Ted Ballantine | Pension360

Detroit Bankruptcy Judge Asks: Why Should City’s Pensioners Should Get Better Treatment Than Its Creditors?

Closing arguments are underway in Detroit’s bankruptcy trial. But even if the trial is almost over, the drama isn’t.

Judge Steven Rhodes wondered aloud on Monday whether the city’s pensioners were getting more favorable treatment than its creditors – pension benefits were cut as part of the bankruptcy deal, but those benefits could be restored in the future.

From the Detroit Free Press:

Judge Steven Rhodes today pressured Detroit’s bankruptcy attorneys to justify better treatment for pensioners than financial creditors, making for an unexpectedly dramatic exchange during closing arguments of the city’s historic bankruptcy trial.

In a discussion of the complicated math underpinning the city’s financial projections, Rhodes noted that pensioners could eventually get all their pension cuts restored if the city’s pension investments perform well over the next several years.

“Tell me why that isn’t a 100% recovery,” Rhodes told Detroit bankruptcy lawyer Bruce Bennett.

“The math gets a little tricky here,” Bennett responded.

The exchange underscores the importance of the unfair discrimination issue in Detroit’s bankruptcy. Although all major creditors have struck settlements, bond insurers Syncora and Financial Guaranty Insurance Co. (FGIC) argued earlier in the case that pensioners were getting extraordinarily favorable treatment.

[…]

Bennett said the largely amicable [pension] plan is “very remarkable” after a tumultuous negotiation period with retirees, insurers, bondholders and unions.

“We had litigation with everybody about something,” Bennett said.

He said the plan of adjustment is feasible and concluded that raising taxes to pay off debts was not workable, in part because the city has reached its legally allowable property tax rate.

“It’s frankly easy to decide taxes should not be increased. The harder question is, should taxes be reduced?” Bennett said.

Core to the city’s bankruptcy restructuring plan is the grand bargain, which Bennett defended. The plan aims to shield the city-owned Detroit Institute of Arts from having to sell masterworks while also providing the equivalent of $816 million to reduce pension cuts to city workers and retirees.

As part of Detroit’s bankruptcy, civilian pensioners accepted 4.5 percent cuts to monthly benefits and the elimination of COLAs.

Police and Fire retirees saw their COLAs reduced from 2.25 percent to 1 percent.

Inside Arkansas Pension’s Farmland Portfolio

Money managers, venture capitalists and institutional investors are increasingly donning their straw hats and getting to work in rural America.

Investments in farmlands have been on the rise. The Arkansas Teachers’ Retirement (ATRS) System, for example, has invested $73 million in farmland in the last four years.

Arkansas Business takes a peek inside ATRS’ rural investments:

“To us, farmland is like a pure Arkansas-flavored investment,” said George Hopkins, ATRS executive director. “Our only regret is that we weren’t there 10 years ago.”

The state’s largest pension fund has invested about $73 million in 14,580 acres of cropland since it began building its roster of farm holdings four years ago.

ATRS owns nine farm properties scattered from Indiana to Idaho and from Wisconsin to Florida.

The May acquisition of Dawson Farms added a new crop to a roster that includes organic oranges, sugar beets, barley, alfalfa, kidney beans and popcorn as well as mainstays such as rice, wheat, corn and soybeans.

ATRS intends to allocate up to 1 percent of its nearly $14.7 billion-asset investment portfolio to agriculture property.

“We think that’s 1 percent that will provide quality returns over time,” Hopkins said.

The agri properties are a subset of the pension fund’s $1.6 billion real estate segment. The biggest chunk of that is almost $1.2 billion worth of retail, office, industrial and apartment investments. Timber property accounts for about $347 million more.

ATRS has adopted the low-risk role of landlord with its farm investments. Purchased for cash, the properties are leased for crop production that generates a reliable flow of income.

Why farmland? ATRS explains:

ATRS officials began to explore agriculture property as an avenue to further diversify its investments in early 2010.

“It’s not uncommon for people to ask us to look at doing this or doing that and investing with them,” Hopkins said. “Along the way, we were asked, ‘Have you ever thought about investing in agriculture?’

