Ted Ballantine | Pension360

How Would Phoenix Officials Handle The Up-Front Costs of Proposition 487?

In two weeks, Phoenix voters will decide the fate of Proposition 487 – the ballot measure that would close off the city’s defined-benefit plan from new hires and shift them into a 401(k)-style plan.

The plan, if passed, would cost the city millions up front – but the tradeoff, proponents of the plan say, is a more sustainable pension system.

There are ways to offset the initial cost of the plan. One option is to eliminate deferred compensation for workers.

Would city officials support eliminating deferred compensation as a cost-saving measure?

The Arizona Republic asked them:

We asked: If Prop. 487 is approved, would you support removing deferred compensation without providing employees its value in another form? Please explain.

“It is important to provide employees fair compensation and to ensure the city remains a competitive employer. With that said, should Prop. 487 pass, the city will comply with the law and not provide deferred compensation. However, I would not want to presume what the end point or other forms of compensation could or could not be. We are required to negotiate in a fair and neutral manner per our Meet and Confer ordinance and to do so without a predetermined outcome. The city would negotiate in good faith with employee groups as required and practice good labor relations practices.”

— Michael Nowakowski,District 7, southwest Phoenix and parts of downtown

“Yes. Prop. 487 lets current employees choose between their pensions or deferred compensation. They get to keep what they earned, but going forward, they can’t have both. Pensions are out of control — costs ballooned from $56 million in 2003 to $240 million in 2013. ‘Yes’ on Prop. 487 saves over $400 million by eliminating pension spiking and secondary retirement. This year, taxpayers saw a new water tax and cuts in police, after-school programs, seniors and libraries to fund the ballooning pension costs and $19 million in pension spiking. Prop. 487 treats employees and you fairly. Ask yourself, what do you get?”

— Sal DiCiccio, District 6, Ahwatukee and east Phoenix

“I support 487. We must end pension spiking, and the prohibitively expensive status quo. I have voted against all final labor contracts as a councilman. By the time the initiative kicks in, the current contracts would have 18 months to run. I believe we must honor the voters’ decision and meet our contractual obligations (even though I voted against the contracts) by re-opening the contracts to mitigate loss of deferred compensation. In subsequent negotiations in 2016 and beyond, we should take a much more realistic approach to negotiations. The ‘we’ve always done it this way’ approach to negotiation must stop.”

— Jim Waring, vice mayor (District 2), northeast Phoenix

“If deferred compensation is contained in contractual minutes — and rightfully owed to city employees — the city will be required to renegotiate its contract and provide payment in the form of wages. Ultimately, courts will decide the outcome at significant cost to taxpayers.”

— Thelda Williams, District 1, northwest Phoenix

Florida Pension Looks To Hire Bank For Collateral Management

Nearly a dozen banks are pitching their services to the Florida State Board of Administration (SBA), the entity that manages assets for the Florida Retirement System.

Reported by the Securities Lending Times:

Multiple banks are competing to provide the State Board of Administration of Florida with prime and collateral management services, it has been revealed.

The State Board of Administration of Florida, which manages the state’s public employees’ retirement savings, has received pitches from CitiGroup, Deutsche Bank, Newedge, Bank of America Merrill Lynch and Pershing for prime services.

State Street, BNY Mellon and CitiGroup have submitted pitches to provide collateral management services following the State Board of Administration of Florida’s request for proposals.

A spokesperson said that a decision on the providers is expected by the end of this week.

An explanation of the services the SBA is seeking, from Pensions & Investments:

Prime services include prime brokerage in short-selling of securities, foreign-exchange prime brokerage, as well as clearing for futures, options and over-the-counter derivatives, including swaps, according to the solicitation.

Collateral management includes margin collateral custody and management services related to prime services.

The SBA manages $180.3 billion in assets.

Virginia Pension Commits $200 Million To Industrial Properties

The Virginia Retirement System (VRS) is committing $200 million to a joint venture with LaSalle Investment Management that seeks to build industrial warehouses in the United States.

