Ted Ballantine | Pension360

Chicago Suburb, Strapped With Pension Debt, Considers Privatizing Pension System

The Chicago suburb of North Riverside is straddled with pension debt, and it’s not about to get better – since the town hasn’t made its required pension payments, the state will likely withhold sales tax revenue from the suburb starting in 2016.

That’s why North Riverside is considering privatizing its fire department – a move that would rid the city of future pension costs.

From the Chicago Sun-Times:

North Riverside says its contract with firefighters expired in April and it seeks to privatize its fire protection services, turning current firefighters into employees of a private company, PSI, which has provided paramedic services to the village for decades.

Current North Riverside firefighters would work for PSI at their current salaries and with their current health insurance plan. They also would keep already-accrued pension benefits but would be folded into a 401-(k) program at PSI that would include an employer-matching contribution. Odelson says privatizing fire services will save the village in insurance, overtime, sick time and pension costs for firefighters who make more than $200,000 in yearly salary and benefits.

[…]

The state will begin garnishing sales tax revenue from North Riverside in 2016 if it doesn’t catch up on pension debt. The state can withhold all of that revenue in 2018, says Burt Odelson, North Riverside’s attorney. “When that happens,” he said, “North Riverside will no longer be able to pay their bills.”

North Riverside is a bedroom community without the home-rule power to raise taxes without voter approval. Most of its revenue is generated by sales taxes from the North Riverside Mall, but the village skipped pension payments for three years when the recession hit and tax revenue dropped.

The village now faces an operating budget deficit of $1.9 million, with $1.8 million due to pension obligations. The required payments to the firefighters’ pension fund have skyrocketed sevenfold in the last 10 years.

Unions say the idea would be a breach of contract:

J. Dale Berry, lawyer for North Riverside Professional Firefighters Local 2714 and counsel to the Associated Firefighters of Illinois, says North Riverside is obligated to keep the contract’s current provisions while it proceeds through arbitration, which he says the village is trying to circumvent. The contract, he notes, has a clause forbidding the kind of subcontracting privatization the village seeks.

“They presented this as a fait accompli,” Berry says, noting officials rejected union offers for cheaper health plans, cost cuts and an offer to help organize a consolidation with other departments. “This privatizing thing is another way to open the door to patronage, nepotism, non-merit hiring,” Berry said.

The North Riverside Firefighters Union Local 2714 has said it will sue if the fire department is privatized.

More coverage of the town’s pension funding crisis can be read here.

Task Force Leader: Jacksonville Needs to Approve Pension Reform

Over the summer, Jacksonville’s mayor put together a Retirement Reform Task Force. The Task Force’s job description, according to the city website, is to “review the proposed public safety pension reform agreement, seek input from stakeholders and other interested citizens, and make recommendations on how the City should proceed.”

On Monday, the leader of that task force, William E. Scheu, wrote a column for the Florida Times-Union urging the Jacksonville city council to approve the pension reform measure currently in front of them.

The reform measure aims to improve the funding of the city’s public safety pension system by forcing the city to make higher payments to the system – to the tune of an extra $40 million a year.

But city council members are worried because the mayor has not specified where he will get that extra money.

Scheu acknowledges that concern, but says this is the best chance to enact a pension reform measure built by compromise.

From the column:

Last year a broad-based, stakeholder-representative task force met 17 times and urged a comprehensive reform that recognized the interests of the various parties, acknowledged the legal conundrum in which the city was forced to operate and examined various alternatives for reform.

The solutions the task force proposed with the help of The Pew Charitable Trusts included significant governance reforms, benefit reductions for both future and existing employees, a reformed plan design and a funding source for accelerated pension contributions.

Task force members considered the fact that litigation was a present fact but an expensive and uncertain route for the future.

Its solution was a compromise that is not perfect, but is attainable and sustainable.

It was supported by the Times-Union and most business, civic and political leaders.

[…]

While the mayor has not provided good leadership in refusing to identify a dedicated funding source for the additional pension contributions recommended by the task force, the City Council should not abandon its own responsibilities and “kick the can” further down the road.

The City Council has an opportunity to move Jacksonville forward by adopting the proposal now before it. It is imperfect, but it is a responsible step toward ensuring that Jacksonville’s quality of life will improve and that the annual fights over funding the city’s core services will end.

The Fitch and Moody’s rating agencies have recognized that Jacksonville’s financial condition is sick.

It is time to enact pension reform.

It is time for Jacksonville to take its medicine for the harm inflicted on it by our leaders in earlier years.

Read the entire column here.

Chicago Teachers Pension CIO Takes Job at Kellogg Foundation

There has been a big shakeup at the top of the Chicago Teachers Pension Fund over the last two weeks.

First, the fund announced that its executive director would be resigning.