“After a while it became clear we needed to be investing in farmland. It’s a great inflation hedge, a slow and steady performer that is outside the stock market.”

Here’s a summary of ATRS’ farmland portfolio:

	Investment	Acres	Primary Crops
Bridge Farm, Idaho	$16.2 million	4,241	Barley, sugar beets
Dundy Farm, Nebraska	$11.8 million	2,317	Wheat, corn, kidney beans, popcorn
Darlington Ridge Farm, Wisconsin	$10.9 million	1,537	Alfalfa, corn
Duvall Farm, Cross County	$9.9 million	2,801	Soybeans, rice
Dawson Farms, Louisiana	$8.2 million	1,596	Sweet potatoes, corn, soybeans
80 Foot Road Grove Farm, Florida	$6.6 million	463	Organic oranges
Wright Farm, Indiana	$5.8 million	854	Corn, wheat
Miller Farm, Prairie County	$3.1 million	771	Soybeans, rice
Total	$73.2 million	14,580

Photo credit: Arkansas Business

New York Comptroller Candidates Spar Over Private Equity Pension Investments

In the race for New York State Comptroller, incumbent Thomas DiNapoli is guarding a comfortable 20-point lead in the polls.

But his challenger, political unknown Bob Antonacci, isn’t holstering his guns quite yet.

Both candidates over the weekend sparred about the place of private equity in New York’s pension portfolio.

Under DiNapoli, New York’s Common Retirement Fund (CRF) allocates 8 percent of assets to private equity. Antonacci thinks that’s far too much.

From the New York Post:

DiNapoli’s challenger in the state comptroller’s race warned that private-equity investments look good now, but can turn bad very quickly.

“Private-equity investments can be very risky,” says Republican Bob Antonacci.

He agrees that it is a good idea to diversify state retirement portfolios beyond stocks and bonds. But 8 percent in private equity is excessive, he says.

“I think the problem is that he (DiNapoli) is putting too much emphasis on risky investments,” Antonacci said.

He added that the comptroller is seeking out chancier investments because his goal is to obtain a 7.5 percent return a year. That, Antonacci adds, is an unrealistic expectation.

“We are taking chances on getting returns that aren’t going to be there in the long run,” Antonacci says.

DiNapoli’s office responded:

“The comptroller sees private equity as diversifying the investment portfolio and getting better investment returns,” says DiNapoli spokesman Matthew Sweeney.

[…]

The recent numbers show that using private equity reduces risk through portfolio diversification, DiNapoli’s spokesman said. That, he adds, reduces risk.

New York State and Local Retirement Systems earned 14.9 percent over the past decade on the private equity part of the investments, according to a new report from the Private Equity Growth Capital Council (PEGCC).

The State Comptroller oversees $181 billion in pension assets. Recent polls have DiNapoli leading Antonacci, 58 percent to 31 percent.

Photo by Awhill34 via Wikimedia Commons

Video: California CIO On Why He Thinks Divesting From Hedge Funds Doesn’t Make Sense

The above video features Sean Bill, CIO of Santa Clara Valley Transportation Authority and trustee for the City of San Jose. During the interview, he touches on CalPERS’ hedge fund exit, why he thinks the move was “political”, and the difficult of handling investments in-house.

Video from Chief Investment Officer magazine.

Do Older Americans Have Enough Money Saved To Last Through Retirement? An Analysis

Do older Americans have enough money saved to last through retirement? It’s a question asked often, but a definitive answer is hard to come by.

An article published in the October issue of Pension Benefits takes aim at answering that question using a metric called the Retirement Readiness Rating (RRR), developed by the Employee Benefit Research Institute.

The analysis, which originally appeared in the EBRI’s June newsletter, was conducted using several different scenarios; the first scenario and the resulting analysis can be seen in Figure 1, above. More on the results:

Figure 1 shows the results assuming that 100 percent of the simulated deterministic expenses are met; in other words, 100 percent of the average expenses (based on post-retirement income) for components likely to be encountered on a regular basis (e.g., food, housing, transportation). In addition to these relatively predictable expenses, the stochastic costs arising from nursing home and home health-care expenses are assumed to be covered in years when the model simulates their existence.

