Ted Ballantine | Pension360

Oklahoma Labor Group Pushes For COLA Boost In Wake of Pension Funding Improvement

Since 2010, the aggregate funding ratio of Oklahoma’s state-level pension systems has risen from 58 percent to 74 percent. Meanwhile, unfunded liabilities have declined by over $6 billion.

Now, a labor group is pushing lawmakers to boost public employee cost-of-living adjustments. The state froze COLAs in 2008.

From the Associated Press:

Representatives of Oklahoma’s public retirees who have not had a cost-of-living adjustment, or COLA, since 2008 say the time has come to boost their pension incomes now that the state’s underfunded pension systems are regaining their financial strength.

Managers of some of Oklahoma’s biggest retirement systems say they are financially stronger than they were just four years ago. Unfunded liability has declined by $6.5 billion and the funded ratio of the systems has improved from 58 percent four years ago to 74.4 percent.

The turnaround has emboldened officials at the Oklahoma Public Employees Association to make COLAs for the state’s pensioners a top priority when the 2015 Legislature convenes in February.“We have made sacrifices to make sure our system is stronger,” OPEA Executive Director Sterling Zearley said. “I think it’s time that we start looking at allowing COLAs.”

But some lawmakers expressed hesitancy and called a COLA re-instatement “premature”. From the AP:

State officials responsible for overseeing the financial health of Oklahoma’s pension systems say that while their improved financial condition is good news for the state, they may still not be financially strong enough for COLAs.

“I would caution and suggest that it’s maybe still a little bit premature to be having that conversation,” said Preston Doerflinger, director of the Office of Management and Enterprise Services and Gov. Mary Fallin’s secretary of finance, administration and information technology.

[…]

Rep. Randy McDaniel, R-Edmond, who has authored many pension overhaul bills, said he favors postponing consideration of pension benefit increases until pending litigation that is challenging one of the measures is resolved.

The lawsuit challenges legislation adopted this year that would end the traditional pension system for newly hired state workers in favor of a 401(k)-style retirement plan beginning in November 2015. It alleges the transition could cost Oklahoma taxpayers millions of dollars in lost revenue returns and reduced employee contributions

State Treasurer Ken Miller cautioned that the turnaround was fueled in part on income from the investment of pension funds that has been “exceptional yet unsustainable.”

“If you look at the long term average of the stock market, 20 percent returns are extraordinary but not sustainable,” Miller said.

Kolivakis Weighs In On South Carolina Pension’s Search For Smaller Hedge Fund Managers

Last week, South Carolina treasurer Curtis Loftis said the state’s pension system was looking to work with smaller hedge fund managers.

Loftis told emerging hedge fund managers to “come show up” at pension meetings and to “shake hands…pass out cards.”

Data exists that supports investing with smaller, newer hedge funds.

Leo Kolivakis, who runs the blog Pension Pulse, weighed in on Loftis’ decision:

I’m glad Curt didn’t hand over his seat and think he’s on the right track bringing light to the excessive fees South Carolina’s pension fund is doling out. The guy who said there is no uniform reporting guidelines in fees is partially right but there should be, especially in alternatives like private equity where many state funds are getting bullied into remaining mum on fees and terms.

As far as focusing on emerging managers, there too, I think he’s on the right track. Smaller hedge funds have withered but the irony is they typically outdo their elite rivals. Why? Because their focus is primarily on performance, not asset gathering (2% management fee really kicks in when managing billions, just ask Ray Dalio, Bill Ackman and other oversized hedge fund egos that now figure among the richest Americans).

Are there pitfalls to investing in smaller funds? You bet there are and I warn Curt and others taking this approach not be be penny-wise and pound-foolish. There are a bunch of charlatans in Hedgeland that know how to talk up their game but they’re pure cons. And many smaller hedge funds stink, just like most of their larger rivals. There is also the big issue of scalability, which most smaller players don’t offer or are not set up for.

I’m not a fan of funds of funds but when it comes to identifying and selecting emerging managers, you need to be cautious and find true alpha generators that will offer you a lot more than just performance (knowledge leverage is critical!). Talking to Tom Hill at Blackstone or Jane Buchan at Paamco is a very good idea but make sure you get the terms and fees right when dealing with funds of funds.

South Carolina’s pension system allocated 17 percent of its assets towards hedge funds as of June 30.

