Ted Ballantine | Pension360

Report Card Grades 151 Florida Pension Plans

The LeRoy Collins Institute, a non-partisan think tank at Florida State University, recently released a report grading 151 municipal pension plans across Florida.

A quick snapshot of some of the grades, from the Florida Times-Union:

Fernandina Beach general employees – F

Fernandina Beach police/firefighters – F

Jacksonville corrections officers – F

Jacksonville police/firefighters – D

Atlantic Beach police – D

Orange Park firefighters – D

Orange Park general employees – D

Orange Park police – D

Palatka firefighters – D

Palatka general employees – D

Atlantic Beach general employees – C

Jacksonville general employees – C

St. Augustine general employees – B

St. Augustine police – A

Palatka police – A

The author of the report told the Florida Times-Union:

“Many cities are in urgent need of reform that will help reverse this decline in healthy pension funds and get more plans headed toward the honor roll,” said David Matkin, assistant professor at University of Albany-SUNY, who wrote the report.

Jacksonville’s Mayor, Alvin Brown, said he considering putting pension reform ideas on the table for the Corrections Officers Fund, the General Employees Fund and the Police and Fire Fund.

Pension Funds, Asset Allocation and Bad Habits

All too often, investors can fall victim to recency bias and return chasing.

Pension funds, it turns out, are no exception.

Three researchers – Andrew Ang, Amit Goyal and Antti Ilmanen – analyzed 978 pension funds’ target allocations over a 22-year period to determine whether the funds were chasing returns, and the cost of such chasing.

The paper was published in the most recent issue of Rotman International Journal of Pension Management. An excerpt where the researchers summarize their findings:

Many pension funds rebalance their asset-class allocations regularly to specific target weights, such as the conventional 60% stocks and 40% bonds. But there is anecdotal evidence that funds may let their allocations drift with relative asset-class performance. This may reflect passive buy-and-hold policies, a desire to maintain asset-class allocations near market-cap weights, or more proactive return chasing. We focus on the last possibility.

[…]

Our key findings are easily summarized: pension funds, in the aggregate, do not recognize the shift from momentum to reversal tendencies in asset returns beyond the one-year horizon, and instead the typical pension fund keeps chasing returns over multi-year horizons, to the detriment of the institution’s long-run wealth.

We hope that this evidence will help at least some pension funds to reconsider their asset allocation practices.

Chief Investment Officer magazine further summarizes the paper’s findings:

Corporate and public pension funds alike tended to increase exposure to asset classes with strong returns in both the short and longer term, the paper noted. Even performance three years prior influenced allocation patterns. While the study split out pension funds by size and plan sponsors, they found no statistically significant variance in behavior.

The researchers then turned to a data set provided by AQR, covering global equity, bond, and commodity markets since 1900. Based on more than a century of market activity, the study found momentum patterns on a one-year time horizon. Beyond that, the only statistically significant result showed that two years following a given return, performance was likely to have moved in the opposite direction.

The entire paper, titled Asset Allocation and Bad Habits, can be read here [subscription required].

Photo by Andreas Poike via Flickr CC License

Judge: Scranton Can’t Tax Commuters To Fix Pensions

Scranton’s pension funds are around 23 percent funded and less than 5 years away from collapse, according to an audit released last month.

As such, the city had planned to start raising money from a new revenue source: a tax on commuters.

But a judge shot down that idea on Wednesday. From Reuters:

A Pennsylvania judge on Tuesday rejected the cash-strapped city of Scranton’s bid to solve its municipal pension woes with a new commuter tax.

The 0.75 percent tax on commuters’ earned income was supposed to have gone into effect on Wednesday. It would have affected about 23,000 people and raised about $5 million annually, according to city officials.

Senior Judge John Braxton of Philadelphia, who heard the case in Lackawanna County Court of Common Pleas, said the city could not impose a commuter tax unless it levied the same tax on residents.

The lawsuit to stop the tax was brought by a group of aggrieved commuters who would have paid it. The city can appeal the ruling.

[…]

The funded level of its pension fund for firefighters sank to 16.7 percent as of Jan. 1, 2013, from 41.7 percent just four years earlier, the audit found. Scranton’s police pension fund is just 28.8 percent funded, and its municipal employees pension is at 23 percent. Above 80 percent is generally considered healthy.

