Ted Ballantine | Pension360

Emanuel Draws Flak For Retiree Premium Increase

Chicago Mayor Rahm Emanuel increased retiree health premiums by 40 percent this week, and it didn’t take long for his challenger, Bob Fioretti, to criticize the decision. Fioretti, currently an alderman, told the Sun-Times:

“This will place an unsustainable financial burden on our retirees, who are already facing cuts to their pensions,” the 2nd Ward alderman said.

“Our retirees dedicated their lives to making our city work. How does this administration repay them? By breaking its promises and pushing struggling Chicagoans closer to poverty. It’s unconscionable at a time when we should be looking to build our [economy] from the middle out and lifting up our working families.”

Fioretti was asked where he would find the $27 million that Emanuel hopes to save in the city’s 2015 budget by continuing to phase out Chicago’s 55 percent subsidy for retiree health care.

“A lot of this they’ve known was coming down the road for a long time. It’s long-term bad planning. We should work to find ways to fund the promises we made,” he said.

“There are ways — whether it’s looking at a [1 percent] commuter tax [or] complete reform of TIFs — all of those are the real tough decisions we have to make to move this city forward. Those are solutions my administration will find.”

The city defended the premium increase as a fiscal necessity. From the Sun-Times:

Budget and Management spokesman Carl Gutierrez has called the increase “part of our efforts to right the city’s financial ship” and save Chicago taxpayers $27 million in 2015.

“For pre-Medicare retirees, there will be an additional reduction in their subsidy by only 25 percent, and the city is offering four plans to provide them with options for health care and to reduce their costs, including an option that would reduce their premiums,” he wrote in an email.

Bob Fioretti is running against Emanuel in Chicago’s mayoral race. Emanuel’s other main challenger, Karen Lewis, has not yet commented on the premium hike.

Photo by Pete Souza

John Bury On New Jersey’s Pay-to-Play Allegations: Let’s Move On To The Real Problems

John Bury is an actuary that tightly covers New Jersey pension news over at the blog Bury Pensions. He has an interesting perspective on the latest pay-to-play allegations thrown at Christie.

Bury’s point: if the pay-to-play allegations are true, it’s par for the course. But there are bigger issues with New Jersey’s pension system, and those issues are the ones we should worry about. Here’s Bury’s post in full:

____________________

By John Bury, Bury Pensions

“It’s a cheap political stunt based on shoddy, distorted reporting from an individual [David Sirota] who over and over again has been shown to be biased, willfully inaccurate, and just flat out wrong,”

– NJ Governor Chris Christie spokesman Kevin Roberts responding to allegations in an AFL-CIO lawsuit

He may have some points – though not the ones I would make:

Like the double-dipping non-issue I do not see Chrisitie allegedly steering investment contracts to campaign donors as the state Retirement System’s biggest problem. Remember, this is New Jersey. Find me someone who has donated to a politician or party who does not expect (and get) payback of some sort.

How about a law firm where the lawyers get together each election cycle to give $30,000 to the campaigns of freeholders and somehow wind up with annual billings from that county of over $1 million. That’s legal here so what’s the problem with hedge fund honchos working the system we have, though much less blatantly than DeCotiis according to Fortune Magazine?

Then there’s the issue of criticizing a rate of return of 16.9% (or 15.9% or 15.5%). Imagine you get any one of those as an annual return in your own portfolio. Are you complaining? The question in New Jersey is whether those Alternative Investment assets being reported are really there. I don’t think so.

Finally, there is this reality:

THE PLAN BARELY HAS 50% OF THE ASSETS NECESSARY TO ANNUITIZE ONLY (YES ONLY) THE RETIREES, WITH THE OTHER 475,000 PARTICIPANTS HAVING LESS THAN NOTHING.

Employ only investment advisers who have never donated to a political campaign (if you can find any) and get rid of all the double-dippers and you may have solved 1% of a $150 billion problem that will be a $250 billion problem in the years it will take your distracto-reforms to be implemented.

CalPERS, LACERS Ramp Up Real Estate Commitments

CalPERS already made headlines today for deciding to pull $4 billion from hedge funds and hedge funds-of-funds.

