Ted Ballantine | Pension360

New Orleans Pension Reform Task Force Begins Work

Last month, New Orleans created a pension reform task force to recommend “fundamental” changes to the city’s Fire Fighters Relief & Pension Fund. On Tuesday, the task force met for the first time. The meeting was covered in the video report above.

The task force consists of:

– New Orleans Chief Administrative Officer Andy Kopplin

– Councilwoman Stacy Head

– Timothy McConnell, superintendent of the New Orleans Fire Department

– Paul Mitchell, Jr., deputy director of the pension board

– Thomas F. Meager, III, secretary and treasurer of the firefighters’ pension board

– Nick Felton, president of New Orleans Fire Fighters Association, Local 632

– Hardy Fowler, an accountant and the former managing partner of KPMG in New Orleans

– Scott Jacobs, an insurance and risk management professional

– Greg Rattler, Sr., a vice president at JPMorgan Chase & Co.

Atlanta Wins Case Over Employee Pension Contributions

A key portion of Atlanta’s 2011 pension reforms have been upheld in court, the city said Tuesday.

In 2011, the city increased employee contributions to the pension system by 5 percent – a move which workers said violated their contracts. But a judge has sided with Atlanta on the matter.

From Governing:

A Fulton County Superior Court judge has upheld Mayor Kasim Reed’s historic 2011 pension reform, siding with the city in a class-action lawsuit brought by employee unions, the mayor’s office announced Tuesday.

A handful of union workers representing Atlanta fire, police and city employees sued the city last November, claiming the pension reform that forced employees to pay 5 percent more toward their retirement benefits was in violation of their contract and, therefore, unconstitutional. Such an increase, the employees argue, must also increase their pension benefits.

But Reed and city officials argued — and Judge John Goger agreed in his ruling — that the change is allowed under Georgia law. The mayor, who championed the reform in his first term, has long said overhauling the employee retirement benefits program was critical to the city’s financial stability, and will help Atlanta pay off a $1.5 billion unfunded pension liability.

Without increasing contributions, the city can’t afford to pay the full benefits eventually owed to workers, city leaders argue.

Reed and City Attorney Cathy Hampton are expected to hold a press conference on the issue Wednesday.

Atlanta City Hall, as well as Fulton Superior Court, was closed on Tuesday in observance of Veterans Day.

An attorney for the public safety unions said he hasn’t had time to review Goger’s decision. Lee Brigham said it is premature to comment on the case and whether his clients are likely to appeal.

Read more about Atlanta’s pension changes here.

Photo Credit: “Atlanta skyline” by AreJay at en.wikipedia – Licensed under Creative Commons Attribution 2.0 via Wikimedia Commons

Chart: Retirement Benefits Are Most Important Job Feature For Majority of Public Sector Workers

Public sector workers were asked what characteristics or features of their jobs are most important to them. Job security, salary and health insurance were all extremely important; but for teachers and public safety workers, retirement benefits trumped everything.

Even among the public workforce at large, retirement benefits were rated as “extremely important” by over 60 percent of respondents.

Chart credit: 2014 Retirement Confidence Survey

Report: Pension Funds Agreed To Risky, “Unusual” Contract Clause When They Invested in Vista Private Equity Fund

Vista Equity Partners has written an “unusual” clause into their contracts with limited partners, which include some major pension funds.

When pension funds invest with private equity firms, they sign “limited partnership” agreements. But a Reuters report says a certain clause included in Vista contracts is “atypical” for the industry, and potentially shifts more risk onto limited partners.

Details on the clause, from Reuters:

Vista Equity Partners has worked in an unusual clause in its contracts with private equity fund investors that gives it more financing flexibility and a leg up in leveraged buyouts, but also carries more risks for it and its investors, according to people familiar with the matter.

The agreement allows Vista to temporarily finance large corporate buyouts just with the cash from its $5.8 billion fund, as against using both debt and equity to buy companies. Under the right circumstances, this flexibility allows Vista to be nimble in auctions and secure the best possible debt financing after it has clinched a deal.

Two months ago, Vista used the clause in one of the largest private equity deals of the year, committing to fund the $4.2 billion takeover of TIBCO Software Inc with equity. One day later, it secured debt commitments from JPMorgan Chase & Co and Jefferies LLC for the deal, reducing its equity exposure to $1.6 billion.

The maneuver helped it not only outbid rival Thoma Bravo LLC in the TIBCO auction, but also use JPMorgan and Jefferies, which where were originally backing Thoma Bravo during the auction and were offering better financing terms, the sources said.

Investors in the Vista fund, known as limited partners, include some of the largest U.S. public pension funds, including the New Jersey State Investment Council and the Oregon Public Employees Retirement Fund. These funds do not disclose to their members and retirees all the risks they undertake, because the agreements with Vista and other private equity firms are confidential. The revelations highlight how important aspects of the investment of public money in private equity are shrouded in secrecy.