Scranton’s pension and benefit costs have been growing by an average 15 percent annually since 2012, budget documents said.

In light of the judge’s decision, Scranton is considering other options. Those ideas include, according to the Scranton Times-Tribune:

Wait to see if the state amends Act 47:

Before deciding on a next step, Scranton leaders first want to see the outcome of changes to Act 47 pending in the state Legislature. These amendments would give financially-distressed cities more revenue alternatives, but also require an Act 205 wage tax to be imposed equally on residents and nonresidents.

Try again for Act 205 wage tax:

If the Act 205 equal-treatment provision dies, the city may consider imposing an Act 205 tax again — but this time with a relatively small increase for city residents and a larger increase for nonresidents, as other cities have done, said Mr. McGoff and city Business Administrator David Bulzoni.

Seek bankruptcy protection or a receiver:

Having the city seek Chapter 9 bankruptcy protection is not under consideration, Mr. McGoff said. It’s not clear the state would allow such a move, anyway, because Harrisburg’s attempt a few years ago was blocked and a receiver was installed there instead.

The city will reconsider the commuter tax in 2015, except this time they’ll consider levying it on everyone, including residents.

Pension Funds Lead “Enormous” New Class Action Lawsuit Against JP Morgan

It’s been less than a year since JP Morgan agreed to a $13 billion settlement to compensate homeowners and pension funds for losses stemming from failed investments.

Now, the bank has been told it will face another class action lawsuit centering on the same issue: the toxic mortgage-backed securities it sold investors in the years leading up to the financial crisis.

At the forefront of the lawsuit are two pension funds: the Laborers Pension Trust Fund for Northern California and Construction Laborers Pension Trust for Southern California, who are both lead plaintiffs.

Chicago’s Pension Hole Gets Deeper

A new report from the watchdog group Civic Federation reveals that Chicago’s unfunded pension obligations have tripled since 2003 and now stand at $37 billion.

Details from the report, summarized by the Chicago Sun-Times:

The report found the gap between current assets of the ten funds and pensions promised to retirees had risen to $37.3 billion.

The 10 funds had an average funding level of 45.5 percent in 2012, down from 74.5 percent a decade ago.

The firefighters pension fund is in the worst shape, with assets to cover just 24.4 percent of future liabilities. The CTA pension fund is in the best financial condition at 59 percent.

Government employees did their part by contributing the required portion of their paychecks to their future pensions. But the government contribution fell nearly $2 billion short of the $2.8 billion required to cover costs and reduce a portion of unfunded liabilities over a 30-year time frame, the report concludes.

Investment income didn’t help. And the future outlook is bleak, thanks to a “declining ratio” of active employees to beneficiaries.

In 2012, the 10 funds had 1.11 active employees for every retiree, down from a 1.55 ratio a decade ago. The police, laborers, Metropolitan Water Reclamation District, Forest Preserve and CTA funds all had more beneficiaries than active employees in 2012.

Counting statewide funds, the pension liability amounts to $19,579 for every Chicago resident.

Chicago is required by law to make a $550 million contribution in 2016 to two police and fire pension funds. Mayor Rahm Emanuel presumably needs to raise that money through various taxes. But he has repeatedly promised not to raise property taxes, and more recently said he won’t raise gas or sales taxes, either. From the Sun-Times:

Mayor Rahm Emanuel on Wednesday ruled out pre-election increases in property, sales or gasoline taxes but pointedly refused to say whether he would steer clear of any other taxes, fines or fees.

“We’ve balanced three budgets in a row holding the line on property, sales and gas taxes and finding efficiencies and reforms in the system. . . . We eliminated the per-employee head tax . . . and we put money back in the rainy day fund,” the mayor said.

“On my fourth budget, we will hold the line on property, sales and gas taxes and put money back in the rainy day fund and continue to look at the system as a whole to find efficiencies and reforms and things that were duplicative where you could do better.”

This past summer, Chicago hiked its telephone tax by 56 percent.

