses.

But the time to sell was now given the fund is restructuring its real estate portfolio.

More details from the Sacramento Bee:

CalSTRS said Thursday it lost around $125 million on the sale of some Florida real estate […]

The California State Teachers’ Retirement System confirmed that one of its investment partnerships recorded a $132 million loss on the recent sale of a swath of industrial land in Florida’s Palm Beach County.

CalSTRS spokesman Ricardo Duran said the teachers’ pension fund owned 95 percent of the investment and took 95 percent of the loss.

The deal was first reported by the Palm Beach Post and South Florida Business Journal.

Duran said CalSTRS wrote off the investment entirely in 2009, so the sale price represents a partial recovery of its losses. The sale price was nearly $3 million higher than CalSTRS valued the land in the third quarter of this year.

CalSTRS decided not to wait any longer for land prices to recover, however. “The likelihood of getting what we paid for it anytime soon is pretty remote,” Duran said.

Besides, CalSTRS wanted to unload the property as it implements a restructuring of its real estate portfolio, moving away from speculative land deals in favor of leased-up, income-producing properties. “This is part of our de-risking,” Duran said.

CalSTRS manages a $189.7 billion portfolio.

Photo by Stephen Curtin

Cuomo Rejects Bill To Increase Alternative Investments By Pensions

New York Governor Andrew Cuomo on Thursday vetoed a bill that aimed to raise the percentage of assets New York City and state pension funds could allocate towards hedge funds and private equity.

From Bloomberg:

Governor Andrew Cuomo vetoed a bill that would have allowed New York state, city and teachers pension funds to allocate a larger percentage of their investments to hedge funds, private equity and international bonds.

The measure approved by lawmakers in June would have increased the cap on such investments to 30 percent from 25 percent for New York City’s five retirement plans, the fund for state and local workers outside the city, and the teachers pension. The funds have combined assets valued at $445 billion.

“The existing statutory limits on the investment of public pension funds are carefully designed to achieve the appropriate balance between promoting growth and limiting risk,” Cuomo said in a message attached to the veto. “This bill would undermine that balance by potentially exposing hard-earned pension savings to the increased risk and higher fees frequently associated with the class of investment assets permissible under this bill.”

[…]

A memo attached to the New York bill said raising the allotment for hedge funds and other investments is necessary for flexibility to meet targeted annual returns. A swing in the value of the funds’ publicly traded stocks can push the pensions “dangerously close” to the investment cap, the memo said. The change would also better enable the funds’ advisers and trustees to “tactically manage the investments to take advantage of market trends, react to market shocks and potentially costly rebalances or unwinds at inopportune times,” it said.

New York City Comptroller Scott Stringer supported the bill.

Photo by Tim (Timothy) Pearce via Flickr CC License

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