Ted Ballantine | Pension360

Bruce Rauner Softens Stance on Pension Cuts, Calls For Protection of Vested Benefits

When talking pensions on the campaign trail earlier this year, Bruce Rauner said that new hires, current workers and retirees all would need to be on the receiving end of pension benefit cuts.

But Rauner has softened that stance this week; the Illinois governor-elect now says the benefits accrued by current workers and retirees need to be protected.

The change is perhaps due to a recent circuit court ruling overturning the state’s pension reform law; the ruling makes it increasingly unlikely that pension reforms can legally come in the form of benefit cuts for retirees.

More on Rauner’s comments from NBC Chicago:

Gov.-Elect Bruce Rauner changed his tune to defend retired state employee’s pensions on Monday, remarking that it’s most important to “protect what is done—don’t change history. Don’t modify or reduce anybody’s pension who has retired, or has paid into a system and they’ve accrued benefits. Those don’t need to change.”

[…]

“What we should change is the future—the future accruals, the future benefits for future work,” he said, according to the Chicago Sun-Times. “That is constitutional. It’s also fair and appropriate for the taxpayers and the workers themselves.”

“Hopefully (the state Supreme Court) will give us some feedback that will help guide the discussion for future modifications as appropriate for the pensions,” noted Rauner.

[…]

The Republican investor said on the campaign trail earlier this year that he’d slash benefits to retirees and current workers and lead a transition into a corporate-esque 401(k) arrangement. But as he prepares to take over the governorship, and see his ambitious election-season statements clash with political realities, Rauner has apparently softened his views on pension reform to pardon those who’ve invested income—placing money (and trust) in a dysfunctional system.

The Illinois pension reform law, which will soon head to the Supreme Court, froze cost-of-living-increases and increased the retirement age. But a circuit court judge ruled last week that the benefits of current and retired workers are protected under the Illinois constitution.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

CalPERS Pays $9 Million in Bonuses in 2014; Up 14 Percent From 2013

As a result of exceeding investment return benchmarks, CalPERS paid out a total of $9 million in bonuses in fiscal year 2014. The fund paid out $7.9 million in fiscal year 2013.

More details from SF Gate:

The rewards are based on three-year performance verses a benchmark, as well as the earnings of each asset class and individual portfolios, said spokesman Brad Pacheco.

“These awards are part of the overall compensation we provide to recruit and retain skilled investment professionals needed to ensure success of the fund,” Pacheco said.

[…]

The biggest bonus earner was Ted Eliopoulos, the chief investment officer, who recorded a $305,810 bonus last year in addition to his $412,039 base pay.

That bonus was paid when Eliopoulos was acting chief investment officer after predecessor Joe Dear died in February from cancer. Prior to that, Eliopoulos headed the fund’s real estate portfolio. He now earns $475,000 in base pay after he was tapped for the top investment job in September.

[…]

Four executives outside the CalPERS investment office were paid a total of $295,930 in bonuses last year, the fund said. CEO Anne Stausboll got $113,679; Chief Actuary Alan Milligan earned $75,748 and Chief Financial Officer Cheryl Eason was paid $89,703, almost double a year earlier.

CalPERS says it pays bonuses to compete with Wall Street for talented staff.

The pension fund’s investments returned over 18 percent in FY 2014.

Study: Public Pensions Gained Confidence in 2014

A survey of 187 public pension plans across the U.S. and Canada suggests that funds are feeling more confident about their long-term sustainability and their “readiness to address future retirement issues.”

The survey, conducted by the National Conference on Public Employee Retirement Systems (NCPERS) and Cobalt Community Research, was released Monday.

The main findings of the survey:

– Confidence continues to grow about readiness to address future retirement trends and issues. Respondents’ overall confidence rating measured 7.9 on a 10-point scale, up from 7.8 in 2013 and 7.4 in 2011.

– Funds experienced an increase in average funded level – 71.5 percent, up from 70.5 percent in 2013. Two factors contributed to the change: average one-year investment returns of 15 percent and lower amortization periods.

