Ted Ballantine | Pension360

St. Louis Fund Files Shareholder Lawsuit Against General Motors

A flood of lawsuits has hit General Motors in the wake of numerous recalls. At least one pension fund has now gotten in on the action: The St. Louis Police Retirement System has sued GM for the “systemic failure” of its board in handling the safety issues and recalls of recent years.

Reported by the St. Louis Business Journal:

A shareholder lawsuit filed on behalf of a St. Louis police pension fund and an individual shareholder takes issue with General Motors’ handling of safety issues.

The suit alleges board members are “guilty of a sustained and systemic failure” to keep the shareholders’ informed of safety and recall issues, the New York Times reports. David Honigman, the attorney representing the plaintiffs, told the newspaper that the company “set up a system that is calculated not to inform them about safety issues.”

GM has been hit with recalls of nearly 30 million vehicles since February, as well as at least 13 deaths linked to a defective ignition switch. The company is now facing multiple investigations and has set aside nearly $4 billion to cover associated costs, according to the New York Times.

General Motors is currently being investigated by the SEC, the Justice Department, and over 40 state attorney generals.

Photo Credit: “General Motors logo” by Gage. Licensed under Public domain via Wikimedia Commons

Newspaper: Report on Canadian Investment Expenses “Misses the Point”

Last week, Pension360 covered a report questioning the Canada Pension Plan’s new investment strategy, which had led to a more than 100 percent increase in investment expenses since 2006.

But one newspaper, the Hamilton Spectator, says the report missed the point entirely. From the Hamilton Spectator editorial:

Rousing displays of verbal fireworks could not conceal the study’s failure to find out what Canadians need to know. […] The country needs to know whether private-sector plans or the public plan is a more efficient way of saving for retirement.

The authors found the government collects the contributions to the Canada Pension Plan and pays out the pensions, for an administrative cost of around $550 million a year. The government recovers that cost by skimming an administrative charge off the contributions. If the CPP Investment Board counted that cost as part of its operating costs, those costs would be $550 million higher.

But we need to know if the government’s costs for collecting contributions and mailing out cheques are out of line with operators of private-sector pension plans. The study’s authors make no inquiry on that point.

A more useful study would produce evidence both from the public and private spheres. That study would have to be written by authors who gather the evidence first and then draw their conclusions. The study published last week seems more like the work of an agency with a narrow agenda — what you might call a self-serving bureaucracy.

The report, released last week, found the Plan’s investment expenses had increased from $600 million or 0.54% of assets in 2006 to $2 billion or 1.15 per cent of its assets in 2013.

Report: New Jersey Pension Investments Trailed S&P 500 For Seven of Last Eight Years

New Jersey's investment returns vs. the S&P 500 CREDIT: IB Times — New Jersey’s investment returns vs. the S&P 500
CREDIT: IB Times

Last week, journalist David Sirota reported on the New Jersey pension system and its drastic shift towards hedge fund investments under Chris Christie.

This week, Sirota has analyzed the state’s financial records. His finding: despite the increased allocation toward hedge funds and other alternatives, the pension system has mostly underperformed relative to the broader market.

Sirota writes:

In seven of the eight years since the state began shifting pension funds into so-called alternative investments, returns have fallen well short of the broader stock market, an analysis of state financial records shows. In those seven years, New Jersey’s alternative investment portfolio has produced gains of just more than half of the S&P 500, the widely watched index seen as a proxy for shares of large corporations.

[…]

The below-market results from the state’s $20 billion alternative investment portfolio belie repeated assurances from New Jersey officials who said the investments would overperform the stock market. Instead, the results buttress arguments by investors like Warren Buffett and some local lawmakers, who assert that pension money should be invested in stock index funds rather than hedge funds, private equity, venture capital, real estate and other alternative investments.

Christie has responded to the fund’s under-performance by claiming that, although it has under-performed the broader market, it has beaten the fund’s internal projections.

Pennsylvania Schools Feeling Pension Pinch

Pension payments for school districts have increased significantly in the last decade. CREDIT: Lancaster Online — Pension payments required of school districts have increased significantly in the last decade.
CREDIT: Lancaster Online

Pension costs have skyrocketed over the last decade for Pennsylvania public school districts, as the state’s pension liabilities and the contributions required from schools have both increased dramatically. From Lancaster Online:

The key concern is the underfunded Pennsylvania School Employees Retirement System. Due mainly to past actions by the Legislature — under both Democratic and Republican control — the statewide pension program currently carries a nearly $50 billion liability.

To make that up, districts have seen the amount they’re forced to pay skyrocket over the past several years.

– Elanco has seen its contributions rise from $350,000 in 2004 to $3.1 million in 2014.

– Lampeter-Strasburg had its payments grow from $325,000 in 2004 to $2.2 million in 2014.

– Hempfield has stretched those costs from nearly $1.5 million in 2004 to $5.4 million in 2014.

– Penn Manor was forced to increase that portion of the budget from just over $1 million in 2004 to $6.3 million in 2014.

