Ted Ballantine | Pension360

San Bernardino Sets Aside $10.6 Million To Repay CalPERS

When San Bernardino went bankrupt, it stopped paying its creditors, including its biggest one: CalPERS.

It suspended pension payments to the country’s biggest retirement system for a full year – those payments totaled $13.6 million.

Now, the debts have come due: San Bernardino will set aside $10.6 million from its budget this fiscal year to pay back CalPERS.

From Reuters:

Bankrupt San Bernardino has begun repaying millions in arrears to the California Public Employees’ Retirement System (Calpers) in a deal that has ended an acrimonious relationship between the California city and its biggest creditor.

San Bernardino has set aside $10.6 million in its current budget, which has yet to be published, to pay an unnamed creditor. A senior city source, speaking on the condition of anonymity because details of the Calpers deal are subject to a judicial gag order, confirmed that creditor is Calpers.

San Bernardino suspended the payment of debts to all creditors when it declared bankruptcy. Its decision to strike a deal with Calpers first, and begin paying arrears before a bankruptcy exit plan could be formulated, shows the reluctance of California cities to take on the pension giant, which insists that it must always be paid in full, even in a bankruptcy.

The city declared bankruptcy in August 2012 and suspended its employer payments to Calpers for an entire year after entering Chapter 9 protection, running up principal arrears of $13.5 million, according to Calpers.

San Bernardino began monthly payments of between $600,000 and $700,000 to Calpers in July, according to the source. A second official, budget officer for the city Dixon Mutadzakupa, confirmed that arrears payments to Calpers had begun.

It wasn’t clear whether the city was only on the hook for $10.6 million. If that were the case, San Bernardino would only be paying CalPERS 80 percent of what it owes.

It’s also possible the city could pay the remaining $3 million during the next fiscal year.

Implications for Pension Investments As Elections Put Ex-Financial Firm Executives in Office

The results of several state-level elections could have implications for pension fund investments as three ex-financial firm executives became their states’ respective governors.

David Sirota writes:

Wall Street firms and executives have poured campaign contributions into states that have embraced the strategy, eager for expanded opportunities. Tuesday’s results affirmed that this money was well spent: More public pension money will now likely be entrusted to the financial services industry.

In Illinois, Democratic incumbent Pat Quinn was defeated by Republican challenger Bruce Rauner, who made his fortune as one of the namesakes of Golder, Thoma, Cressey & Rauner (GTCR) – a financial firm that manages more than $40 million of the state’s $50 billion pension system. Rauner — who retains an ownership stake in at least 15 separate GTCR entities, according to his financial disclosure forms— will now be fully in charge of the pension system.

In Rhode Island, venture capitalist Gina Raimondo, a Democrat, defeated Republican Allan Fung. Raimondo retains an ownership stake in a firm that manages funds from Rhode Island’s $7 billion pension system. Raimondo’s campaign received hundreds of thousands of dollars from financial industry donors. She was also aided by six-figure PAC donations from former Enron trader John Arnold, who has waged a national campaign to slash workers’ pensions. Fung slammed Raimondo as a tool of Wall Street, but she eked out a victory after a libertarian-leaning third party candidate, Robert Healy, unexpectedly siphoned votes away from Fung.

In New York, Gov. Andrew Cuomo, a Democrat, handily defeated his Republican opponent, Rob Astorino, after raising millions of dollars from the finance industry. The New York legislature is set to send Cuomo a bill that would permit the New York state and city pension funds to move an additional $7 billion into hedge funds, private equity, venture capital, real estate and other high-fee “alternative” investments. Assuming the standard 1 to 2 percent management fees applies, that could generate between $70 million and $150 million a year in fresh fees for Wall Street firms.

Cuomo has not taken a public position on the bill, but his party in the legislature passed it by a wide margin, and he is widely expected to sign it into law.

In Massachusetts, Republican Charlie Baker appeared early Wednesday to have secured a narrow victory over Massachusetts Attorney General Martha Coakley. Baker was a board member of mutual funds managed by a financial firm that also manages funds from Massachusetts’ $53 billion pension system. Baker is also the subject of a New Jersey investigation over his $10,000 contribution to the New Jersey State Republican Party just months before New Jersey Gov. Chris Christie’s officials awarded his firm a state pension deal. Christie, whose Republican Governors Association spent heavily to support Baker’s campaign, blocked the release of documents related to that investigation until after the election.

Read the full analysis here.