Note that in Figure 1, while 5 percent or less of those in the second-, third-, and highest-income quartiles would run short of money in the first year of retirement, more than 2 in 5 (43 percent) of those in the lowest-income quartile would, based on deterministic and stochastic costs. Moreover, by the 10th year in retirement (assuming retirement at age 65), nearly 3 in 4 (72 percent) of the lowest-income quartile households would run short of money, while fewer than 1 in 5 (19 percent) of those in the second-income quartile would face a similar situation. Only 7 percent of those in the third-income quartile and 2 percent of those in the highest-income quartile are simulated to run short of money within a decade.

By the 20th year in retirement (again, assuming retirement at age 65), more than 4 in 5 (81 percent) of the lowest income quartile households would run short of money, compared with 38 percent of those in the second-income quartile that would face a similar situation. Only 19 percent of those in the third-income quartile and 8 percent of those in the highest-income quartile are simulated to run short of money by the twentieth year. These values continue to increase until all households either run short of money or there are no surviving retirees. By the 35th year in retirement (age 100, assuming retirement at age 65), 83 percent of the lowest-income quartile households would run short of money and almost half (47 percent) of those in the second-income quartile would face a similar situation. Only 28 percent of those in the third-income quartile and 13 percent of those in the highest income quartile are simulated to run short of money eventually.

A summary of the full results:

The results presented in Figures 1 through 6 show that the years of retirement before Baby Boomer and Gen Xer households run short of money vary tremendously by:

Preretirement-income quartile.

The percentage of average deterministic costs assumed paid by the household.

Whether or not nursing home and home health-care expenses are included in the simulation.

However, even when 100 percent of average deterministic costs are paid by the household and nursing home and home health-care expenses are included (Figure 1), only the households in the lowest-income quartile eventually end up with a majority of the households running short of money during retirement.

Each of the six analyses with results presented in Figures 1 through 6 show the same stark conclusion: The lowest preretirement income quartile is the cohort where the vast majority of the shortfall occurs, and the soonest. When nursing home and home health-care expenses are factored in (Figures 1, 3 and 5), the number of households in the lowest-income quartile that is projected to run short of money within 20 years of retirement is considerably larger than those in the other three income quartiles combined. Indeed, as the results across multiple scenarios and assumptions show, the lowest-income quartile is the most vulnerable, while longevity and long-term care are the biggest risk factors across the entire income spectrum.

The full analysis, including all six scenarios, can be read in the October issue of the Pension Benefits, or the EBRI’s June newsletter.

Think Tank: Blame Pension Costs For The 140 Tax Increases On California’s Ballot

When Californians go to vote on November 4, they will find a ballot stuffed with tax hikes. There will be 140 different proposed tax increases on ballots across California. Is there a reason behind the surge?

Mark Bucher, president of the California Policy Center, thinks he knows the reason. In a new column he says voters need look no further than pension costs. From Bucher’s column in the Sacramento Bee:

Tax-weary Californians looking to explain this paradox need look only to former Vernon (population 114) city administrator Bruce Malkenhorst for an answer.

Malkenhorst received a $552,000 pension in 2013, according to just-released 2013 CalPERS pension data on TransparentCalifornia.com.

[…]

Malkenhorst is part of a growing number of 99 California retirees who received at least half-million-dollar pension payouts in 2013, up from four in 2012. Such lucrative pensions mean that in 2014, California will spend approximately $45 billion on pensions, equaling total state and local welfare spending for the first time. And in the zero-sum game of government spending, an extra dollar spent on pensions means one less spent on welfare, infrastructure or safety – or returned to the taxpayer.

Though Malkenhorst and his ilk personify California’s pension profligacy, they do not drive it. That distinction goes to the 40,000 California retirees who took home pensions greater than $100,000 in 2013.

