Ted Ballantine | Pension360

Will Villa Park Cut Ties With CalPERS?

The California city Villa Park could vote today to remove itself from the California Public Employees Retirement System (CalPERS).

The decision comes in the face of mounting pension costs and calls for increased transparency in local budgets, which would shine more light on California cities’ unfunded pension liabilities.

First reported by the Voice of OC:

The Villa Park City Council could vote Tuesday to end its contract with the California Public Employees’ Retirement System or CalPERS, the world’s sixth largest pension provider, in an effort to reduce increasing pension costs.

The CalPERS move follows an Orange County Grand Jury report that called for greater budget transparency in Orange County cities.

The report indicates Orange County cities’ unfunded pension liabilities have been increasing on an annual basis since 2007.

There have been increased calls for budget transparency in recent years as cities and towns in the CalPERS system have shouldered more liabilities. A recent report called for all cities to put their budgets online and include CalPERS cost projections in all budgets going forward.

Villa Park has millions in unfunded pension liabilities. From Voice of OC:

For its pension costs, Villa Park, a north OC bedroom community of about 5,000, has a shortfall of about $3.5 million, leaving 17.5 percent of its employee pension costs unfunded, according to the grand jury report.

Gov. Jerry Brown enacted sweeping pension reforms in 2012 aimed at reducing pension payments for most public employees hired after 2013.

But because many public workers were hired before 2013, they are grandfathered into the old system, and reforms likely won’t make a dent for another decade, the grand jury report states.

Villa Park could vote on leaving CalPERS as early as 6:30 pm (Pacific Time) Tuesday. The city wouldn’t be the first to leave CalPERS; Canyon Lake, a city of 11,000, left the system in 2013 due to increasing employee contributions.

Here’s How Philadelphia’s New Labor Deal Will Affect Pensions

After years of negotiations, Philadelphia and its largest union have come to an agreement on a new labor contract that has implications for the city’s pension system and the workers that pay into it.

The union, AFSCME District Council 33, indicated that its members will overwhelmingly approve the deal.

A major provision of the deal gives employees a choice between several retirement plan options. Employees will also have to pay more into the pension system. From Business Insurance:

[The deal] will increase employee contributions to the pension fund and allow new employees the choice between a hybrid plan and the traditional pension plan, said Mark McDonald, a spokesman for Mayor Michael A. Nutter.

The contract agreement term is retroactive from July 1, 2009, through June 30, 2016. Terms of the contract must be ratified by members of DC 33.

Current participants in the $4.8 billion Philadelphia Municipal Retirement System, a defined benefit plan, will have their employee contribution increase by 1% of pay over the next two years — 0.5% effective Jan. 1, 2015, and an additional 0.5% effective Jan. 1, 2016.

All employees hired after the contract is ratified can either enter the defined benefit plan and pay 1% more than current participants or enter a hybrid plan. Current employees have 90 days following ratification to make an irrevocable election to move to the hybrid plan.

The rest of the deal, as reported by ABC:

The newly reached seven year tentative agreement is retroactive from July 2009 and expires in 2016.

The deal will include wage increases of 3.5 percent this year, 2.5 percent next year plus a lump sum of $2,800 for every member. However the wage increases are not retroactive.

Also in the deal – employee contributions to pensions will increase and the city will pay a one-time $20 million lump sum into their healthcare.

In the future, the city will be able to use temporary layoffs, if needed, during an economic crisis.

The deal marks a compromise for both sides. According to WPVI, the deal will prove expensive for the city—estimates put the cost at $127 million over five years—that will require some budgetary finagling.

One major concession for the union was that sick leave will no longer be eligible for overtime pay.

Photo by Peter Miller via Flickr CC License

American Century Lands $530 Million Investment From Arizona State Retirement System

The Arizona State Retirement System has invested $530 million with American Century Investments. As reported by the Kansas City Business Journal:

The investment will be placed in the American Century Non-U.S. Growth strategy, which looks for companies with a market capitalization of $3 billion or more, with accelerating growth and improving fundamentals. The overall portfolio typically invests in about 90 to 135 companies.

The investment management team is led by Senior Portfolio Manager Rajesh Gandhi, a 17-year financial services veteran who joined American Century in 2002.

The Arizona State Retirement Systems manage $34 billion in assets for 500,000 members.