– Funds continue to experience healthy investment returns: 14.5 percent for one-year investments (compared to 8.8 percent in 2013); 10.3 percent for three-year investments (up from 10.0 percent last year); 9.8 percent for five-year investments (up from 2.7 percent last year); 7.8 percent for 10-year investments (up from 7.0 percent), and 8.1 percent for 20-year investments (virtually unchanged from last year’s 8.2 percent). Funds continue to work toward offsetting sharp losses from the Great Recession in 2008 and 2009 by strengthening investment discipline. Signs point to long-term improvement in public retirement systems’ funded status.

– Public funds continue to be the most cost effective mechanism for retirement saving. The total average cost of administering funds and paying investment managers was 61 basis points. According to the Investment Company Institute’s 2014 Investment Company Fact Book, the expenses of most equity funds average 74 basis points and hybrid funds average 80 basis points.

– Funds continue to tighten benefits, assumptions and governance practices. Examples include a continued trend toward increasing member contribution rates, lowering inflation assumptions, shortening amortization periods, holding actuarial assumed rates of return and lowering the number of retirees receiving health care benefits.

– Income used to fund public pension programs came from member contributions (8 percent); employer (government) contributions (19 percent) and investment returns (73 percent).

The full summary of the study, including comments by NCPERS’ Executive Director, can be found here.

Rhode Island Panel, Tasked With Improving Local Pensions, Sends Recommendations to Lawmakers

A Rhode Island panel, established three years ago to make recommendations to improve the health of local pension plans, finally submitted its proposals to state lawmakers Monday.

The panel submitted 11 recommendations in all, but only a handful had majority support from the panel. From the Providence Journal:

As drafted, the recommendations and ideas from the Locally Administered Pension Plans and OPEB Study Commission range from the practical, such as establishing a permanent board to oversee locally managed pension and retiree health plans, to the proactive, such as requiring actuarial reviews when a new collective bargaining agreement is going to impact pension or “other post-employment benefit” costs.

Both of those recommendations had support from a majority of the commission members as did others, including recommendations that the state require annual reports on local plan investment returns, and that city and town budgets state the “actuarially determined contribution” for local pension plans and also state how much of that contribution a proposed budget will make.

Some of the recommendations that were submitted without majority support from the panel:

There was no consensus, for instance, on whether having a local pension plan that is in “critical status” — or less than 60 percent funded — be one of the factors that can lead to a state takeover of a city or town’s finances.

Nor was there agreement on whether the state should create a voluntary pathway for locally managed pension plans to become part of the state-run Municipal Employees Retirement System. In that case, the commission recommended further study, and it did the same on the question of requiring funding improvement plans for retiree health funds that are in critical status, even though the improvement plans are required for pension funds that are in critical status.

Rhode Island’s 34 local retirement plans are collectively shouldering $2.1 billion of unfunded liabilities.

New Jersey Pension Shifts $100 Million From U.S. to Asian Real Estate

The New Jersey Division of Investment, the arm of the state government that manages and invests pension assets, is pulling $100 million out of U.S. real estate and shifting the money to a fund that invests in Asian real estate.

The fund will invest in real estate in China, Japan, Singapore and Australia. More details from IPE Real Estate:

The New Jersey Division of Investment is pulling capital out of two core US real estate funds and redeploying it into an Asia-Pacific property fund.

New Jersey is redeeming all of its $91m (€73.2m) interest in the AEW Core Property Trust as well as a partial redemption from its $400m interest in the CT High Grade Partners II fund.

The pension fund has approved a $100m commitment to SC Investment Management’s Real Estate Capital Asia Partners I, which will be funded by the two redemptions.

Following a recent recovery in US real estate prices, New Jersey decided to rotate capital from existing managers to new opportunities. Over the past several months, the pension fund has been evaluating core investments it made between 2006 to 2008.

New Jersey is seeking to capitalise on sustained occupier and investor demand in Asia Pacific, driven by long-term demographic and urbanisation trends in the region.

[…]

SC Invesmtent is targeting a 9% return by investing in undervalued, under-managed and distressed properties where value creation opportunities exist.

According to New Jersey, SC Investment has been a consistent top-quartile performer. In the manager’s previous investment funds, deals generated a 35% gross IRR and 2.1x return, with proceeds of $600m.

The Division of Investment manages $81.22 billion in pension assets.