From IPE Real Estate:

The pension fund told IP Real Estate it was committing $200m in equity to the LaSalle VA Industrial JV.

The partnership will develop industrial warehouses in select US markets. Virginia would not comment on which markets the venture would focus on.

LaSalle said it would focus on opportunities to develop and lease large, modern distribution buildings in major population centres with strong transportation infrastructure.

LaSalle recently announced it had been awarded a mandate from a large US public pension fund, an existing client.

Jason Kern, chief executive of Americas at LaSalle, said end-user demand for industrial real estate is “very strong”, driven by growing GDP and global trade, as well as the need for “modern buildings part of an efficient supply chain”.

According to the firm’s research and strategy team, the availability rate for industrial supply has dropped 2.2% since the end of 2012 and 4.2% since 2010. LaSalle is forecasting annual rental growth of 3%. Internet retailing and larger multinational retailers’ focus on improving supply-chain efficiencies are also improving demand.

Virginia has existing exposure to industrial real estate, with 15.6% of its private real estate portfolio invested in the sector at June this year.

Real estate assets make up 10.5 percent of the VRS portfolio. The fund manages $65 billion of assets.

Auditors: Jacksonville Pension Officials May Be Skirting Payout Rules

Auditors and watchdog groups are asking questions about the “questionable benefits” of some members of the Jacksonville Police and Fire Pension Fund.

This comes in the wake of a Florida Times-Union investigation that claimed some of the system’s top officials, and active members, were breaking city rules by participating in the Deferred Retirement Option Program (DROP) even if they weren’t eligible.

From the Florida Times-Union:

The long-time chairman [Bobby Deal] of the troubled Jacksonville Police and Fire Pension Fund will collect $610,000 more in retirement funds than a strict interpretation of the law says he is entitled to, a Florida Times-Union investigation found.

Even more alarming to City Council members, city auditors and independent analysts is that Deal is not alone.

There is also former fire chief Richard Barrett, who was allowed into DROP even though he had passed the point of eligibility. And there is Richard Lundy, a former fire captain and business partner of Deal’s. Together they stand to receive more than $1.8 million in questionable benefits.

They are among what is expected to be potentially more than 1,000 former police officers and firefighters who were allowed to skirt the rules and participate in the DROP either too early or — like Deal — for longer periods than city law allows.

Most of the special arrangements allow employees into DROP prematurely, which has a negligible impact on the troubled pension fund. But others like Deal who participate longer than the city law states will end up costing taxpayers hundreds of thousands of dollars each in DROP payouts.

DROP payments are secondary pensions on top of regular pensions that sometimes stretch out for four to five decades.

Pension officials and city officials seem to disagree on what the rules have to say about DROP eligibility. From the Times-Union:

The police and fire pension fund’s executive administrator denies any favoritism or improper application of the law.

“It’s absolutely done properly,” John Keane said.

[…]

Under rules set up by the police and fire pension fund — and agreed to by the city in the late 1990s — an employee who already has worked 30 years is allowed to be in DROP for only three years. Workers with 20 years of service but fewer than 30 years are able to participate in DROP for the full five years. Those with 32 years of service may not participate in DROP at all.

Not so, says Keane.

Keane said it takes time to process paperwork and emphatically denies that rules were skirted for Deal or any other member.

“It’s like going out and catching an airplane; you have to go out and get a ticket before you can board the plane,” Keane said. “When you have 40 to 50 people signing up for the DROP, [all that paperwork] cannot be cleared in just a few days.”

[Jacksonville City Council auditor] Kirk Sherman said there is no quarrel about paperwork deadlines, only about eligibility and following the rules.

The Jacksonville Police and Fire Pension Fund is 43 percent funded.

Read the entire Florida Times-Union investigation here.

Alicia Munnell: Should Insurers Handle Public Pension Payouts?

Last month, Pension360 covered the Urban Institute’s ringing endorsement of a Congressional bill that would let local governments turn over the assets of their pension plans to insurance companies, who would then make payments to retirees.