Photo: Pete Souza [Public domain], via Wikimedia Commons

Chamber of Commerce Gives New Jersey “F” On Pensions, Fiscal Responsibility

The U.S. Chamber of Commerce released a state-by-state report card yesterday, grading all 50 states on various areas, including education and fiscal responsibility.

New Jersey graded well on education. But it flunked the fiscal responsibility portion of the report card, earning a solid “F” from the Chamber of Commerce.

Why? The under-funded pension system was singled out as the main reason for the failing grade. From the report:

“Grade: F – New Jersey receives very low marks on fiscal responsibility. Only 65 percent of the state’s pension is funded, and the state’s most recent contribution was a meager 39 percent.”

More on the rationale behind the grade, from NewsWorks:

The grade is comprised of two factors: one, the percentage of pension obligations that are currently funded and, two, the amount of money allocated from each state’s 2012 budget for pension fund contributions.

For the first factor, the U.S. Chamber of Commerce calculates N.J.’s total pension funding at 65 percent. A few other states share that large a gap in available funds for pensioners. But no other state made as low a contribution to pension funds in 2012 as N.J.’s paltry 39 percent. Even renowned laggard Illinois managed to earmark 76 percent in funds toward pension obligations that year.

The N.J. Pension and Health Benefit Study Commission reported last week that N.J. has a combined $90 billion in unfunded pension liabilities. That’s three times our annual state budget. This week Fitch Ratings and Standard & Poor’s dropped our bond rating down yet again. There are no quick fixes to this, like millionaire taxes or amnesty programs or even higher contributions from already-strained state workers. Indeed, it’s unclear how to fix this at all.

Ten other states received F’s in the fiscal responsibility category.

View the entire report card here.

CalPERS May Be Done With Hedge Funds, But It’s Far From Finished With Fees

There’s been a torrent of media coverage about how CalPERS, with its decision to kick hedge funds to the curb, has also distanced itself from high-fee investment managers.

But nearly $500 million of private equity fees say otherwise, writes the New York Times’ Josh Barro:

Here’s the thing: Calpers, America’s largest public employee pension system, with $300 billion in assets under management, isn’t getting away from investment gurus altogether.

The system’s $4 billion hedge fund program is small potatoes; its main exposure to high-fee gurus is through $31 billion in private equity funds, which just like hedge funds rely on the premise that highly paid fund managers can beat the market through special insight and talent.

Calpers paid $476 million in management fees on its private equity portfolio in the fiscal year ending June 2013, equal to 1.4 percent of private equity assets, about 20 times what it would have cost Calpers to invest a similar amount in stocks and bonds. And Calpers’s commitment to private equity remains strong, guru-driven fees and all.

Ted Eliopoulos, the interim chief investment officer at Calpers, the California Public Employees’ Retirement System, made clear in a statement that the choice to exit hedge funds was specific to the asset class. He criticized hedge funds’ “complexity, cost and the lack of ability to scale at Calpers’s size.” The key word there is “scale”: Even at $4 billion, hedge funds made up just over 1 percent of the Calpers portfolio. That wasn’t enough to make a meaningful difference to the fund’s returns or diversification, and the system didn’t see good opportunities to scale up.

As of 2013, CalPERS invested 10.4 percent of its portfolio in private equity. That’s a big jump from its 6 percent PE allocation in 2006.

But, according to Josh Barro, CalPERS cut its target private equity allocation twice this year—the target allocation at the beginning of 2014 was 14 percent. Now, two downward revisions later, PE’s target allocation sits at 10 percent.

Photo by 401kcalculator.org

Governorship Presents Conflict of Interest For Bruce Rauner, Pension System

http://youtu.be/Ge1jo2KwyNA

Illinois’ GOP candidate for governor, Bruce Rauner, touts in a recent ad (above) that his investment firm, GTCR, made millions for the state by helping the Teacher’s Retirement System (TRS) invest its pension assets in private equity investments.

The investments apparently returned 17 percent – but returns aren’t the issue.

There may be a serious conflict of interest if Rauner is eventually elected governor. That’s because the governor appoints six trustees to the TRS Board—and GTCR still manages investments for the fund.

That wouldn’t be a big problem, except Rauner is still a partner at a GTCR subsidiary.