These are the pensions of Susan Kent, a retired Los Angeles city librarian, who took home a $137,000 pension in 2013. And Thomas Place, a retired San Joaquin court reporter, whose pension was $105,000. And, Betty Smith, a retired Alameda nurse, who received $116,000.

Anecdotal evidence aside, more tax dollars than ever are going toward paying pension costs. From Bucher:

Six-figure pensions for mid-level public servants have brought the state to the point where one out of every nine state and local tax dollars goes to pay for pensions. That’s up from one in 16 tax dollars in 1994. Tax increases now do not increase government services, but simply service government pensions.

And these compensation figures do not include five-figure health benefit obligations, which will only increase as the population ages and health care costs inflate. Bankrupt Stockton, where city employees who worked as little as one month receive a lifetime of retiree health benefits (including spousal coverage), is already paying this price.

Barring pension reform, Stockton – where one in five tax dollars will soon go to pensions – is a harbinger of things to come for other California cities that find themselves at some point on Stockton’s adverse pension spiral: Big pension obligations mean fewer tax dollars for services like safety and infrastructure, driving away taxpayers and increasing pension burdens further. Hence the need for yet more tax increases.

But taxpayers are having trouble keeping up: California pension funds are currently only 74 percent funded. And this is an optimistic estimate given that pension funds assume a very high rate of return of about 7.5 percent per year, an ambitious goal in this investment climate. For every 1 percent this projection drops, California taxpayers must contribute $10 billion more per year to maintain the same funding level, according to a recent analysis by the California Policy Center, using investment formulas provided by Moody’s Investors Service.

The entire column can be read here.

Omaha Hit With Credit Downgrade As Pension Liabilities Increase

Moody’s downgraded Omaha’s credit rating from Aa1 to Aa2 on Thursday, citing “pension costs” as a major driver of the downgrade.

Moody’s did give the city a “stable” outlook, but admitted that pension costs are “not expected to moderate in the near future.”

Factors that played a part in the downgrade, according to the Moody’s report:

CHALLENGES

– Large and growing unfunded pension liabilities, persistent underfunding of ARC

– High fixed operating costs arising from pensions, debt service, and OPEB

– Protracted union negotiations likely to require retroactive expenses

Factors that could drive the city’s rating up, or further down, from the report:

WHAT COULD CHANGE THE RATING- UP

-Significant progress to reduce the city’s long-term pension and OPEB liabilities

-Reduction in fixed cost burden to the city’s budget

WHAT COULD CHANGE THE RATING – DOWN

-Failure to achieve significant progress towards reducing long term liabilities

Omaha Mayor Jean Stothert released a statement addressing the downgrade. From WOWT News:

“Omaha’s bond rating is still better than 80% of all US cities,” reads a news release from the Mayor’s Office.

[…]

“This bond rating shows we still have a lot of work to do in reforming our public employee pensions,” says Mayor Jean Stothert. “Our unions must realize the severe consequences of delays, inaction and failure to accept reasonable contract offers.”

Photo credit: “Omaha skyline humid day” by Mawhamba. Licensed under Creative Commons Attribution-Share Alike 2.0 via Wikimedia Commons

CalPERS May Have Approved Special Pay Items Without Doing The Math On Cost

CalPERS recently approved a list of 99 “special pay items”, or bonuses given to workers whose jobs meet certain requirements.

But a report from the Los Angeles Times suggests that CalPERS approved the items without knowing how much they would cost.

From the LA Times:

CalPERS repeatedly told The Times it didn’t know how much the bonuses were adding to the cost of worker pensions even though cities submit detailed pay and bonus information that is used to calculate retirement pay.

Even a small bump in salary can cause a public agency’s pension costs to soar. An increase of $7,850 to a $100,000 salary can amount to an additional $118,000 in retirement if the employee lived to 80, according to an analysis by the San Diego Taxpayers Assn., a watchdog group that scrutinizes city finances.

Fitch, a Wall Street rating firm that weighs in on the financial health of governments, warned that the pension fund’s vote would burden cash-strapped cities.