In Kansas, Pension System Prepares To Be Target of Spending Cuts

Kansas lawmakers will need to cut almost $300 million in spending to balance the 2014 budget, and even steeper cuts are being predicted for 2015.

History shows that states consistently look to one place for “easy” cuts: annual payments to pension systems.

Kansas pension officials are now being asked by lawmakers how decreased state payments would alter the system’s liabilities.

From the Lawrence Journal-World:

New concerns were raised Monday that those gains could come undone if Kansas lawmakers decide to cut back on the state’s contributions to the pension system to address a looming $715 million revenue shortfall.

Sen. Laura Kelly, D-Topeka, asked KPERS officials Monday to come up with projections about what that would do to the system’s unfunded liability.

“Those of us who have been around here long enough know that when tough times come, we have either reduced or eliminated our KPERS contributions,” Kelly said during a meeting of the Legislature’s Joint Committee on Pensions and Investments.

Last week, state budget officials released new revenue projections showing lawmakers will need to cut $279 million in spending to balance this year’s budget. And for the next fiscal year, which begins July 1, they will need to carry those cuts forward and make another $435.7 million in spending cuts.

Some lawmakers vocally opposed cutting payments to the pension system:

Republican leaders on the panel said there is little chance of cutting back on KPERS contributions to make up for the revenue shortfalls, although they left open the possibility that the funding may have to come from money other than the state general fund.

“We need to keep those commitments,” said Sen. Jeff King, R-Independence, who chairs the panel. “I am always open to suggestions — what we’ve seen from other states; new proposals to more efficiently make those commitments we’ve made — but keeping the commitment to paying down the unfunded liability is vital.”

The Kansas Public Employees Retirement System manages $14.4 billion in assets.

Photo by TaxRebate.org.uk

Alabama Pension Gets $21 Million in Securities Fraud Settlement Deal

The Retirement System of Alabama (RSA) has a $21 million check heading its way after the state reached a settlement deal with Greg Aziz, who was charged with 11 counts of securities fraud stemming from a loan given by RSA to Aziz’s company, National Steel Car Limited.

From the Times-Daily:

The settlement requires Aziz, 66, to pay $21 million in damages to the Retirement Systems of Alabama and to reimburse about $1 million to the Alabama Securities Commission and the Colbert County District Attorney’s Office for investigative costs associated with the case, according to authorities. The charges against Aziz were dropped.

“I wouldn’t have agreed to anything without the agreement of the Retirement System and the Securities Commission,” Colbert County District Attorney Bryce Graham Jr. said. “They were OK with the agreement, and we moved forward with it.”

Aziz was charged in November 2013 with 11 counts of securities fraud. Under the settlement, the charges will be dropped.

Graham said Aziz did not plead guilty to anything. He said the $21 million already has been paid back.

“We’re happy to be able to return the money back to RSA,” Graham said. “It was a good settlement for all parties concerned.”

David Bronner, CEO of the Retirement Systems of Alabama, told the TimesDaily in a telephone interview from his home Friday, “I think it was good for the state to get something out of him. We did about as good as we could possibly do.”

“It’s hard to sneeze at $21 million,” Bronner said. “It’s good to get this behind us and move on. This lets people know you can’t just rip off the Retirement Systems and get away with it.”

More background on the loan that eventually led to charges being filed:

According to the indictment and the settlement agreement, RSA granted Aziz a three-year loan of $350 million to construct a railcar plant in Colbert County.

Aziz was to have paid interest to RSA on the loan at 9 percent.

The nearly mile-long plant in the Barton Riverfront Industrial Park was supposed to employ 2,200 people and was, at the time, thought to be a major industrial development project for the state. At the conclusion of the construction, Aziz was to obtain long-term financing through an alternate source.

The workforce at the plant never reached 200 under National Steelcar Limited.

To induce RSA to make the loan, court documents show, Aziz represented that he could build the plant for $350 million, that he owned a railcar manufacturing company in Canada worth more than $200 million that was debt free, that he had access to an unused line of credit of $100 million and that he owned the unencumbered rights to the patents necessary to build numerous types of railcars in Alabama.

According to court documents, Aziz failed to disclose to RSA that before he spent any of the original loan proceeds he knew the plant would cost well in excess of $350 million or that his company had incurred over $100 million in long-term debt, no longer had the $100 million line of credit, and had granted liens on the railcar patent rights, which would have required him to get permission from a third party to build the railcars in Alabama.