Now, the fund’s chief investment officer says she will be leaving for another job as director of investments for the W.K. Kellogg Foundation.

From Chief Investment Officer magazine:

Carmen Heredia-Lopez, current CIO of Chicago Teachers Pension Fund, has been tapped to lead the W.K. Kellogg Foundation’s $8.3 billion portfolio.

According to the foundation, Heredia-Lopez will begin her post on December 1, 2014. As director of investments, she will report to Vice President and CIO Joel Wittenberg.

At the Battle Creek, Michigan-based philanthropy, she will be responsible for “driving further development of the foundation’s mission-driven investment strategy and managing emerging diversity-owned firm work and diversified assets,” the foundation said.

[…]

Heredia-Lopez has been at the helm of the $10.8 billion Chicago Teachers Pension Fund since January of 2013. Prior to taking over the CIO position, she served as the fund’s director of investments for two-and-a-half years.

She also worked as an investment analyst at the Illinois Municipal Retirement Fund for more than four years after spending a decade in asset management and investment banking.

The fund’s executive director, Kevin B. Huber, has resigned and his last day at the fund will be December 31.

A search for a new chief investment officer may not start until a new permanent executive director is found.

State Street Being Probed by SEC, Department of Justice For Possible Misconduct While Soliciting Pension Business

An interesting piece of information was tucked away in a new State Street Corp. regulatory filing.

In an SEC filing filed Monday, State Street said it was being subpoenaed by the SEC and the Department of Justice for information related to the way the bank solicits business from public pension funds.

State Street admits in the filing that “in at least one instance” a consultant employed by the firm made political contributions while bidding for pension business.

From the filing:

We are responding to subpoenas from the Department of Justice and the SEC for information regarding our solicitation of asset servicing business of public retirement plans. We have retained counsel to conduct a review of these matters, including our use of consultants and lobbyists in our solicitation of business of public retirement plans and, in at least one instance, political contributions by one of our consultants during and after a public bidding process. While we are unable to predict the outcome of these matters, adverse outcomes could have a material adverse effect on our business and reputation.

Depending on the nature of the political contribution, the action could violate SEC pay-to-play rules.

Under the SEC’s current rules, investment advisors can’t make donations to politicians that have any influence—direct or indirect—over the hiring of investment firms.

Specifics of Rule 206 (4)-5, as explained by law firm Bracewell & Giuliani:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

Businessweek reached a State Street spokewoman for comment:

“We are cooperating with governmental authorities and have retained counsel to conduct an internal review of these matters,” said Alicia Curran Sweeney, a spokeswoman for State Street, while declining to comment further on confidential discussions with regulators.

Earlier this year, investment firm TL Ventures was busted when an employee was found to have made a political donation to Pennsylvania’s governor while the firm was working with the Philadelphia Board of Pensions. The consequences: the firm has to give up over $250,000 in fees it earned from the work, and pay a $35,000 fine.

San Diego Pension Close to Firing Outsourced CIO, Bringing Investment Management In-House

The San Diego County Employees Retirement Association (SDCERA) is on the verge of firing its controversial outsourced CIO, Lee Partridge of Salient Partners.

Board members held a mock vote on the issue, and the firing was “approved” 7-0.

If Salient Partners is indeed fired, the SDCERA would move its investment management in-house.

More on the situation from the Union-Tribune:

The county retirement board has made an informal decision to end its five-year experiment with a Texas portfolio strategist and return oversight of the $10 billion pension fund to an in-house expert.

The vote came late Thursday toward the close of another marathon meeting of the San Diego County Employees Retirement Association board, which has been racked with discord in recent months over its leverage-heavy investment policy.

An hour into a late-afternoon discussion on governance models, Trustee Dick Vortmann suggested their time might be better spent if they knew whether the board majority still supported using an outsourced chief investment officer.

“Can we take a straw poll right now?” he asked. “For Christ’s sake, if it isn’t a close debate, why are we debating?”

Minutes later, all seven trustees in attendance raised their hand to show they are ready to hire an internal investment officer to manage the fund — a function that has been served by Salient Partners of Houston.

The 7-0 vote isn’t as clear cut as it sounds.

The vote wasn’t official – and it didn’t include all the trustees. Two trustees had left the meeting before the vote was held. At least one of those trustees, David Myers, is likely to vote to retain Salient Partners. From the Union-Tribune:

The nonbinding vote excluded board members David Myers, who was absent, and Mark Oemcke, who left the meeting earlier in the day. Myers has been a staunch supporter of Salient and its main representative in San Diego, Lee Partridge. Oemcke has not.

Three of the seven board members to vote — Vortmann, Kristina Maxwell and E.F. “Skip” Murphy — said they were raising “half a hand” to reflect concern over finding the right candidate for the job.