David Sirota explains:

Despite assertions that Rauner has retired from GTCR, SEC documents confirm that Rauner remains a partner in a GTCR subsidiary. There are other ownership stakes in GTCR funds listed in Rauner’s campaign finance disclosure forms. And according to state documents, GTCR currently manages Illinois pension funds, meaning that if elected, Rauner would appoint the board of a pension system that employs — and pays fees to — his firm.

If Rauner became governor, he would elect nearly half of the board of trustees of the Teacher’s Retirement System. From the TRS website:

TRS is governed by a 13-member Board of Trustees. Trustees include the state superintendent of education, six trustees appointed by the governor, four trustees elected by contributing TRS members, and two trustees elected by TRS annuitants. Two appointed positions are vacant.

As David Sirota writes, there are other issues surrounding Rauner’s tenure at GTCR, as well:

Rauner’s campaign ad comes as his investments hold center stage in a federal civil trial. Chicago’s NBC affiliate says that the suit involves allegations “that GTCR, the Chicago-based firm where Rauner served as managing partner for decades before retiring in 2012, may have masterminded an operation to allegedly avoid responsibility for the deaths of elderly patients residing in nursing homes it had invested in.” The Chicago Tribune says that GTCR is being “accused by attorneys for the estates of several former nursing home patients of engineering a complicated 2006 sale to avoid wrongful death judgments.”

GTCR denies the allegations.

Rauner promotes a pension plan that would freeze the pensions of current workers and shift all workers into a 401(k)-type plan.

Photo by By Steven Vance via Wikimedia Commons

How Should Investors Manage Climate Change Risk?

CalPERS is measuring the carbon footprint of its portfolio. CalSTRS is helping to fund a study on the market impact of climate change.

For the first time, institutional investors are beginning to wonder: How will climate change impact the value of our investments?

Howard Covington of Cambridge University and Raj Thamotheram of the Network for Sustainable Financial Markets tackled that question in a recent paper, titled How Should Investors Manage Climate Change Risk, in the most recent issue of the Rotman International Journal of Pension Management. From the paper:

The consequences of high warming, if we collectively go along this path, will emerge in the second half of this century; they are therefore remote in investment terms….Capital markets anticipate the future rather well, which suggests that investment values may respond strongly over this time scale as views on the most likely path begin to crystallize. Technologies for producing and storing electrical energy from renewable fuel sources, for energy-efficient housing and offices, and for reducing or capturing and disposing of greenhouse gas emissions from industrial processes are moving along rapidly. In important areas, costs are falling quickly. Given appropriate and moderate policy nudges and continuing economic and social stability, it is overwhelmingly likely that the global economy will substantially decarbonize during this century.

If…an emissions peak in the 2020s becomes a plausible prospect, investment values for fossil fuels, electrical utilities, and renewable energy (among others) will react strongly. The value of many fossil fuel investment projects will turn negative as assets lose their economic value and become stranded; companies and countries will face significant write-downs, with clear consequences for financial asset prices.

As the authors note, we don’t know exactly how the earth will eventually react to greenhouse gasses. Different responses will have different implications for the global economy. From the paper:

If we are unlucky, and the climate’s response comes out at the upper end of the range while emissions go on climbing, the likelihood of the global economy’s potentially heading toward rolling collapse will significantly increase. A run of extreme weather events in the 2020s, particularly events that lead to sharp increases in prices for staple crops or inundate prominent cities, might then focus the attention of the capital markets on the consequences. A broad adjustment of asset values might then follow as investors try to assess in detail the likely winners and losers from the prospect of an increasingly turbulent global social, economic, and political future.

We are not suggesting that this kind of outcome is unavoidable, or even that it is the most likely. We are merely noting that the chance of events’ unfolding in this way over the next 10 to 15 years is significant, that it will rise sharply in the absence of a robust climate deal next year, and that long-term investors need to factor this into their investment analysis and strategy.

If these scenarios correctly capture the likely outcomes, then we have reached a turning point for the global economy. For the past 150 years, the exploitation of fossil fuels has generated enormous value for investors, both directly and by enabling global industrialization and growth; but it is now rational to anticipate that continued and increasing emissions from fossil fuel use might, over several decades, lead to the destruction of investment value on a global scale. Moreover, capital markets may adjust to this possibility on a relatively short time scale.