But there was another bit of news that was less headline-worthy, but still important: CalPERS has decided to invest an additional $1.3 billion in real estate funds, according to a report from Pensions & Investments:

The $298 billion California Public Employees’ Retirement System, Sacramento, added $600 million to Institutional Logistics Partners, a real estate partnership with Bentall Kennedy. CalPERS first invested $250 million in Institutional Logistics Partners in March 2013. The strategy seeks to invest in core industrial properties.

Separately, CalPERS added a total of $700 million to two real estate partnerships with GI Partners.

The pension fund added $400 million to TechCore and $300 million to CalEast Solstice. TechCore invests in “technology advantaged” properties in the U.S., such as data centers, Internet gateways, corporate campuses for technology tenants and life-science properties in U.S. metropolitan areas, according to a news release from CalPERS. The pension fund first invested $500 million in TechCore in May 2012. The size of the CalEast Solstice portfolio could not be learned by press time.

LACERS, meanwhile, is committing $190 million to real estate funds over the next two years, according to a separate Pensions & Investments report:

Los Angeles City Employees’ Retirement System plans to commit $140 million to four new open-end core real estate funds this year and make $50 million in additional commitments in 2015, minutes from the pension fund’s Aug. 26 board meeting show.

Townsend Group, real estate consultant for the $14.4 billion pension fund, is recommending the pension fund this year commit about $35 million each to Clarion Partners’ Lion Industrial Trust, Jamestown Premier Property Fund,Morgan Stanley(MS) Real Estate’s Prime Property Fund, and Principal Real Estate Investors’ U.S. Property Account.

The recommendations will be presented to the board for approval at a later meeting. The recommendation is part of the pension fund’s decision in May to double its exposure to core real estate to a 60% target and decrease non-core investments to 40% from 70%. LACERS has an overall 5% allocation to real estate, with $739 million funded as of March 31.

Photo by thinkpanama via Flickr CC License

Rhode Island Gov. Candidate Allan Fung Is A Pension Reformer, Too

By now, everyone knows about Gina Raimondo’s track record on pensions. Despite the controversy surrounding her 2011 reform efforts and subsequent investment strategies, she made pensions a central facet of her campaign for governor.

Her Republican opponent, Allan Fung, is now taking up a similar strategy. Fung, currently the Mayor of Cranston, has this week begun touting his own record of pension reform. From Public Sector Inc:

Like Raimondo, Fung, who served on a reform panel that helped craft the 2011 state pension changes, has been an ardent backer of trimming pensions to make them more affordable. The difference is that the media hasn’t seemed to consider that such an unusual story for a Republican politician. Raimondo, by contrast, has benefited from a barrage of stories hailing her as a Democrat willing to take on public employees and their unions.

[…]

Cranston’s current employees participate in the state’s retirement system, so the city had a stake in the state-engineered reforms. But Cranston fire and police retirees and those workers who were hired before July 1, 1995 participate in a separate city-directed plan that was deeply in debt . Although the plan has just 483 members, the vast majority of which were already retired, the plan was so expensive that it cost the city $22.3 million to support this year, amounting to 20 percent of the city’s operating budget, excluding its school system.

Earlier this year Fung struck a deal with the majority of plan members to suspend cost of living adjustments and to cap any future COLA’s at 3 percent. The deal is expected to save Cranston about $6 million a year for a plan that was so expensive that the city began winding it down in 1995. When Fung took office in 2008 the pension system had just 15 percent of the assets on hand necessary to pay its current liabilities, and Fung warned beneficiaries that a day could come when the fund went bankrupt. Now the system is on track to be fully funded, but it will take two decades.

Cranston is also saving money because Fung struck a deal to place new city employees in a 401(k) style defined contribution plan.

A side note: this election will be a historic one for Rhode Island no matter who wins. Raimondo is vying to become the first woman governor in the state’s history. Fung, meanwhile, would be the first Asian elected to that office.

Photo credit: “Mayor Allan Fung visits Providence” by Office of Mr. Fung. Licensed under Creative Commons Attribution 3.0 via Wikimedia Commons

Legal Quirks Complicate New GASB Rules in Pennsylvania

The Governmental Accounting Standards Board (GASB) has rolled out new financial reporting rules for pension funds, and the expectation is that the new rules will expose some “red ink”, so to speak, at pension funds who previously kept some liabilities off the books.