Industry insiders told Reuters that the clause is “highly atypical”:

Several pension fund investors, private equity placement agents and lawyers interviewed by Reuters said Vista’s terms are highly atypical and not widely known even within the private equity industry. Most firms have caps – usually around 15 to 20 percent of the fund – on how much equity they can commit to a particular deal. Private equity funds also rarely make all-equity commitments for such deals, preferring to tie up debt financing ahead of time. When they do make such all-equity commitments, the equity checks tend to be much smaller.

The reason is that doing so poses the risk that investors see their entire capital tied up in one investment, potentially hurting returns and denying them the benefits of diversification, these industry sources said.

Such a situation can arise, for example, if the debt market conditions were to suddenly sour, as it happened in the summer of 2007 before the financial crisis. In the TIBCO deal, Vista’s financial liabilities are capped at $275.8 million. But if the banks walk away before the deal closes, TIBCO can try to force Vista to close on the deal with its fund.

“It’s a bit like walking on a wire without a net,” said Alan Klein, a partner at law firm Simpson Thacher & Bartlett LLP.

Public pension funds that have invested in Vista funds include the Oregon Public Employees Retirement Fund, the Virginia Retirement System, the Michigan Retirement System, the Arizona Public Safety Personnel Retirement System and the Indiana Public Retirement System.

Photo by Juli via Flickr CC License

CalSTRS Aims to Bring More Investment Management In-House

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.

Video: New York City Comptroller Talks About Push By Pension Funds For More Control of Corporate Boardrooms and City’s Hedge Fund Allocation

Here’s an interview with New York City Comptroller Scott Stringer. Stringer is trustee of the City’s five pension funds.

During the course of the interview, Stringer talks about his push for pension funds to have more control over corporate boardrooms. He also defends the city pension system’s hedge fund allocations.

Canada Pension Plan Among Bidders For $10 Billion of Cement Facilities

The Canada Pension Plan (CPP) has teamed up with Blackstone Group and Cinven to bid on $10 billion of cement assets that are being sold as a result of a pending merger between two major building material suppliers.

The CPP is one of 60 parties who have placed bids.

From the Wall Street Journal:

Private-equity firms are jostling to acquire more than $10 billion of cement facilities being sold as part of the merger of two large European companies, reflecting the dearth of buyout deals available in the region.

The sale of the cement assets in Europe, Canada, Brazil and the Philippines are a precondition to winning antitrust approval of a $50-billion merger between French cement giant Lafarge SA and Swiss rival Holcim Ltd.

The assets have attracted interest among cash-flush private-equity firms. Some 60 parties, a mixture of buyout firms and building-materials companies, have submitted bids for all or some of the assets, said Holcim finance chief Thomas Aebischer. Private-equity bidders include Blackstone Group, KKR & Co. and other top firms, according to people familiar with the matter.

[…]

The cement deals are “sort of classic private-equity assets,” said Josh Lerner, a professor at Harvard Business School, of the Holcim and Lafarge sales. “The idea of a transaction that has the classic PE kind of recipe, where this is a mature industry, is a good thing for them.”

The deal is also attractive because it could create an entirely new cement rival overnight. Some argue creating a new company with the assets could be a challenge for buyers, since the facilities are spread across the globe and aren’t independent companies at this stage.

The $10 billion price-tag on the for-sale assets is too big for many private-equity firms to digest on their own. Many are forming groups to bid for the assets, a practice they have moved away from in recent years since investors prefer to spread their money among several funds invested in different assets.

Among the private-equity bidders are: a group consisting of Blackstone Group, Cinven and the Canada Pension Plan; BC Partners and Advent International; Bain Capital and Onex Partners; and KKR., according to the people familiar with the matter. Industry bidders include Irish cement maker CRH PLC, according to people familiar with the matter. The structure of the consortia could still change, said one person familiar with the deal.

The Canada Pension Plan has $227 billion in assets, which are managed by the Canada Pension Plan Investment Board.

Photo by Parée via Flickr CC License

HarbourVest May Be Last Party Interested in Buying CalPERS’ Stake in Under-Performing Healthcare Fund

CalPERS announced this summer it was looking to exit the Health Evolution Partners (HEP) Growth Fund, a private equity fund specializing in healthcare companies.

HEP is run by David Brailer, a world-renowned physician who had no previous private equity experience before starting the firm.

The fund promised returns of 20 percent. But its IRR as of March 31 was just 2 percent.

According to Reuters PE Hub, HarbourVest Partners is interested in buying CalPERS’ stake in the fund. From Reuters PE Hub:

HarbourVest Partners appears to be the last bidder interested in buying CalPERS’ stake in a healthcare fund run by a former Bush Administration official, according to two sources.

The California Public Employees’ Retirement System since summer has been trying to sell its stake in a growth fund managed by Health Evolution Partners (HEP). Evercore Partners is running the sales process, sources said.

Landmark Partners was also a bidder until recently, a secondary market professional said.

CalPERS is the sole limited partner in the fund and committed $505 million at its inception in 2008. So far, the GP has drawn down just over $430 million, as of March 31, according to CalPERS.

The fund’s performance has not been stellar. It produced an internal rate of return of 2 percent and a 1x multiple as of March 31, according to CalPERS.

One secondary market professional said bad blood between CalPERs and HEP likely drove away some potential buyers.