So how should institutional investors respond?

Broadly speaking, there are three main ways that investors can help. The first is to raise the cost of capital for companies or projects that will increase greenhouse emissions. The second is to lower the cost of capital for companies or projects that will reduce greenhouse emissions. The third is to use their influence to encourage legislators and regulators to take action to accelerate the transition from a high- to a low-emissions economy.

Formally adopting a policy of divesting from the fossil fuel sector can be helpful with the first of these, provided that the reasons for doing so are made public, so that other investors are encouraged to consider their own positions. Alternatively, active investors might take significant shareholdings in fossil fuel companies, so as to exert a material strategic influence to prevent investments that encourage long-term value destruction.

Supporting investments in renewable energy sources and related sectors is particularly effective where the potential exists to disrupt traditional industries. Tesla Motors is a case in point, since the potential for rapid growth of electric vehicles could transform the auto industry. Through the related development of high-performance, low-cost battery packs, it may also transform both the domestic use of solar power and the electrical utility business.

There is little time left for legislators to agree on the terms for orderly cooperative action to reduce emissions. Investors concerned about long-term value should act now to encourage the adoption of mechanisms to ensure an early peak and rapid decline in greenhouse missions. By the end of 2015, the chance for this kind of action will have largely passed.

The above excerpts represent only a portion of the insights the paper has to offer. The rest of the article can be read here [subscription required].

Photo by Penagate via Flickr CC

Stockton Can Cut Pensions And Stop Paying CalPERS. But Will It?

In a groundbreaking decision, a judge ruled yesterday that the bankrupt city of Stockton, California could indeed cut worker pensions and halt payments to CalPERS. From the LA Times:

A federal bankruptcy judge dealt a serious blow to California’s public employee pension systems by ruling Wednesday that payments for future worker retirements can be reduced when a city declares bankruptcy — just like its other debts.

U.S. Bankruptcy Judge Christopher Klein ruled that bankruptcy law supersedes California pension laws that require cities to fund their workers’ future retirement checks.

“I’ve concluded the pension could be adjusted,” Klein said.

The potentially groundbreaking decision came after a large creditor of Stockton, which filed for bankruptcy protection two years ago, asked the judge to reduce the amount the city owes to the California Public Employees’ Retirement System, the nation’s largest public pension fund.

Until now, CalPERS had argued successfully in the bankruptcy cases of other California cities that amounts it requires for public worker pensions could not legally be reduced.

But just because Stockton can cut pensions doesn’t mean the city will. The city’s current bankruptcy plan doesn’t include pension cuts or the halting of payments to CalPERS. From the Sacramento Bee:

The practical effect of Klein’s ruling is unclear. It depends in large part on whether Klein will accept Stockton’s financial reorganization plan – a plan under which the city promises to keep making its annual $29 million pension payments in order to retain its relationship with CalPERS.

If Stockton gets Klein’s approval and can resolve its bankruptcy without slashing pensions, the impact of Klein’s ruling is blunted somewhat. But Klein won’t rule on the city’s plan until Oct. 30.

Because of Stockton’s pledge, CalPERS attorney Michael Gearin downplayed the decision and said it doesn’t force the city to cut its pension payments. “It doesn’t establish a precedent. Those were his comments about a hypothetical city” that wants to cut ties with the California Public Employees’ Retirement System, he said.

The city seems to have an interest in working to keep pensions intact. Staying with CalPERS, on the other hand, is being viewed as a reluctant necessity. From the Sacramento Bee:

City officials have said they have no choice but to stick with CalPERS. If it doesn’t pay the pension fund in full, default would occur, and the city would either have to make a one-time payment of $1.6 billion to keep pensions whole or let CalPERS slash benefits by 60 percent. The result would be a mass exodus of employees, the city said, creating an enormous setback just as the troubled city, saddled with poverty and a high crime rate, is starting to get back on its feet.

CalPERS released a statement immediately after the ruling expressing their disappointment with the decision and claimed that the ruling was “not legally binding”. From Reuters:

“This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment,” Calpers spokeswoman Rosanna Westmoreland said in an emailed statement.

“CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”

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