Portfolio Manager Rajesh Gandhi explains his investment strategy in this video, courtesy of American Century.

Houston Firefighters Fund CIO Resigns

Christopher Gonzales, the Chief Investment Officer of the Houston Firefighters Relief and Retirement Fund (HFRRF), resigned from his position today. As Pensions & Investments reports:

Mr. Gonzales said he has taken a position with a corporate retirement plan. He declined to provide further information. He has been CIO at the pension fund for 13 years. His last day is Sept. 12.

The board will discuss how to handle the upcoming vacancy at a special board meeting on Thursday, said Chairman Todd E. Clark.

Notably, Gonzales is a staunch supporter of private equity investments. The most recent data reveals the HFRRF allocated just over 10 percent of its assets towards private equity in 2013, but that number was once as high as 18 percent.

In an op-ed written for Pensions & Investments in January 2014, Gonzales lauded the performance of his fund’s private equity investments:

For the second year in a row, the Houston Firefighters’ Relief & Retirement Fund was among the top ranked in the Private Equity Growth Capital Council’s top 10 pension funds by private equity returns.

HFRRF earned a fourth-place spot in the private equity return ranking with a 13.6% annualized return, net of fees, over the 10 years and 9.3% over the five years, ended June 30, 2012.

Returns have shown consistency. In the 10 years ended June 20, 2011, the PEGCC study ranked HFRRF seventh best in private equity portfolio performance.

The PEGCC’s report showed that private equity returns to large public funds outperformed all other asset classes with median annualized 10-year returns of 10% for the subset of 146 large public pension funds that published 10-year returns ended June 30, 2012.

The HFRRF returned 11.24 percent, net of fees, in 2013 after returning 1.89 percent in 2012 and 20.29 percent in 2011.

Photo by Daniel Fleming via Flickr CC License

CalPERS Weighs Withdrawal From Commodities

California is often on the cutting edge of trends that eventually reverberate throughout the rest of the country. The same is true of CalPERS, the pension fund that was among the first to invest in real estate, hedge funds and private equity.

So when CalPERS announces a dramatic change in investment strategy, other funds drop what they’re doing and listen. Funds are certainly listening lately, as CalPERS is considering a handful of moves that would shift its asset allocation significantly.

Among them: the fund is considering taking all of its money out of commodities. From the Wall Street Journal:

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio and it currently has $2.4 billion in such derivatives, or less than 1% of total holdings.

[…]

The discussions are taking place between the fund’s interim Chief Investment Officer Ted Eliopoulos and Calpers’s other top investment executives. The Calpers board hasn’t yet been informed about any possible changes and no final decisions have been made, the people said.

The move, however jarring, wouldn’t be out of step with other recent investment decisions by CalPERS. The fund has shown a willingness to exit large investments it considers risky. From Wall Street Daily:

CalPERS’ potential retreat from riskier investments is evidence that it’s trying to simplify its portfolio and guard against losses during the next market downturn.

In a sense, CalPERS is turning to a bit of a “risk off” mode in this time of uncertainty.

Ultimately, with the realization that we’re in the midst of the Fed’s continued tapering, talk of interest rates hikes, and geopolitical unrest from the Middle East to the Ukraine, it may be time to dial down risk and play it safe.

In fact, this move is reflective of last fall, when CalPERS hinted at a shift away from complex investments, warning that the fund “will take risk only where we have a strong belief we will be rewarded for it.” This decision came after it had approved a new set of investment goals that reduced future exposure to equities and private equity, while increasing allocations to bonds and real estate.

A similar move by CalPERS also took place at the end of 2012, when the fund chopped commodities investments by more than half – prompting reports that it was shifting from commodities to inflation-linked bonds.

And in both incidences, the commodities markets experienced corrections.

CalPERS is weighing several other ideas, including whether forgo individual stocks in favor of securities that track broader industries.

CalPERS also made headlines last month when it announced it would cut its hedge fund allocation by 40 percent.

Photo by Terence Wright via Flickr CC License

New Jersey Is Still Waiting For Return on Hedge Fund Investments

New Jersey Pension Returns — CREDIT: International Business Times

New Jersey is one of the most active states in the country when it comes to investing pension fund assets in hedge funds. That strategy carries risks and boatloads of fees—but it also carries potentially big returns.