Pennsylvania’s Public School Employees’ Retirement System (PSERS) was 66.3 percent funded as of 2012.

Rhode Island Primary Draws Interest of Political Scientists; Can a Democrat Win After Agitating Unions?

Political observers are eagerly awaiting the results of tomorrow’s Democratic primary in the race for Rhode Island Governor. That’s because the results will be a case study on what happens when a Democratic candidate runs without much support from labor groups.

Gina Raimondo’s 2011 pension reforms agitated many unions who said the cuts were too steep and the negotiations too one-sided. Most union groups have publicly endorsed Raimondo’s challengers, Angel Taveras or Clay Pell. Reported by Bloomberg:

As U.S. states and cities contend with underfunded worker retirement systems that are crowding out spending for services, roads and schools, the vote is a test of whether a Democrat can challenge unions that have been a pillar of the party’s support and still win at the ballot box.

“It will send a real signal to other politicians about what it means to take on this particular interest group,” said Marion Orr, a political scientist at Brown University in Providence and former head of its Taubman Center for Public Policy and American Institutions. “She may be able to pull this off.”

Pensions are an issue in the race because the overhaul was Raimondo’s main achievement since winning election four years ago. Her efforts have led Taveras to portray her as a tool of Wall Street.

Government unions have divided their support between Taveras, who was raised in public housing by his Dominican immigrant mother, and Pell, a former official in President Barack Obama’s Department of Education and husband of Olympic figure skater Michelle Kwan. All three candidates went to Harvard University.

A recent poll found that 32 percent of Democratic voters would vote for Raimondo; 27 percent of Democratic voters would back Taveras, and 26 percent would vote for Pell.

Fitch Downgrades New Jersey Credit Rating For Second Time in Five Months

On Friday, New Jersey was dealt another fiscal blow when rating agency Fitch downgraded New Jersey’s credit rating. The agency said New Jersey exacerbated “a key credit weakness” when it decreased its payments to the state pension system. From the Star-Ledger:

Wall Street analysts at Fitch Ratings today downgraded New Jersey’s bond rating for the second time this year, citing the state’s poor economic performance, Gov. Chris Christie’s rosy revenue forecasts — which failed to materialize — and his decision to plug the resulting budget gap by cutting $2.4 billion in funding for the state’s strained pension system.

Fitch said Christie’s decision to cut the pension payments this year marked a “repudiation” of a bipartisan plan he signed to fix the beleaguered retirement system for public workers, which is underfunded by nearly $40 billion, according to state estimates.

Instead of pumping bigger cash infusions every year into workers’ retirement accounts to save them from collapse — as Christie and lawmakers agreed to do in his first term — New Jersey is now stepping away from its plan, Fitch said.

“Following significant revenue underperformance, the state relied upon the repudiation of its statutory contribution requirements to the pension systems to return to budgetary balance, exacerbating a key credit weakness,” the Fitch analysts wrote in a note to investors, lowering their rating on the state’s debt from A+ to A.

New Jersey’s Treasury department responded to the downgrade by defending Christie’s decision to divert much of the state’s pension payment into the general budget. From The Star-Ledger:

A spokesman for the state Treasury Department said Christie “acted responsibly” by shrinking two pension payments that had been scheduled for the current and previous fiscal years.

“Without raising taxes on an already overburdened populace, Governor Christie has already contributed more to the pension system than any previous governor,” said the Treasury spokesman, Chris Santarelli, in an emailed statement.

“As rating agencies and ratings expectations have been recalibrated following the financial crisis of the late 2000s, the state Treasury and Office of Public Finance have worked tirelessly to ensure that New Jersey is rated fairly and equally by the Wall Street rating agencies; and will continue to do so.”

This is the second time in five months Fitch has downgraded New Jersey’s credit rating.

Photo by Walter Burns via Wikimedia Commons

Berkshire Hathaway Sued By Subsidiary Over Retirement Benefit Cuts

Workers at Acme Brick Co. say Berkshire Hathaway promised not to scale back retirement benefits when it bought the company in 2000.

Since then, Acme Brick employees have had their pensions frozen and been subjected to other rollbacks in retirement benefits. So they have sued Hathaway, the holding company run by Warren Buffett, for breaching its alleged promise. Reported by the Star Telegram:

Two employees and a retiree of Fort Worth-based Acme Brick Co., including the company’s chief financial officer, have sued the company and its parent, Berkshire Hathaway, alleging the company improperly reduced the company match on its 401(k) retirement plans and froze its pension plan.

The class action suit, filed Aug. 15 in U.S. District Court in Fort Worth, says Berkshire Hathaway, run by multi-billionaire Warren Buffett, broke a pledge it made when it acquired Acme with Justin Industries in 2000 not to reduce benefits in the company’s retirement plans.

“Since that time, the employees have stuck with the company through good times and bad, in anticipation that their benefits under the Retirement Plans would ultimately compensate them fairly,” the lawsuit says. “Now, almost 14 years later, Berkshire Hathaway has broken its promise.”