Photo by Keith Ivey via Flickr CC License

Voters Reject Phoenix Pension Overhaul

http://youtu.be/8GC0bEBzJ-g

The controversial Phoenix ballot measure Proposition 487, which would have transferred all the city’s non-public safety new hires into a 401(k)-style system, has been struck down by voters.

From Reuters:

In a big victory for city labor unions, voters rejected Prop. 487 by a margin of 56.5 percent to 43.5 percent, according to results posted online by the Maricopa County Recorder/Elections Office.

The measure proposed to end the city’s traditional defined-benefit pension plan for new workers, shifting them to a plan dominant in the private sector, with employees pay a far greater share of the cost. Existing workers could have kept their current pensions.

The initiative was one of this year’s biggest test cases pushed by pension-reform advocates, including Texas billionaire and former Enron executive John Arnold, who have argued that traditional pension plans are an increasingly unaffordable burden for cash-strapped state and local governments.

The measure, by the city council’s own admission, would have cut retirement benefits significantly for new hires.

The city’s non-public safety pension fund is 64.2 percent funded.

Knoxville Voters Approve All 5 Pension Measures on Ballot

There were five separate pension measures on the Knoxville ballot yesterday – and voters approved all five by a large margin.

The measures weren’t as far-reaching as more controversial reform initiatives such as Phoenix’s Proposition 487.

But they still introduce changes to Knoxville’s retirement system. Among the changes: more investment options for workers covered by the city’s defined-contribution plans and the appointment of finance and accounting experts to the city’s pension board.

The five measured, explained by WBIR:

No. 1: Better clarifies some terms and is essentially nothing more than housekeeping and cleaning up language.

No. 2: Gives city leaders the authority to consider granting retirees the option to take a single lump payment when they retire rather than receiving monthly payments. Note that it doesn’t automatically grant officials the option, but rather the chance to study whether they want to do it.

No. 3: Could lead to those employees covered under a contribution plan (think: 401K) to have a say in how their dollars are invested. Or at least there could be more options than what the city currently sets aside for them.

No. 4: This amendment…says that only the retiree’s spouse would be eligible for his/her retirement benefits. Right now, children and grandchildren can get them.

No. 5: This amendment…would add two new spots to the pension board. The new members would have to have expertise in finance and accounting, they would have to be city residents and they could not be city employees or folks who receive pensions from city employees.

The specific language of the measures can be found here.

Photo by Elektra Grey Photography

Ontario Teachers’ Pension Finalizes Deal to Buy DTZ

The Ontario Teachers’ Pension Plan is part of a group of investors that bought Chicago-based property services firm DTZ this week, according to a DTZ release.

The deal was announced in June but was only completed this week.

From the DTZ release:

DTZ, a global leader in property services, today confirmed the close of its sale to the private investment consortium of TPG Capital (TPG), PAG Asia Capital (PAG) and Ontario Teachers’ Pension Plan (the TPG & PAG Consortium), and its beginning as an independent, privately owned global property services company.

“Today’s dynamic business environment holds both opportunities and challenges for our clients. DTZ is a progressive partner who understands their needs and can deliver tailored solutions wherever they do business, while offering the client experience of a smaller, more nimble and more tenacious organization.”

DTZ will continue to operate under the DTZ brand and its seasoned executive leadership team. Brett White, former Chief Executive Officer of CBRE Group, will begin serving as full-time Executive Chairman of the new company in March 2015. Tod Lickerman will continue in his current role as Global Chief Executive Officer of DTZ and report to Brett White.

“DTZ now has the independent governance, strong capital base and speed-to-market of a private company, which will allow us to grow and serve our clients’ ever-changing needs,” said Tod Lickerman. “Today’s dynamic business environment holds both opportunities and challenges for our clients. DTZ is a progressive partner who understands their needs and can deliver tailored solutions wherever they do business, while offering the client experience of a smaller, more nimble and more tenacious organization.”

DTZ’s new capital structure and strong financial backers better positions DTZ to make continued investments to expand its capabilities and offer clients a complete suite of services in every major market around the world. In September, an affiliate of DTZ Investment Holdings (backed by the TPG &PAG Consortium) announced it had entered into an agreement to acquire Cassidy Turley, with plans to combine it with the DTZ business during 2015. The acquisition of Cassidy Turley is expected to be completed by December 31, 2014.

The Ontario Teachers’ Pension Plan manages $140.8 billion in assets.

New Mexico Pension Grants Staff Authority to Pull Trigger on Some Alternative Transactions

The pension fund that manages assets for New Mexico’s teachers and professors disclosed this week it has given investment staff a bit of new authority: the ability to execute transactions on alternative secondary markets.