“It’s qualified on the assumption that we can find the requisite skills to match our desired level of sophistication on our investment philosophy,” Vortmann said.

No one from Salient was at the meeting.

While not yet formalized, the decision to abandon the outsourced CIO model prompted trustees to begin the process of recruiting an in-house investment expert.

They plan to hire an executive search firm in two weeks, when the board convenes a special two-day retreat. Installing a chief investment officer is expected to take between four and six months.

SDCERA pays Salient $10 million a year to perform CIO duties.

A consultant told the SDCERA board that they could likely hire a new, qualified CIO for less than $250,000.

Public Pensions Experience First Negative Quarter Since Early 2013 As Investments Decline

The median return of public pension investments was –1 percent in the third quarter, according to a Wilshire Trust Universe Comparison Service report.

It was the first negative quarter in over a year for public plans, collectively.

More on third quarter performance, from Reuters:

Public pensions lost a median 1.00 percent in the third quarter, compared with a median drop of 0.84 percent for all plans over the same period. Wilshire’s benchmark investment performance measure is gleaned from nearly 1,600 plans, including corporate plans, foundations and endowments.

The biggest losers: small public pensions with less than $1 billion of assets. Their returns were down a median 1.07 percent for the quarter.

Larger corporate funds with more than $1 billion of assets had the best showing for the second quarter in a row, losing just 0.54 percent this past quarter.

Overall, the various plans suffered their first negative quarter since the second quarter of 2013, Wilshire said.

The funds’ underperformance was a surprise, said Robert Waid, managing director at Wilshire Associates, in a quarter when the Barclays U.S. Aggregate Index rose 0.17 percent.

“This is a quarter where classic diversification did not pay, with U.S. small-cap, international equity, real estate and commodities all underperforming,” Waid said in a statement. “This explains why the median performance for all plan types underperformed the classic 60/40 portfolio.”

In the second quarter, public pensions’ performance had improved greatly, returning a median 3.71 percent and outperforming peers, Wilshire data showed.

The Wilshire Trust Universe Comparison Service (TUCS) is a widely accepted benchmark for institutional investment performance, representing $3.7 trillion in institutional assets from over 1600 plans and endowments.

Video: Pension Limbo Spurs Early Retirement in Illinois

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The legality of Illinois’ pension reform law is up in the air, and may remain so until year’s end. That puts many soon-to-be-retirees in an unusual position: they can retire early and lock in their benefits, or they can wait to see the outcome of the state’s pension legal battle.

Many are choosing the former, according to ABC 20 .

Ontario Teachers’ Pension Becomes One of BlackBerry’s Top 10 Shareholders

The Ontario Teachers’ Pension Plan saw something it liked in BlackBerry in the third quarter, as the pension fund bought into the company to the tune of 7.8 million shares. Now, the fund is among the company’s ten largest shareholders.

Waiver on Retirement Income Tax Gains Steam in Rhode Island

Rhode Island is one of a handful of states that tax social security and pension benefits. But the idea of offering a waiver on those taxes is gaining momentum in the state, and the push for retiree tax relief is coming from several directions. The idea has been proposed by labor group leaders, who say a waiver could be part of a settlement in the lawsuit over the state’s 2011 pension reforms. From the Providence Journal:

The president of the Rhode Island retiree chapter of the American Federation of Teachers is “cautiously optimistic” that a waiver of state taxes on pensions and Social Security benefits could provide the framework for a settlement of the high-stakes pension lawsuit. […] Roger P. Boudreau, the state retirement board member who is also president of the Rhode Island branch of the AFT’s retirees chapter, made this prediction on October 28, at an informational meeting of members of the Rhode Island Public Employees’ Retiree Coalition. The coalition was created to represent retirees’ interests in the union challenge to the state’s 2011 pension overhaul. Boudreau could not be reached for comment on Friday. But his Oct. 28 comments were captured in the “RIPERC Legal Defense Fund Newsletter” for October-November 2014 that said, in part: “Roger also expressed cautious optimism that an opportunity to settle the dispute through negotiations with the General Assembly would occur in the upcoming session. One of the things that Roger spoke about exploring is a waiver of RI income taxes for pensions and Social Security; a statutory waiver would have a major impact on retirement security for all retirees, and the labor movement has always represented all workers, including nonmembers, in a quest for economic and social justice.” […] Added Robert Walsh, the executive director of the National Education Association of Rhode Island: ”The idea has been around for years – probably before Gina was Treasurer [and] dating back to the first pension lawsuit. “I think it makes sense either on a stand-alone basis or as part of a larger settlement but no discussions are ongoing that I am aware of, but the retiree group has its own steering committee and lawyer,” Walsh said. “On the bigger issue, I support the resumption of settlement discussions and if there are ideas such as income tax relief on pensions and Social Security that will help resolve the issue they should be fully explored,” Walsh said. “Until the lawsuits are resolved it will be hard to focus on other issues, so a comprehensive settlement would be good for all concerned.”