Senator Orrin Hatch proposed the bill, called the SAFE Retirement Plan.

On Wednesday, another major pension player threw their opinion in the ring: Alicia Munnell, director of the Center for Retirement Research at Boston College.

She begins by outlining why the Urban Institute likes the plan, and why the Pension Rights Center doesn’t:

The folks at the Urban Institute think that this plan is terrific. They gave it an “A” under all seven of their criteria: 1) rewarding younger workers; 2) promoting a dynamic workforce; encouraging work at older ages; 4) retirement income for short-term employees; 5) retirement income for long-term employees; 6) making required contributions; and 7) the funded ratio.

Essentially it does not allow sponsors to underfund plans (items 6 & 7) and provides a more equitable distribution of benefits across participants’ age demographics. That is, young and short-term workers get more benefits and older workers have less incentive to retire than under a traditional defined benefit plan. With their criteria, the Urban Institute researchers would always give a higher grade to any type of cash balance or defined contribution plan than to the current defined-benefit plan.

The Pension Rights Center lumps the Hatch proposal with other de-risking activities, such as General Motors transferring its retiree liability to Prudential. In the private sector, such a transfer means the loss of protection by the Pension Benefit Guaranty Corporation (PBGC), and reliance on the strength of the insurance company to provide the benefits. Such a loss does not occur in the case of state and local plans, because these plans are not covered by the Employee Retirement Income Security Act of 1974 and therefore benefits are not protected by the PBGC.

Munnell then delves into her own opinion:

First, I am not quite sure how it would work. In the private sector, a company can spin off only fully funded plans. But few public sector plans are fully funded. Is the suggestion to close down the current public sector defined benefit plan and send all future contributions to the insurance company? In many states that path would be quite difficult given that employers cannot reduce future benefits for current employees. So I am not clear how a SAFE Retirement Plan would actually be adopted.

Second, I am very concerned about costs. One issue is that investments would be limited to those acceptable for underwriting annuities, a requirement that means essentially an all-bond portfolio. Trying to produce an acceptable level of retirement income without any equity investments requires a very high level of contributions. My other concern on the cost side is fees; insurance companies need a significant payment to take on all the risks associated with providing annuities.

In short, the SAFE Retirement Plan doesn’t seem like either a feasible or efficient way to provide retirement income. Fortunately, the plan is optional. So, I’m moving on to other topics!

Munnell runs the Center for Retirement Research and the Public Plans Database.

How Financially Sophisticated is America’s Older Population?

As people grow older, they start paying more attention to their retirement.

But evidence suggests that much of the United States’ older population is ill equipped to take responsibility for their retirement security – because their financial sophistication falls short of where it needs to be to make the complex financial decisions retirement requires.

A paper, authored by Annamaria Lusardi, Olivia S. Mitchell, and Vilsa Curto and published in the Journal of Pension Economics and Finance, takes a closer look at the financial sophistication of older Americans.

From the paper:

In 2008, we subjected around 1,000 randomly-selected HRS respondents in the United States to a special module of questions assessing knowledge of the stock market and asset prices, investment strategies, risk diversification, the importance of fees, and related topics. Respondents averaged age 67, with about half (55%) female. Some 15% had less than a high school education, 32% had completed high school, 24% had some college, and 28% had college or advanced degrees. Most (81%) of the respondents were White, with 9% African-American, and 8% Hispanic.

[…]

The 10 questions of key interest here are grouped into four categories, according to the topic they cover: knowledge of capital markets, risk diversification, knowledge of fees, and savvy/numeracy.

The results:

Older Americans displayed a deep lack of understanding about key concepts related to risk diversification, bond prices, and portfolio choice. For instance, many respondents expressed a support for holding own employer company stock, despite the fact that it is unlikely to be wise to hold much own employer stock from a risk diversification viewpoint…

A large majority of respondents (60%) also did not know about asset pricing, which we explore by asking whether people knew about the inverse relationship between bond prices and interest rates. This is a particularly good question to assess financial sophistication because it is difficult (if not impossible) to know or infer the correct answer to this question without having some knowledge of finance.