But implementation and enforcement of the rules is hardly straightforward. Pennsylvania serves as a great microcosm of the rules’ complexity. Mark Guydish writes about the impact of the rules on small municipalities:

GASB standards do not have the weight of law and GASB has no enforcement powers. The standards are widely adopted because independent auditors look for compliance with GASB, and state and federal money may depend on that compliance.

Theoretically, a small township that has an elected auditor rather than a contracted auditor could disregard GASB standards…though the risk to state and federal funds would still exist.

There’s another quirk in Pennsylvania, and Luzerne County, that complicates how these standards play out: The high number of municipalities managing their own pension funds, creating a wide disparity in the size of those funds.

On the one hand, the sheer number of municipalities and authorities may prevent big swings in the numbers once the new standards are used, simply because so many pension plans cover only a handful of people in many townships and boroughs.

On the other hand, Dave Davare, retired director of research at the Pennsylvania School Boards Association, noted that the dollar figures are so small it wouldn’t take much of a change to move a fund from surplus to deficit.

Dreyfuss pointed out that the standards do not require a municipality to meet pension obligations, simply to report them differently. From the municipality’s point of view, the most important number in Pennsylvania is the state-mandated “Minimum Municipal Obligation,” or MMO. Fail to pay the MMO, and state money can be at risk.

Hanover Township Manager Sam Gusto said that’s the focus at his office, and that there is no way of knowing the impact of the new GASB standard until the actual book work changes are implemented.

You can read the rest of Guydish’s massive piece here. It goes on to explain how the rules might impact school districts and state-level pension funds.

Photo by www.SeniorLiving.Org

Audit Rips Into Connecticut Pension Board

A state audit released this week ripped into Connecticut’s Teacher’s Retirement Board, accusing the Board of “severe” management problems and revealing that the board has failed to keep tabs on millions of dollars.

Reported by NBC Connecticut:

A recent state audit says the people in charge of the funds need to do their homework and learn better accounting procedures.

The state auditor’s findings report that the TRB had a “severe lack of management oversight” of its retiree health fund less than a year ago, resulting in a multimillion-dollar discrepancy.

Auditors also criticized the TRB for failing to tell beneficiaries of deceased retirees that they were due the remaining portion of the retirees’ pensions, in one case amounting to $200,000.

The TRB also admitted to auditors it was doing a poor job of keeping track of accounts payable and receivable, and in some cases retirees who died received pension benefits after their death, according to the report.

The TRB responded in the audit saying it is understaffed, but trying to solve these issues.

It now has subscribed to a people finding service to locate the survivors of retirees who have passed, among other moves.

The board controls $14 billion of assets. Read the entire audit here.

What Would Adam Smith Say About CalPERS’ Hedge Fund Pullback?

Tim Worstall has written an interesting piece for Forbes in the wake of CalPERS’ decision to remove $4 billion from 30 different hedge funds. The premise: What would Adam Smith think about the pension fund’s decision to end its investments with hedge funds?

Worstall writes:

We can look back all the way to 1776 and the foundation text of modern economics, Adam Smith’s “Wealth of Nations” and find a reasonable explanation of what’s happening here. Essentially, hedge funds were a great idea but the innate structure of free market capitalism means that no idea stays great over time.

[…]

When the capitalists (investors) spot someone making those above average profits then they’ll move their investments over into that sector so that they can get them some of those excess returns. All of which is entirely fine and is a reasonable enough description of what happened to hedge funds from their small start in the 60s and 70s up to recent times. They were making higher (risk-adjusted) profits and people were moving more of their capital into them in order to get those higher returns.

However, Smith goes on to point out what happens next. That increased capital in that sector introduces more competition into that sector. Such competition, umm, competes away those excess profits and it’s thus, in the end, the very movement of capital (or investment) in chase of higher returns that leads to the higher returns disappearing. This would be a reasonable description of the hedge fund industry in more recent times.

Certainly, some funds have done very well indeed, but others have tanked. The average return from the industry (after fees, a vital point to consider) is now lower than many if not most other investment strategies. At which point we should see capital flowing out of the industry and that’s just what Calpers is doing.

Worstall is a senior fellow at the Adam Smith Institute. Read the rest of his piece here.