Former Illinois Governor Jim Edgar Weighs In On State’s Pension Problems; Calls Pension Reform Law A “Huge Mistake”

Jim Edgar, former Illinois governor from 1991 to 1999, sat down with Reboot Illinois this week to discuss the state’s pension crisis and the court ruling that deemed Illinois’ pension reform law unconstitutional.

Edgar talked about the ruling and placed fault on lawmakers for not drafting a bill that would pass the scrutiny of the courts. From Reboot Illinois:

I thought they made a huge mistake passing a clearly unconstitutional proposal. It just delayed trying to figure out something that we can do for three years and we went through a lot of anguish we didn’t need to go through that scared a lot of people. I’m not a lawyer, but it’s pretty plain if you read the constitution, if you read the debates of the convention, they put that language in exactly to keep the Legislature from doing what they did two years ago. I expect courts will throw it out and we’re going to have to start over.

Then, I don’t think there’s any silver bullet. It’s obvious you can’t say we’re going to solve this on the backs of the retirees or the employees. I don’t think it’s going to get done overnight. Whatever plan gets put in place will be like the plan we put in place back in the mid ‘90s and, unfortunately, they got away from it.

He talked about the funding ratio Illinois should be shooting for:

I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.

Edgar also touched on Bruce Rauner’s stated plan of moving new hires into a 401(k)-style plan:

That’s something they’re going to have to work out with the Legislature and if they do that, they have enough money to take care of the commitments. The constitution says the pension benefits already granted have to be honored. You can’t cut those. You’re going to have to balance those two things off.

[….]

unfortunately we won’t have that much growth in the number of new people coming in and if they’re not paying into the system, it’s like Social Security. Same thing with state workers. You had a growth in state workers that occurred from about ’68 and a lot of those people are now retiring, so I doubt if we’re going to keep seeing the growth in state government, so you’ve got to be careful on that.

That’s all his suggestion. I don’t think he’s said it’s this way or no way. I think he knows he’s going to have to negotiate it.

Read the entire interview here.

Texas Teachers Pension Invests $200 Million in Automotive Real Estate

The Teacher Retirement System of Texas (TRS Texas) has committed $200 million to a fund that invests in car dealership properties.

From IPE Real Estate:

The pension fund is investing in the $651m BSREP CARS Co-Invest Pooling, a vehicle set up by Brookfield to invest in Capital Automotive, which provides real estate financing for car dealerships.

The commitment by Texas Teachers was one of several from institutional investors and will amount to 30.5% of invested capital in the vehicle.

Brookfield Strategic Real Estate Partners Fund provided most of the capital for the joint venture. Brookfield declined to comment on how much capital it has invested. Additional capital came from BSREP CARS.

Capital Automotive, which has invested $4.3bn in 440 US facilities and has a 16.3m sqft portfolio in 35 US states, typically provides real estate financing for automotive dealers to either acquire new locations or upgrade existing operations. The firm was previously owned by DRA Advisors.

Texas Teachers made the investment for its ‘special situations’ portfolio, a new category it created within its real assets portfolio for investments outside traditional core, value-added and opportunistic classifications.

TRS Texas manages $124 billion in assets and is the sixth-largest public pension fund in the United States.

Photo by Billy Wilson 2010 via Flickr CC License

Kolivakis Weighs In On Restructuring of CalSTRS Investment Staff

CalSTRS recently completed a restructuring of its investment staff, which including appointing its first chief operating investment officer.

The restructuring had a purpose: the fund is planning to move a significant portion of investment management duties in-house.

CalSTRS currently manages 45 percent of its portfolio internally. The fund wants to bring that number up to 60 percent, according to a CalSTRS press release.

Leo Kolivakis, who runs the blog Pension Pulse, weighed in on the changes in a recent post, which is printed, in part, below:

_____________________

By Leo Kolivakis

The shift toward internal management is a smart move and I like the way they restructured their senior staff to implement this shift.

According to Reuters, Debra Smith, the new chief operating investment officer, will oversee the fund’s Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. And as stated in the WSJ article above, Smith will report to the investment committee twice a year, giving her a direct line to board members.