Acme Brick’s senior management on July 15 voted to make changes to the retirement plans urged by Buffett, Berkshire’s chief executive officer, and Marc Hamburg, its chief financial officer. Otherwise “Berkshire Hathaway intended to divest itself of Acme as a subsidiary,” the lawsuit says.

The class-action lawsuit alleges that Berkshire Hathaway violated the Employee Retirement Income Security Act (ERISA) when it cut benefits.

Trustees Express Fears About San Diego Fund’s Risky Strategy

The San Diego County Employees Retirement Association (SDCERA) made headlines this summer with its decision to embrace a high-risk investment strategy including extensive use of leverage and derivatives.

But members of the fund’s board expressed concern at a meeting Thursday over potential losses the fund could experience if the risky strategy goes awry. Reported by UT San Diego:

At a contentious meeting Thursday, the pension fund’s board directed managers to fence in potential losses without reducing expected investment returns.

Under a revised investment strategy that took effect July 1, managers can use derivatives to put $20 billion or more at risk in financial markets, using the fund’s $10 billion in assets as collateral.

“Frankly, it scares the heck out of me,” said Dianne Jacob, a county supervisor and appointed member of the pension board, said Thursday.

The fund’s chief investment strategist, Lee Partridge of Salient Partners, said the probability of total losses was exceedingly low. The view was echoed by the fund’s chief executive and a consultant charged with risk management oversight.

Board members approved the new strategy in April, by a unanimous vote that included Jacob.

“The draft IPS does not include appropriate limits and board approval processes in the areas of asset allocation, leverage and portfolio risk monitoring,” said county Treasurer and board member Dan McAllister, in a letter given Thursday to the fund’s chief executive, Brian White.

The point was driven home by Samantha Begovich, a county prosecutor who joined the board in July.

Holding up a dollar bill, then adding a second dollar bill, Begovich asked directly whether the fund could lose its entire balance — and still owe $10 billion.

Fund officials maintained that the probability of a total loss of assets as a result of the strategy was close to zero.

Photo by dktrpepr via Flickr CC

Judge Hints Illinois Pension Case Could Be Fast-Tracked

It’s been a foregone conclusion that the lawsuit against Illinois’ pension reform law would eventually be heard in the halls of the Supreme Court. The question has always been how long it would take to get there.

But a judge indicated this week that he’d like to fast track the case through the lower courts and get it to the Supreme Court as quickly as possible. Reported by the Herald-Review:

Sangamon County Judge John Belz said Thursday that an earlier court decision that blocked changes to retiree health insurance premiums could provide a roadmap for how the pension case will be handled in the coming months.

In July, the Illinois Supreme Court ruled that a law requiring retirees to pay more for health insurance was unconstitutional, triggering speculation that the pension changes also would be tossed out.

Belz told attorneys gathered for a hearing Thursday that the court’s decision in the health insurance case was like “an elephant in the room.”

“I can’t stick my head in sand and act like it isn’t there,” Belz said.

When Belz and attorneys were initially laying out a schedule for the case, it was not expected to be resolved at the lower court level until sometime in 2015.

Now, with the health insurance case providing a path, Belz said he’d like to move the case to the Supreme Court quickly.

“As fast as we can move it along within reason the better,” Belz said.

“This can be wrapped up by the end of this year,” said attorney John Fitzgerald, who represents a group of retired teachers.

A speedy judgment would make both sides happy. But there was bad news for the state mixed into yesterday’s hearing; the judge indicated he’d heavily weigh July’s ruling on retiree health insurance when crafting his judgment on the pension reform law. The July ruling declared an increase in retirees’ health premiums unconstitutional.

Pennsylvania Lawmaker Proposes Trash Tax to Ease Pension Pains

Pennsylvania Governor Tom Corbett has made pension reform a major part of his re-election platform, but has had little luck finding lawmakers to help him push through proposals.

One lawmaker put a new idea in the ring Thursday, although it’s probably not what Corbett had in mind.

Reported by the Morning Call:

State Rep. David Milliard thinks there may be pension gold buried in the state’s landfills.

On Thursday, the Republican from Columbia County floated a bill that would impose an additional $3 tipping fee on waste haulers to reduce school districts’ rising pension costs.

The additional fee would generate an additional $51 million and be put into a new pension-only fund controlled by the state Treasury, according to a memorandum Milliard published seeking co-sponsors to his bill. The Additional Commonwealth Contributions to School Districts Account.” to be used to help districts lower pension costs. The money would be distributed to districts, but not charter schools, on a prorated basis.

The proposal is meant to ease pension costs for school districts, which are subject to rising contribution rates designed to help cover the state’s pension funding shortfall. From the Morning Call:

Mandatory pension payments for school districts rose about 4.5 percent to 21.4 percent of payroll this fiscal year. The rising rates are based on Act 120, which went into effect in 2011. The law sets a increasing, fixed rates the state and school districts must pay each year to cover back pension debt, which is now approaching $50 billion. The state and school districts are having trouble keeping up with those payments even though they are lower than they would be if the law were not in effect.

So far, no other lawmakers have sponsored the bill.

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