Photo credit: “AdamSmith” by Etching created by Cadell and Davies (1811), John Horsburgh (1828) or R.C. Bell (1872). Licensed under Public domain via Wikimedia Commons

New York Police Unions Lobby For Higher Disability Pensions

Public safety unions in New York have renewed lobbying for a bill that would increase pensions for less experienced police officers that are injured on the job.

More details on the bill and how it would change current law, from Capital New York:

To determine the size of their pensions, police officers, like most municipal employees, are grouped into a tier system based upon their date of hire. The Albany bill, which has been introduced in both houses of the State Legislature, would afford all police officers the same disability benefit of three-quarters of their salary.

Currently those hired after July, 2009 receive less than their colleagues with more seniority.

The bill received added attention after NYPD officer Rosa Rodriguez suffered severe lung damage after responding to a Brooklyn fire in April. Her partner, Denis Guerra, died from injuries he sustained at the high-rise arson fire in Coney Island.

A memo attached to the Albany bill notes that Rodriguez’s disability benefits would currently total $22,000 annually, compared to roughly $39,000 if she had been hired earlier.

Mayor Bill de Blasio does not support the bill, although his support isn’t needed to pass the measure. De Blasio says the bill would cost the city $35 million in the first year alone, but union officials dispute that number.

Moody’s: Undoing Retiree Cuts Would Spell Bankruptcy For Flint

Detroit isn’t the only Michigan city having a hard time financially. Flint, a smaller but similarly distressed city, has toyed with the idea of bankruptcy for months.

The city cut retiree benefits in an attempt to improve its fiscal condition, but a lawsuit over those cuts is waiting in the wings.

Moody’s has now said that the city is unlikely to face bankruptcy – but if retirees win their lawsuit against the city, that outlook could change. From Michigan Live:

Flint and Detroit have many similarities, but bankruptcy isn’t likely to be among them, according to an analyst with Moody’s Investors Service.

David Levett, writing in the Sept. 11 issue of U.S. Public Finance Weekly Credit Outlook, says Flint is unlikely to follow Detroit’s path into bankruptcy in the near term, especially if the courts allow the city to keep benefit cuts to retirees in place.

[…]

Earlier this year, Earley himself raised the possibility of bankruptcy for Flint if it loses a lawsuit filed by city retirees, which seeks to maintain the health benefits that workers retired with.

Levett’s analysis credits Flint’s emergency managers with having “substantially improved financial operations with dramatic changes, including restructuring pension benefits, outsourcing services, eliminating 20 percent of the city’s workforce and reducing total employee compensation equivalent to 20 percent of wages.”

He says Flint’s financial progress “would be derailed” if cuts to retiree benefits are overturned.

“The city would face substantial financial pressure should the benefit cuts not stand, increasing the likelihood of a bankruptcy filing … If the city ultimately loses the challenge, annual expenditures would increase by $5 million, equivalent to 8 percent of 2013 revenues,” the report says.

Flint Councilman Joshua Freeman was not so optimistic. In an email to Michigan Live, he said he sees “no clear path forward that does not include bankruptcy”.

CalPERS To Ditch Hedge Funds Entirely

CalPERS has been reviewing its hedge fund strategy for months, and that review initially led to a 40 percent pullback from hedge funds.

But now the California pension fund has announced plans to cut the cord from hedge funds entirely, pulling out $4 billion from 30 hedge funds. From Reuters:

Calpers, the largest U.S. pension system, said on Monday it has scrapped its hedge fund program and will pull about $4 billion in its investments from 30 such funds.

The $300 billion California Public Employees’ Retirement System said it would exit the program, known internally at Calpers as the Absolute Return Strategies (ARS) program, to reduce “complexity and costs.”

“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale … the ARS program doesn’t merit a continued role,” Ted Eliopoulos, Calpers interim chief investment officer, said in a statement.

Calpers said it will spend the next year exiting 24 hedge funds and six hedge fund-of-funds, “in a manner that best serves the interests of the portfolio”.

The decision to exit the hedge fund program culminates a search, Calpers says, that began after the 2008 financial crisis to ensure it was “less susceptible to future large drawdowns.”

Calpers has signaled waning enthusiasm for the asset class for some time. It started a review of its hedge fund program this year and has said for months it would cuts its allocation to hedge funds.

CalPERS overall portfolio returned 18.4 percent last year. But it’s hedge fund portfolio earned only 7.1 percent, while racking up $135 million in fees and expenses.

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