As a result of Aziz’s failure to notify RSA of these events, RSA said it was required to expend an additional $215 million to complete the railcar plant and in 2010 took over ownership of 100 percent of the stock in the plant from Aziz.

Alabama’s state-level retirement systems have combined assets of $28 billion.

University of California Considers Raising Tuition As Pension Liabilities Mount

The University of California is considering a plan that would raise tuition by 5 percent each of the next five years.

If the plan is approved, the extra revenue will go, in part, towards paying down billions in unfunded liabilities associated with the University’s pension plan.

From the Sacramento Bee:

When the University of California Board of Regents on Wednesday debates a plan to raise tuition by up to 5 percent annually over each of the next five years, they will focus on how the revenue could benefit the university’s academic mission: expanded course offerings, more support services, 5,000 more slots for California students.

But UC officials say the system also needs the money to help rescue its pension fund – neglected for two decades and facing $7.2 billion in unfunded liabilities – and to cover the growing cost of retiree health benefits.

“They’re going to have to ramp up contributions considerably over the next few years in order to maintain the financial health of the system,” said Adam Tatum, a retirement systems specialist at California Common Sense, a nonpartisan policy research organization. “What is certain is that the UC needs more money to pay off these unfunded liabilities – if not now, then in the future. That’s inevitable.”

This year, UC will pay about $1.3 billion to the pension fund, about 5 percent of its overall operating budget.

The University has asked the state to cover a portion of the school’s payments into the system. But California hasn’t taken the school up on their offer. From the Bee:

UC officials want the state’s general fund to pick up nearly a third of the payment, which would cover the university’s portion of pension contributions for faculty and other employees who are paid from state funds.

“Frankly, if the state were to pay that, we would not be proposing a tuition increase,” said Nathan Brostrom, UC’s chief financial officer. “That is money that could go to other resources.”

UC notes that the state covers the costs of employer pension contributions to CalPERS for other state agencies, including California State University. “This is money we’re paying out of our own resources that the state is providing to every other state agency,” Brostrom said. “It’s just a matter of equity. Why do they not take any action to help us with it?”

Gov. Jerry Brown’s administration maintains that UC, with a good deal of governing autonomy and its own retirement system, should cover the costs. H.D. Palmer, spokesman for the Department of Finance, said the state’s taxpayers aren’t obligated to help UC cover its liabilities. He said the state has increased UC’s general fund allocation so the university could determine its own fiscal priorities.

“They have an independent system,” Palmer said. “We don’t have any input on the structure of the system. We don’t have any input on the level of benefits.”

The UC Retirement Plan is 76 percent funded.

Are Phoenix Pension Costs Really Rising by $18 Million a Year?

Phoenix voters struck down a pension reform measure, Prop. 487, on Election Day. But in the weeks since the defeat, several local lawmakers have vocally called for a renewed discussion of pension reform.

Perhaps the most prominent of those voices is Phoenix City Councilman Sal DiCiccio, who supported Proposition 487 and wants the conversation about pension reform to continue.

The Councilman has claimed that the city’s pension costs rise by $18 million every year—and those costs will have a major impact on the funding of other public services.

Eighteen million dollars is a lot of money. But is that claim true? The Arizona Republic fact-checked the figure:

In 2011, state pension-reform laws raised the employee contribution to 11.05 percent, and it will continue increasing until it hits 11.65 percent in 2015-16. The city contributes whatever is needed to completely fund the pensions.

Poorer-than-expected investment returns on both pension funds during the recession raised the city’s contribution in recent years. In 2010-11, Phoenix spent approximately $93.9 million on general pensions, $60.4 million on police pensions and $30 million on fire pensions.

By the 2014-15 budget, the city’s planned contributions had risen to $129 million for general pensions, $91 million for police pensions and $46 million for fire pensions.

DiCiccio’s $18 million figure comes from a projection made before the city approved its budget. It forecast Phoenix would spend $271 million on pensions, $18 million more than it budgeted in 2013.

However, when the city finalized its budget, the numbers had changed. Phoenix set aside $266 million for pension contributions, $13 million more than in 2013.

So, the $18 million figure isn’t exactly right. But the sentiment of the statement is generally correct – the city’s pension costs have risen by millions of dollar each year.