Real Desrochers, senior investment officer for CalPERS’ Private Equity Program, recommended the retirement system get out of the investment because he didn’t believe HEP would achieve its goal of a 20 percent IRR, Pensions & Investments reported in August. CalPERS investment staff earlier this year refused to allow HEP to use already-committed capital and told the firm to find a new partner or face liquidation, P&I reported.

[…]

Besides the growth fund, CalPERS committed $200 million to an HEP fund-of-funds in 2007. The sales process has not included the FoF, which had produced a negative 3 percent IRR and a 0.9x multiple as of March 31.

Read more coverage of the HEP Growth Fund here.

Photo by Hobvias Sudoneighm

Moody’s: Voter Rejection of Prop. 487 Is “Credit Negative” For Phoenix

Last week, Phoenix voters shot down Proposition 487, the ballot measure that would have shifted the city’s non-public safety new hires into a 401(k)-style retirement plan.

Many public workers, and the city’s mayor, were happy with the result. But one credit rating agency was not.

A Moody’s report released Tuesday said the measure would have improved the city’s finances, and the results of the vote are a “credit negative” for Phoenix.

From the Arizona Republic:

“The vote is a credit negative for the city,” which is grappling with a $4.4 billion adjusted net pension liability, said Moody’s Investors Service. Phoenix has the sixth-highest adjusted pension shortfall relative to revenues among 50 large cities tracked by Moody’s.

[…]

According to the update by Moody’s analysts Tom Aaron and Don Steed, Phoenix actuaries projected the new plan would have increased city contributions by $358 million over 20 years but with savings that would have exceeded those outlays, especially if the underlying investments didn’t perform well.

The ballot measure could have saved the city up to $1.9 billion over 20 years, according to Moody’s, citing a city-council analysis. Cost savings would have derived from limiting the types of pay used to calculate benefits — which leads to the costly practice of “pension spiking” — eliminating supplemental retirement plans offered by the city and calculating pension benefits by spreading them over more years of employee salary, which tends to lower the payout.

But Moody’s admitted the measure would have incurred some extra costs if it had passed. Among the costs: legal expenses. From the Arizona Republic:

On the other hand, Moody’s noted that the measure, had it passed, likely would have triggered costly legal challenges. For example, one part of the proposition would have required only one retirement plan to be offered to newly hired employees, including those in public safety. That would have conflicted with a state law mandating participation in the Public Safety Personnel Retirement Plan, which covers police and fire employees throughout the state.

Moody’s didn’t change the city’s credit rating, however. It remains at Aa1.

Teacher Sues Kentucky Pension System Over Funding Status, Transparency Issues

A Kentucky teacher has filed a lawsuit against the Kentucky Teachers’ Retirement System (KTRS), claiming KTRS has “failed in their fiduciary duty” by letting the system become one of the worst funded teachers’ plans in the country.

From WFPL:

A Jefferson County Public Schools teacher filed a lawsuit Monday against the Kentucky Teachers’ Retirement System, which has been called one of the worst-funded pension systems for educators in the U.S.

The plaintiff, duPont Manual High School teacher Randolph “Randy” Wieck, told WFPL that the system supporting over 140,000 teachers in Kentucky is billions of dollars in debt; also that teachers pay about 12 percent of their paychecks into the retirement system.

“We have raced to the bottom and we’re neck and neck with the worst funded teachers plan in the country,” he said.

As WFPL reported, the General Assembly during this year’s legislative session funded KTRS at around 50 percent of what the retirement system requested.

The federal Government Accounting Office and Standard & Poor say Kentucky’s pension system is being funded at an unhealthy rate.

KTRS has “failed in their fiduciary duty by not aggressively and publicly demanding the full funding they need to stay solvent,” Wieck argues in a copy of the complaint he provided to WFPL. The complaint further alleges that KTRS has not been transparent enough in the “system’s dire funding status,” and that the investments made by KTRS are not responsible.

The teacher, Randy Wieck, is giving KTRS one year to become fully funded. After that, he says he will bring the lawsuit to the steps of Kentucky’s General Assembly; for many years, lawmakers have failed to pay the state’s actuarially-required contribution to the pension system – although they did make the full payment to the teachers’ system in 2011.

TRS’ attorney commented on the suit:

“I am very optimistic that we are going to find a solution for this,” said Beau Barnes, general counsel for KTRS.

There are positive signs among members of the General Assembly to come up with a plan, he said, adding that next week, KTRS will appear before the state’s Interim Joint Committee on State Government to discuss a financing plan for the pension fund. Wieck, who was joined by “Kentucky Fried Pensions” author Chris Tobe, seemed skeptical of previous conversations that seemed to excite Barnes.

The state legislature is not poised to discuss budget issues during the 2015 legislative session, but Wieck said Kentucky is violating its duty to keep the pension system solvent.

“You don’t actually have to wait for the bus to hit you to experience danger. And that is what is happening to Kentucky Teachers’ Retirement System. It is being damaged every year,” he said.

KTRS manages $17.5 billion in assets. The system is about 51 percent funded.

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