[…]

When presented with the statement ‘If the interest rate falls, bond prices will fall’ (second wording), only about one-third (35.7%) of respondents answered correctly; when the wording was reversed (first wording: ‘If the interest rate falls, bond prices will rise’), more answer correctly (44.7%) and this difference is statistically significant.

[…]

Many respondents were aware that ‘Even if one is smart, it is very difficult to pick individual stocks that will have better than average returns.’ But here, too, responses varied depending on how the question was asked: in one case 73.7% got the correct answer, but only 37.6% got it correct using the reverse ordering. In other words, this question, too, was poorly understood by respondents.

The authors also posed questions about risk diversification and fees:

Almost two-thirds of respondents knew that ‘it is not a good idea to invest in a few stocks rather than in many stocks or in mutual funds,’ which might be thought to imply some sophistication about risk. Yet this question jointly tests knowledge of risk diversification and awareness of mutual funds, as indicated by results when we reversed the question wording: responses proved quite sensitive. The second risk question sought to avoid this by simplifying the question and using less financial terminology; and now we find that most knew that spreading money across 20 stocks rather than two decreased the risk of losing money (and here, word order did not matter).

[…]

Several prior studies have found that investors often overlook fees when deciding how to invest…In our sample of older Americans, around two-thirds seemed to know that mutual fund fees are important when investing for the long run. Nonetheless, responses were again sensitive to question wording, perhaps due to the fact that respondents needed to know both about mutual funds and investing for the long run. Additionally, a large majority of respondents said they would find it difficult to locate mutual funds charging annual fees of less than one percent of assets, suggesting that many respondents may not know about low-cost mutual funds. The fact that again there is some sensitivity to question wording confirms that, here too, respondents have difficulty with financial terminology (fees, mutual funds, etc.).

The paper, titled Financial literacy and financial sophistication in the older population, features much more analysis and discussion of the survey data, and can be read in full here.

CalPERS’ Administrative Expenses Are Twice As High As Peers

CalPERS incurs much higher administration costs than its peers, according to an analysis by CEM Benchmarking.

The firm measured CalPERS’ administrative costs against four other large, complex public pension plans. CalPERS paid almost double the expenses of its peers.

From the Sacramento Business Journal:

CalPERS had a pension administration cost of $215 per member — far above the peer average of $108, according to Cost Effective Measurement Benchmarking, a Canadian firm that compares public pension funds across the nation and globe.

The findings, first reported in Calpensions.com, also found that CalPERS has the highest “complexity” in the firm’s global database of 75 pensions, which can impact cost and service.

The CalPERS total service score, however, was 63, very close to the peer average of 66.

A primary reason for the higher complexity is customization. CalPERS has five cost-of-living adjustment options. Employers also can change contribution rates for new hires, allowing for an infinite number of possible plans.

The complex system requires more administrative staff, CEM representatives found, which can include legal advisers, auditors and accountants.

Those findings from two years ago are already thought to be somewhat outdated, however, because the fund has completed a computer system that was new at the time of the measurement. Pension reforms were also taking extra time and money at the time of the measurement. CalPERS expects its costs have decreased and continue to drop, and service scores to rise.

The other funds CalPERS was measured against:

– The California State Teachers’ Retirement System;

– The Florida Retirement System;

– The New York State and Local Employee Retirement System; and

– The Teachers Retirement System of Texas.

You can view the full CEM presentation here.

New Jersey Blocks Public Release of Pension Pay-to-Play Investigation

In 2011, politician and businessman Charlie Baker made a $10,000 contribution to the New Jersey Republican State Committee. At the time, he was a partner at General Catalyst, a venture capital firm.

Months later, New Jersey’s pension system gave a contract to General Catalyst to manage the state’s pension money.

After the potential conflict of interest was uncovered by journalist David Sirota, New Jersey launched an investigation into the situation.

But the state is now refusing to release the findings of the investigation. From David Sirota:

Christie officials have denied an open records request for the findings of the investigation.