“Cities and taxpayers will undeniably face higher costs,” said Fitch analyst Stephen Walsh. “Pensions are taking a bigger share of the pie, leaving less money for core services.”

[…]

At The Times’ request, CalPERS analyzed salary and bonus costs for Fountain Valley — one of hundreds of cities and public agencies that award pension-boosting bonuses to workers.

CalPERS found the Fountain Valley perks could hike a worker’s gross pay as much as 17%. About half the city’s workforce received the extra pay that will also increase their pensions, most of them police and fire employees.

CalPERS’ response to the report:

CalPERS executives said they don’t understand the anger caused by the board’s vote. The action simply clarifies the 2012 reform law, which was designed to stem rising pension costs, said Brad Pacheco, a spokesman for the agency.

CalPERS always assumed that new employees would continue to benefit from bonuses just as those hired earlier did, Pacheco said. The reform law is still estimated to save taxpayers $42 billion to $55 billion over the next 30 years, he said.

“It’s far-stretched to say this is a rollback of reform,” Pacheco said. “We implement the law as it was written, not how others wish it were written.”

The special pay items passed a vote from the CalPERS board, but some board members have voiced their displeasure for the rules, according to the LA Times:

State Treasurer Bill Lockyer and state Controller John Chiang both complained about the pension boosters but said they had little choice but to approve them.

“Many of the items on this premium pay list are absolutely objectionable,” said Tom Dresslar, a spokesman for Lockyer. But frustration, he said, “needs to be directed to the proper place, which is the public agencies that negotiated the perks through collective bargaining agreements.”

All of Pension360’s coverage of CalPERS’ special pay items can be read here.

New Jersey Anti-Pay-To-Play Bill Passes Senate

The New Jersey Senate on Thursday approved a recently introduced piece of legislation that would tighten rules regarding political donations made by investment firms vying for business from the state’s pension funds.

The bill, called S-2430, passed by a vote of 25–8.

Kentucky Bill Aims To Increase Transparency, Accountability In Retirement System

Kentucky State Rep. Jim Wayne has introduced legislation that would infuse a ray of transparency into the state’s retirement systems, including KRS, a system oft criticized for its opaque practices.

From the Independent:

The legislation, Bill Request 91, would require state-administered retirement systems to operate under the state procurement laws, which includes making contracts public. It would also prohibit the use of placement agents, intermediaries who have been involved in pay to play scandals in other states.

The legislation also seeks to tighten requirements for KRS board members appointed by the governor to ensure they have appropriate investment expertise. The current low-qualified “investment experts” on the board refused to comment on any investment issues for the Kentucky Center for Investigative Reporting story, Wayne said. He added the two investment experts on the board need to be knowledgeable, independent and willing to be accountable to the public.

[…]

“The current model smacks of the good ol’ boy system,” said Wayne, D-Louisville. “The system is closed. A small group decides behind closed doors who gets to manage billions of dollars in public money and what they’ll get paid for it, no questions allowed. That’s just way to chummy for my tastes.”

The urgency for such legislation was illustrated after two journalism organizations investigating the pension plans during the summer were denied information on fees and even the names of individual managers, Wayne said.

The Lexington Herald-Leader reported June 14 that KRS spent at least $31 million on managers of hedge funds, private equity, real estate and other “alternative investments” that hold just one-fourth of the system’s $15 million in assets and produced its lowest returns.

A July 24 report by the Kentucky Center for Investigative Reporting in Louisville found KRS potentially spent $156 million in mostly undisclosed fees to these “alternative investments.”

Wayne added one more comment:

“The health and well-being of public employee retirement systems should not be shrouded in mystery,” said Wayne. “No one should be required to invest their hard-earned money in a system that is not fully transparent. Not only should public employees know if the systems are financially stable, the taxpayers should also know.”

The Kentucky Retirement Systems holds $16 billion in assets and is about 45 percent funded, although certain parts of the system are unhealthier.

KRS allocates about 35 percent of its assets toward alternative investments, including real estate; the nationwide average is 25 percent, according to data from Cliffwater LLC.

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