Reported by Pensions & Investments:

New Mexico Educational Retirement Board, Santa Fe, delegated general, ongoing authority to the staff to execute transactions on the alternative investment secondary markets “when it is deemed appropriate by staff and the asset class consultant,” said Bob Jacksha, chief investment officer of the $11.2 billion pension fund, in an e-mail.

This is blanket authority across all non-publicly traded asset classes, Mr. Jacksha said.

“Secondary transactions are difficult to execute in the traditional committee approval structure/timetable,” Mr. Jacksha wrote. “This authority is in recognition of that fact. It is expected to be used sparingly.”

The authority is not attached to any one specific transaction, Mr. Jacksha said.

The pension fund had $271 million in private real estate and $849 million in private equity as of June 30.

The New Mexico Educational Retirement Board manages $11.2 billion in assets for 132,000 members.

Teacher Group: Illinois Pension Reform Is “Direct Violation” of Lawmakers’ Oath of Office

Last week, the Illinois State Journal-Register published a piece by Ty Fahner exalting the state’s pension reform law and detailing the consequences that would face Illinois in the wake of a court rejection.

Now, the newspaper has published a rebuttal from Bob Pinkerton, president of the Illinois Retired Teachers Association.

The letter reads:

“What if pension reform is rejected?”

These words were written by Ty Fahner, president of the Civic Committee of the Commercial Club of Chicago, sometimes referred to as the Millionaires’ Club.

The question should be, “What happens when the Supreme Court reminds us what the Illinois Constitution says in Article 13, Section 5, ‘… benefits, of which, cannot be diminished or impaired?’”

What does the legislature do when it is forced to acknowledge the pension reform lawmakers voted for is in direct violation to their oath of office?

Mr. Fahner writes, “A decade ago, only a small fraction of state revenues went to fund the pensions.”

This is the problem. Over the years, the legislature violated the laws they passed by skipping or reducing pension payments so they could afford new projects.

The state cannot expect retirees to fill the pension gap left by irresponsible lawmakers. It is not right that the legislature is now attempting to reduce benefits to pay for the past negligence of the state.

Over the years, no one complained when new programs were implemented without new revenues because stealing from the pensions seemed harmless to them at the time and these were available dollars already allotted in the state budget.

The bill is coming due for all those years of pension holidays. Illinois has the fifth-largest economy in the country. I believe we can figure out a way to pay our bills.

Read Ty Fahner’s original column here.

Are Pensions More Important To Retirement Security Than Data Shows?

Alan L. Gustman, Thomas L. Steinmeier and Nahid Tabatabai have authored a paper exploring the possibility that the importance of pensions, and the financial support they provide retirees, is understated in retirement income data.

The paper, titled “Mismeasurement of Pensions Before and After Retirement”, was published in the Journal of Pension Economics and Finance.

From the paper:

There are a number of reasons why the value of pensions after retirement may be underestimated, especially if evaluation is based on sources of income realized in retirement. First, not all pensions are in pay status, even after the person leaves the pension job. When a pension is not in pay status, it is commonly ignored in questions related to pension incomes. Even when a pension is in pay status, a survey may not include income from the pension. For example, as pointed out by Anguelov, Iams and Purcell (2012), CPS data on pension incomes in retirement count only annuitized income, but not irregular income from pensions, such as periodic withdrawals from 401k accounts. This is an important problem because funds in DC pension accounts often are not claimed until the covered worker reaches age 70, when withdrawals are mandated. Indeed, a disproportionate amount of benefits may not be withdrawn until even later.

The paper provides further reason that survey data may not accurately portray pension benefits received by retirees:

Another factor is that actual benefit payments may be reduced from the pension called for by the simple benefit formula advertised by the firm when an annuity is chosen that differs from the single life annuity emphasized by plan. For example, the annuitized benefit will be reduced when, as required by law, a spouse or survivor benefit is chosen. The reduction will depend on the ages of each spouse and on whether the survivor benefit is half the main benefit, whether it is two thirds as in Social Security, or whether the annual benefit will remain unchanged upon the death of the covered worker. There may be further reductions if the retiree chooses a guaranteed minimum payout period.

To be sure, these differences in payout due to actuarial adjustments do not create actual differences in the present value of benefits. But one must know the details of the respondent’s choice as to spouse and survivor benefits and other characteristics of the annuity, and adjust using appropriate life tables. That is, a proper analysis would not just consider the annual pension payment, but would also consider the value of payments that will be made in future years to the surviving spouse. Typically these details are not available on a survey and no such adjustment is made.

The paper delves much deeper into this issue – read the full paper here.