In a reply to International Business Times’ request for the findings of the audit under New Jersey’s Open Public Records Act, Christie’s Treasury Department said the request is being denied on the grounds that the documents in question are “consultative and deliberative material.” Despite officials’ assurances in May that the probe would take only weeks, the New Jersey Treasury said in September that the investigation is still “ongoing” — a designation the department says lets it stop the records from being released.

IBTimes is appealing the open-records denial to the state’s Government Records Council. Neither Baker nor Christie responded to requests for comment on the issue.

General Catalyst and Baker have denied that Baker had anything to do with persuading Christie officials to invest in the firm. To try to verify that assertion, IBTimes filed a separate request for any General Catalyst documents sent to the New Jersey Department of Treasury prior to its investment. Those documents would show whether General Catalyst specifically promoted Baker’s involvement in the firm when pitching its investment to New Jersey.

Christie officials are pushing back the due date to release those documents to Nov. 6 — two days after the election.

New Jersey has fallen into a habit recently of denying public records requests. From the International Business Times:

The denial letters to IBTimes come only weeks after the Associated Press documented a spike in the number of open records requests that have been rejected by Christie officials. Since 2012, Christie’s administration has paid out $441,000 in taxpayer funds to reimburse open-records plaintiffs who were unlawfully denied access to government records.

“Open records requests to the executive branch have become even more highly politicized than usual,” said Walter Leurs, president of the New Jersey Foundation for Open Government. “These documents are subject to the open records laws and they are supposed to be disclosed within seven days, so this is stonewalling. They know that any lawsuit challenging the denials wouldn’t be heard for 60 days — which is well after the election.”

Charlie Baker has denied he worked for General Catalyst when New Jersey decided to give the firm a contract. But the firm’s website listed him as a partner, and Baker himself called himself a partner in documentation related to his $10,000 contribution back in 2011.

Denmark Ramps Up Oversight Of Alternative Investments in Pension Systems

The entity that regulates Denmark’s financial system has announced plans to tighten oversight of alternative investments made by pension funds.

The move comes as regulators in the Financial Supervisory Authority have reported an uptick in risk, illiquidity and opacity in pension investments. From Bloomberg:

The Financial Supervisory Authority in Copenhagen will require pension funds to submit quarterly reports on their alternative investments to track their use of hedge funds, exposure to private equity and infrastructure projects. The decision follows funds’ failures to account adequately for risks in their investment strategies, according to an FSA report.

The regulatory clampdown comes as Denmark deals with risks it says are inherent to a system due to be introduced across the European Union in 2016. The new rules will allow pension funds to invest according to a so-called prudent person model, rather than setting outright limits. In Denmark, the approach has proven problematic for the only EU country to have adopted the model, said Jan Parner, the FSA’s deputy director general for pensions.

“The funds are setting up for their release from the quantitative requirements, but the problem is, it’s not clear what a prudent investment is,” Parner said in an interview. “The challenge for European supervisors is to explain to the industry what prudent investments are before the opposite ends up on the balance sheets.”

Denmark, which has almost two years of experience with the approach after its early adoption in 2012, says a lack of clear guidelines invites misinterpretation as firms try to inflate returns.

[…]

Danish funds and insurers have overestimated the value of alternative investments they made while failing to adequately account for the risks, the FSA said in a February report.

Pension funds held 152 billion kroner ($26 billion) at the end of 2012, or about 7 percent of their balance sheets, in equity stakes and other assets sold on markets the FSA characterized as illiquid, opaque and thin. The agency said they need to account better for those risks and ordered reports from the third quarter. PFA, Denmark’s biggest commercial pension fund, said today it invested in a shopping mall in western Denmark as part of a strategy to increase its presence in retail properties.

Denmark’s pension systems hold $500 billion in assets, collectively.

Photo: “Dannebrog”. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

Judge: Closed-Door Pension Meeting Violated Florida Sunshine Laws

An appeals court ruled today that pension and union officials violated Florida’s Sunshine Law when they held benefit negotiation sessions behind closed doors.