The Arizona Republic also checked DiCiccio’s statement on pension costs hurting funding for public services:

Overall city spending on fire, parks and police has increased in recent years, but the city has also hired fewer police officers and firefighters. The Phoenix Law Enforcement Association estimates that the city has 550 fewer police officers now than it did at its peak employment in 2009.

The United Phoenix Fire Fighters didn’t have similar numbers available, but Phoenix went from 1,671 firefighters in 2009 to 1,578 in 2012.

Staffing cuts caused Phoenix police officers to expand their patrol areas, DiCiccio said.

Phoenix also delayed more than $200 million in capital bond projects in 2010. Voter-approved bond projects allow construction of new public facilities, such as parks or libraries, or renovating existing buildings.

Phoenix’s pension payments have grown at a steeper rate than funding for such services.

Overall, the Arizona Republic said DiCiccio’s statement were “mostly true.”

Video: Entitlement Reform and the Future of Pensions

The above talk was given by Gene Steuerle (Urban Institute) at the 2014 Pension Research Council Conference; Steuerle spoke about his research into the inevitability of entitlement reform and what it means for the future of pensions.

Mr. Steuerle’s biography:

Eugene Steuerle is Richard B. Fisher chair and Institute Fellow at the Urban Institute, and a columnist under the title The Government We Deserve. Among past positions, he has served as Deputy Assistant Secretary of the Treasury for Tax Analysis (1987-1989), President of the National Tax Association (2001-2002), chair of the 1999 Technical Panel advising Social Security on its methods and assumptions, Economic Coordinator and original organizer of the 1984 Treasury study that led to the Tax Reform Act of 1986, President of the National Economists Club Educational Foundation, Resident Fellow at the American Enterprise Institute, Federal Executive Fellow at the Brookings Institution, and a columnist for the Financial Times.

Dr. Steuerle is the author, co-author or co-editor of fifteen books and close to one thousand articles, briefs, and Congressional testimonies. Books include Contemporary U.S. Tax Policy (2nd edition), Retooling Social Security for the 21st Century, and Nonprofits and Government. He serves on advisory panels or boards for the Congressional Budget Office, the Government Accountability Office, the Joint Committee on Taxation, the Committee for a Responsible Federal Budget, the Independent Sector, the Aspen Institute Initiative on Financial Security, the National Committee on Vital and Health Statistics, and the Partnership for America’s Economic Success.

Canada Pension Chief Talks About “One of the Best Investments We’ve Ever Made”: Investing in Alibaba in 2011

The chief executive of the Canada Pension Plan Investment Board (CPPIB) talked with the Financial Post on Thursday about the Board’s investment in Alibaba in 2011.

At the time, Alibaba was an unknown tech company in China. A few years later, the company’s initial public offering was the largest in history.

From the Financial Post:

[Wiseman] said the reason the Canadian pension fund manager was able to make a “very sizeable investment” in what was then “an obscure Internet company” in a city in China few had heard of is because executives had opened an office in Hong Kong back in 2008.

“That investment story which everybody is touting as one of the best investments we’ve ever made, it didn’t happen overnight. That investment started in many respects almost seven year ago,” Mr. Wiseman said.

“It started with a view towards that market, a view that we need to build capabilities in the region, that we need to deepen our understanding of the region, and that we had a long-term view around the Chinese consumer, the importance of the Chinese consumer.”

Mr. Wiseman said the route to the Alibaba investment, which is worth “substantially more” than the fund’s cost base thanks in part to a large investment in the successful IPO last month, illustrates the long-term strategy and the “on the ground” investing style.

“We didn’t get brilliant in four weeks, right? … We had people on the ground in Hangzhou [the city in China where Alibaba is based] before people knew where Hangzhou was,” he said.

“We were there soon after opening our office in Hong Kong, developing those relationships with people who speak the language and who understand the market… To me, this is exactly what we’re trying to do as an organization.”

After the initial investment in 2011, CPPIB increased its stake the following year and then again through the IPO, Mr. Wiseman said.

The CPPIB has a total of $314.5 invested in Alibaba.

Photo by Charles Chan via Flickr CC License

Pension Official: Here’s How Congress Could Make Investing in Environmental Projects More Appealing to Pension Funds

Girard Miller, CIO of the Orange County Employees Retirement System, sat down with Governing magazine yesterday to talk about what’s holding many public pension funds back from taking on “green” investments.