Unions aren’t the only ones championing the waiver on retirement income. State lawmakers are looking for ways to make Rhode Island friendlier to retirees, although they remain non-committal on specific proposals. According to the Providence Journal:

House and Senate leaders just this week cited tax relief for retirees as one of their top priorities for the new legislative session that will begin in January. […] This was the response from House Speaker Nicholas Mattiello’s spokesman on Friday, when asked if Mattiello had [a waiver] in mind when he pledged on Thursday to seriously consider the exemption of state taxes on pension and other retirement income: “He said the intent of the legislation he is looking closely to enact is to help all retirees and has nothing to do with the pension lawsuit. He said any consideration of the pension lawsuit would be dealt with independently.” When asked Friday where she stood on a state tax exemption for retirement income, Governor-elect Gina Raimondo said she would need to see specifics before she could evaluate the proposal.

In Rhode Island, out-of-state government pensions are fully taxed as income. Photo by John Morgan via Flickr CC License

Lowenstein: Do Pension Fund Make Investing Too Complex?

Former New York Times financial writer Roger Lowenstein wonders in his new Fortune column whether pension investments have become too complex.

Lowenstein’s thesis:

Pricey consultants have convinced many pension funds to pile into private equity, real estate and hedge funds, which don’t necessarily promise higher returns or long-term investing.

[…]

[Pension funds] have assembled portfolios that are way too complex, way too dependent on supposedly sophisticated (and high fee) investment vehicles. They have chased what is fashionable, they have overly diversified, and they have abandoned what should be their true calling: patient long-term investing in American corporations.

[…]

It’s true that the stock market doesn’t always go up. But a long-term investor shouldn’t be wary of volatility. Over the long term, American stocks do go up. And state pension systems should be the ultimate long-term investors; their horizon is effectively forever.

Lower volatility helps fund managers; they don’t like having to explain what happened in a bad year. But it is not good for their constituents. The Iowa system has trailed the Wilshire stock index over 10 years—also over five years, three years, and one year. Over time, that translates to higher expenses for employees or for Iowa taxpayers. And Iowa is typical of public funds generally.

[…]

Many hedge funds trumpet their ability to dampen volatility. Pension funds should not be in them. From 2009 to 2013, a weighted index of hedge funds earned 8% a year, according to Mark Williams of Boston University. The return on the S&P 500 was more than twice as much, and a blended 60/40 S&P and bond fund earned 14%. Granted, a small minority of hedge funds consistently beat the index. But most public pensions will not be in such superlative funds.

Lowenstein on private equity:

Private equity remains the rage. However, private equity is hugely problematic. Those confidential fees are often excessive—with firms exacting multiple layers of fees on the same investment.

Moreover, there is no reliable gauge of returns. Private equity firms report “internal rates of return.” These do not take into account money that investors commit and yet is not invested. “The returns are misleading,” says Frederick Rowe, vice chairman of the Employee Retirement System of Texas. “The professionals I talk to consider the use of IRRs deceptive. What they want to know is, ‘How much did I commit and how much did I get back?’”

Since no public market for private equity stakes exists, annual performance is simply an estimate. Not surprisingly, estimates are not as volatile as stock market prices. But the underlying assets are equivalent. A cable system or a supermarket chain does not become more volatile by virtue of its form of ownership.

The fact that reported private equity results are less volatile pleases fund managers. But the juice in private equity comes from its enormous leverage. Pension managers would be more honest if they simply borrowed money and bet on the S&P—and they would avoid the fees. And if high leverage is inappropriate for a public fund, it is no less inappropriate just because KKR is doing it.

Lowenstein ends the column with a call for pension funds to renew their focus on “long-term goals”:

With their close ties to Wall Street, pension managers tend to be steeped in the arcane culture of the market. The web site for the Teacher Retirement System of Texas refers to its “headlight system” of “portfolio alerts” and the outlook for the U.S. Federal Reserve and China.

Managers who think in such episodic terms tend to be traders, not investors. This subverts the long-term goals of retirees.

The focus on the short and medium term squanders what a pension fund’s true advantage is. You may not have thought that public funds had an advantage, but they wield more than $3 trillion and have the freedom to invest for the very long term.

Better than chase the latest “alternative,” pensions could become meaningful stewards of corporate governance—active monitors of America’s public companies. A few fund managers, including Scott Stringer, the New York City comptroller, who oversees five big funds, are moving in this direction, seeking board roles for their funds. More should do so, but that will require an ongoing commitment. It will require, in other words, that pension funds stop acting like turnstile traders and fad followers, and that they start behaving like investors.

Read the entire column here.

Photo by Victoria Pickering via Flickr CC License

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