Pay attention here folks because this is a great move from a pension governance perspective. I’ve always argued that the head of risk and head of operations at public and private pension funds should report directly to the board of directors, not the CEO or CIO. If there is a disagreement on operational or investment risks being taken, the board can listen to the arguments and decide if the risks are worth taking.

I’ve also long argued that whistleblowers need to be protected and whistleblower policies need to be beefed up at all public pension funds so that employees who witness shady activity can safely report it without worrying about being fired. If some senior manager is accepting bribes from an external fund manager or from a big vendor peddling the latest most expensive software, there should be a way to detect and report this fraud.

Finally, go back to read my comment on why U.S. pension funds are going Canadian. The reason is simple. It makes sense to manage assets internally, saving on fees and having more control over your investments. CalSTRS isn’t the first big state pension fund to do this (Wisconsin is) and it won’t be the last.

Of course, to really go Canadian, U.S. public pensions have to pay their senior investment staff big bucks and they have to separate politics from their entire governance process. When I read articles on how John Buck Co., a real-estate investment firm whose executives contributed substantially to the campaign of Chicago Mayor Rahm Emanuel, has earned more than $1 million in fees for managing city pension money, I shake my head in disbelief. This is Chicago-style politics at its worst. No wonder Illinois is a pension hell hole!

Photo by Stephen Curtin

San Diego Pension Board Votes to Move CIO In-House; Approves Other Governance Changes

The San Diego County Employees Retirement Association formally voted on Friday to begin searching for an in-house chief investment officer to replace Salient Partners, the firm currently serving as the fund’s outsourced CIO.

The board also made several changes in governance structure. From the San Diego Union-Tribune:

Near the end of a two-day board retreat this week, trustees voted 8-1 to return to an in-house chief investment officer rather than rely on an outsourced portfolio strategist.

Trustee David Myers was sole opponent to the reversal.

The board is likely to start the recruiting process for a CIO as soon as next month.

Pension officials also reversed course on their unusual governance structure, a model that had both CEO Brian White and Salient principal Lee Partridge reporting to the board.

Under the new organizational chart, the in-house chief investment officer will report to the CEO, who in turn will report to the board.

Consultants invited to the two-day retreat told trustees that retaining the dual-reporting model was not among the best practices for public pension systems.

One area of concern for trustees: could the pension fund offer a high enough salary to attract a talented CIO? More from ai-cio.com:

Board members aired their views on Friday about how much the county would be willing to pay. The matter concerned Dick Vortmann, who said he did not want SDCERA to end up with “the best of the rest” if the fund was not allowed sufficient budget to hire someone with the requisite skillset to manage investments.

Jacob said the annual salary would be in the $200,000 to $300,000 a year range. She referenced the $4.5 million that was agreed for the four year contract with Salient and said the county “would probably baulk at that.”

[…]

Board Chairman “Skip” Murphy voted with the motion, but said if the county did not agree to a pay package that would attract the right candidate, he was “in a world of hurt”.

Read more coverage of the decision here and here.

Moody’s: Deals With CalPERS Will Further “Weaken” Bankrupt California Cities

Three California cities – Stockton, San Bernardino, and Vallejo – have declared bankruptcy in recent years. But all three have struck deals with CalPERS to keep its citizens’ pension benefits intact.

That’s a win for pensioners, but Moody’s says the deals may not be healthy for the cities: they will have to pay large, rising contributions to CalPERS, and risk “weakening” their financial profiles in the process.

From Chief Investment Officer:

Moody’s said [San Bernardino] would face rising bills from CalPERS in the years ahead.

“San Bernardino’s choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS will likely increase to the point where they weaken the city’s financial profile, even after the relief provided by the bankruptcy adjustments,” said report authors Gregory Lipitz and Thomas Aaron.

The pair added that they expect similar “weakening” in both Stockton and Vallejo, two other Californian cities that have reached funding agreements with CalPERS following bankruptcy. CalPERS and the California State Teachers’ Retirement System have both been increasing employer contribution rates to deal with funding gaps and improvements in longevity.

“CalPERS’ latest actuarial valuations for each city forecast unrelenting increases to required contributions, despite the very strong investment performance of CalPERS in 2013 and 2014,” Moody’s said.

Actuarial projections indicate that by 2021, the three cities’ contributions could rise to between 30 percent and 40 percent of payroll.

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