Miller first explains the concept of “green bonds”. From the Governing interview:

These are bonds issued to finance environmentally friendly capital projects. One use of the concept applies very narrowly to tax-exempt bonds for what are called brownfields development. Then there is also an international working group promoting “climate bonds,” which are sometimes called green bonds. CalSTRS, the large state teachers pension fund here in California, is part of that working group. The central idea is to reduce the carbon footprint globally through infrastructure projects that can be funded through big bond issues. I use the term green bonds very broadly to include essential environmental projects that might be funded by states and localities through bond financing. Beyond carbon reduction and water conservation in drought areas, I’ll leave it to the policy geeks and public finance guys to haggle over the definition. It’s a big tent.

Miller goes on to talk about the problem with “green bonds”: they are tax-exempt, and, in his words, pension funds “don’t want tax-exempt paper in their portfolios.”

But he says Congress can fix that problem, and in the process make the bonds more appealing to some of the world’s largest institutional investors. From the interview:

The problem is that pension plans don’t want tax-exempt income. We’re not the only ones. Sovereign investment funds from abroad, such as those in China and the Middle East, and endowment funds don’t care about taxes either.

[…]

What we need is a taxable option to be approved by Congress and limited to green bonds, not to every conceivable capital project, which is typically what happens when politics gets involved. A taxable bond option (TBO) is a concept that has been kicking around in public finance circles for four decades. As far back as the 1970s, economists like John Petersen were saying there is a smarter way to do this stuff. Build America Bonds, which were authorized in 2009-2010 at the bottom of the Great Recession, were a taxable option. A TBO allows, but does not require, a muni bond issuer to elect to pay taxable interest and receive a direct interest-cost reimbursement from the U.S. Treasury rather than the indirect subsidy of tax exemption. In most cases, that would mean a lower borrowing cost — net-net — than issuing tax-exempt bonds. For pension plans, a TBO-yield will compare favorably with corporate credit and foreign sovereign bonds, plus the bonds would be a diversifier for our bond portfolios. Foreign investors and endowment funds, as well as ordinary investors with incomes below $200,000, would prefer taxable municipals.

Read the whole interview here.

Photo by penagate via Flickr CC

Illinois Teachers’ Pension Official Praises Asian Private Equity

Speaking at the AVCJ Private Equity & Venture Forum last week, Illinois Teachers Retirement System investment officer Kenyatta Matheny expressed his bullishness on Asian private equity. Recapped by Asian Investor:

Matheny is very positive on the region. “If you’re building a global private equity portfolio, you would be remiss to not earnestly look to having an allocation to Asia and, quite frankly, with China as the anchor,” he said.

The Illinois fund last month struck a partnership with Asia Alternatives, one of the biggest Asia-focused PE fund-of-funds managers with $3 billion in AUM. At the end of October it approved a $200 million commitment to the manager. This followed a period of 18 months to two years spent developing the relationship, Matheny noted.

Illinois Teachers had spent two or three years visiting the region to understand the landscape in the mid-2000s and subsequently made direct investments in PE funds and sought a local investment partner. It now has $5 billion of assets invested in private equity and another $3 billion of unfunded commitments, amounting to an $8 billion portfolio overseen by Matheny.

He was effusive about the benefits of the relationship with Asia Alternatives. “We think alike, we’re looking at the same managers, underwriting from the same perspective, but now you’ve got this piece that we don’t have: you can access small managers, you’ve helped fund a few start-ups” he said.

Matheny also spoke about an increased number of partnerships between U.S. and Asian private equity firms. From Asian Investor:

Kenyatta Matheny, who co-runs the PE portion of Illinois Teachers, has seen more cross-border partnering taking place between PE firms in Asia and the US, in both directions.

“This has been more recent, within the past 12 months, where there may be an Asia-specific PE fund with an asset that can continue to scale, but they’re looking to exit.” One route for them has been for an international PE firm taking on the asset and expanding it beyond China to other markets, such as Southeast Asia.

Matheny has also seen such deals originating outside Asia. “With an asset that has 5-10% exposure to China, we can pick up the phone and call counterparts in Asia. We’ve scaled the asset via acquisitions at home.”

The conference also featured a panel discussion on “Why Asia Still Matters for Private Equity.” The audio of the panel can be heard here.

Photo Credit: “Asia Globe NASA”. Licensed under Public domain via Wikimedia Commons

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