Photo by www.SeniorLiving.Org

Survey: Pension Funds Disagree on Time Horizon of Long-Term Investing

The results of a new survey from IPE magazine reveal that the world’s pension funds agree they are long-term investors. But there is disagreement about what “long-term” actually means.

From Investments & Pensions Europe:

One-quarter of respondents to the Focus Group survey for the November issue of IPE said 3-5 years constituted a ‘long-term’ view, while nearly 78% of respondents considered themselves to be long-term investors.

Only one respondent rejected the label outright.

One UK pension investor pointed to the need for a long-term approach based on long-term liabilities, while an Austrian pension fund argued that it was important to take a generational view – at least when managing the assets of beneficiaries up until 45.

There was less agreement among the 36 European respondents, managing nearly €290bn in combined assets, as to what constitutes ‘long term’ when investing in public market assets.

More than one-third of pension investors said taking a 7-10 year view was long term, whereas nearly 14% believed the better definition was considering investments over the course of a business cycle.

One-quarter of funds said a 3-5 year time horizon was adequate, and 17% argued in favour of a generational view, spanning 15-25 years.

One respondent, a UK local authority scheme, said the long-term perspective manifested itself in asset allocation decisions, pointing to the development of emerging markets over the course of a generation.

The fund added: “Stock selection does tend to take a shorter view, and this is probably dysfunctional.”

A second UK corporate fund questioned whether the idea of long-term investing in public markets was compatible.

“The idea that long-term investment should be public market inherently seems to be at odds with long-term investing,” it said.

“Public markets are driven by short-term liquidity and [mark-to-market] ideology, which is anathema to long-term investing, which is about long-term, sustainable cash flows.”

Despite this, nearly half of respondents did not see a problem in finding external public market asset managers “willing and able” to invest for the long term, and only 9% rejected the notion out of hand.

One-quarter of respondents said asset managers could be found, but only for certain asset classes.

A Swedish investor blamed the regulatory environment, not asset managers.

“[The] main hassle is the short-term view of the regulator and new regulations where you value your liability against a short-term model,” it said.

A second Swedish investor concurred.

“If anything,” it said, “regulation is a problem – in particular, its tendency to change radically every 5-10 years.”

When asked which factors prevented long-term investing, 24% cited the regulatory environment and 21% the maturity of their liabilities.

Only 20% said the asset management industry’s unwillingness or skill was at fault.

One respondent cited the career risk of misguided long-term investments.

For more, see IPE’s analysis here.

International Organization Raises Questions About Governance, Oversight of UN Pension Fund

Last week, the Coordinating Committee of International Staff Unions and Associations (CCISUA) raised concerns to the UN General Assembly about governance problems at the UN pension fund.

The remarks were delivered by Ian Richards, President of CCISUA, a group composed of UN system staff unions and associations.

Concerns included the weakening of the methods by which pension staff can report fraud and abuses, the possible harassment of whistleblowers and other managerial issues.

The remarks from Ian Richards:

Let me end with a common system issue of great concern to us, the management of the pension fund, an item you are also considering today.

We welcome the decision of the fund’s board that it should continue to be administered by the UN Secretariat, ensuring that the necessary management controls can be maintained.

But we are concerned that the management team at the Fund is actively seeking waivers to four important elements of the staff regulations. If approved, we foresee reduced opportunities for qualified pensions experts in your countries to work at the Fund and a weakened ability of OHRM to check abuses of authority.

Firstly, management has requested exemption from the UN mobility policy as its functions are specialized. Yet, as you are aware, having passed the mobility policy in April, mobility already exempts specialized posts; this matter is moot.

Secondly, management wants discretionary authority to keep some staff beyond retirement, citing an IT project. Such discretion will remove incentives for workforce and succession planning and does not make strategic sense. The Fund’s new IT system will need to be implemented by staff who can stay on for years to come in order to manage and maintain it.

Thirdly, management wants to promote certain colleagues from the G to P categories without passing through the exam, an issue on which you may well have an opinion.

Finally, management has asked for the right to laterally assign staff in contravention of your own instructions, reiterated on many occasions, that all vacancies be advertised externally.

Distinguished delegates, all this is taking place in a UN department whose management recently issued a directive forbidding staff from reporting fraud to OIOS. We have also received reports of alleged threats against suspected whistleblowers. With $51 billion at stake, this is alarming. As Member States, ultimately responsible for the fund’s finances. I therefore trust that you will seriously examine these risks to the Fund.

The full remarks, which include a discussion of retirement age, can be read here.

They can also be seen starting at around the 31:30 mark of the following video:

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