Journalist David Sirota investigated the state’s investment decisions and the corresponding return data. He found that New Jersey was certainly straddled with management fees.

But the promised returns have not yet materialized. From Sirota:

Between fiscal year 2011 and 2014, the state’s pension trailed the median returns for similarly sized public pension systems throughout the country, according to data from the financial analysis firm, Wilshire Associates. That below-median performance has cost New Jersey taxpayers billions in unrealized gains and has left the pension system on shaky ground.

Meanwhile, New Jersey is now paying a quarter-billion dollars in additional annual fees to Wall Street firms — many of whose employees have financially supported Republican groups backing Christie’s reelection campaign.

Neither Christie nor the state pension fund’s top investment official responded to Sirota’s requests for comment. But to a certain extent, the numbers speak for themselves. Here’s a chart of the state’s management fees since 2009:

New Jersey's pension investment expenses since 2009 — CREDIT: International Business Times

Thousands of Early Retirements Coming In Indiana As New Law Takes Effect

A new law has pushed forward the retirement plans of thousands of Indiana workers, who may retire early to try and avoid lower interest rates on their monthly retirement benefits.

One state system, the Indiana Public Retirement System, said it expects 2,000 more retirements than last year, which amounts to a 25 percent increase. From the Lafayette Journal and Courier:

A law, passed by the General Assembly this spring, lowers the interest rate retirees will be paid if they choose to annuitize some of their retirement benefits, taking monthly payments for the rest of their lives rather than a lump sum.

For employees whose last day of work is before the end of August, the rate is 7.5 percent. It’ll drop to 5.75 percent thereafter and keep dropping until it’s tied to the market rate.

The change is supposed to prevent a changing world from bankrupting the system, according to INPRS documents. Concerns stem from longer life expectancies and the system’s return on investment, which is lower than the current interest rate.

While system administrators say the lower rates are necessary, the change has inspired government workers who were nearing retirement to move up their plans.

Of course, nobody knows for sure how many of those extra retirements were spurred specifically by the new law. From JC Online:

Local officials says it’s hard to judge the exact impact the new law has on retirees.

In the Lafayette School Corp. for example, 37 teachers retired this year, more than the typically 20 to 25 teachers, said assistant superintendent John Layton. But without asking each one point blank why they’re retiring, the reasons prompting that retirement aren’t always clear.

[…]

West Lafayette city human resources director Diane Foster said the change has had minimal impact on the city. The only retiree to cite that as a reason is soon-to-retire parks and recreation superintendent Joe Payne.

“Other than that I’m not aware of any other employees who have made that decision based on this,” Foster said. “It could be that if an employee is already considering retirement this may be just one more factor that could help them go ahead (and do it).”

It’s unclear how the change is impacting Lafayette. Human resources director Kim Meyer said retirement data wasn’t immediately available.

Rhondalyn Cornett, president of the Indianapolis Education Association, told the Lafayette Journal Courier that a retiree could see significantly less benefits under the new law—to the tune of $5,000 a year.

With that number in mind, it’d be surprising if the new law wasn’t at least a factor in most of these early retirements.

Photo by www.aag.com via Flickr CC License

Infrastructure Investments Becoming Big Part of Canadian Pensions

Infrastructure investments are becoming increasingly common endeavors for public pension funds. That’s true around the world, but nowhere is the trend more pronounced than in Canada, where the average pension fund has doubled its allocation to infrastructure since 2009. As reported by Benefits Canada:

Historically, Australian and Canadian investors—primarily pension funds—have dominated investment in infrastructure assets, accounting for 40% of historical allocations despite representing only 7% of total potential available capital.

Canadian pension assets totaled US$1.6 trillion in 2013, while infrastructure allocations by Canadian plans totaled US$47.2 billion. This contrasts with U.S. pension assets, which were in excess of US$18 trillion also in 2013, and whose allocations to infrastructure were only US$25.4 billion, less than those made by Canadian pension plans.

On average, Canadian pension funds have allocated 4% of their pension fund assets to infrastructure, up from 2% in 2009.

More recently, there have been some noticeable trends in infrastructure investing, both in terms of investor location and type. To date, pension funds have accounted for 72% of allocations made to infrastructure assets. Based on prospective allocations, sovereign wealth funds are expected to increase their “market share” from 13% of the total allocations to 40%, with a corresponding decrease in the percentage attributed to pension funds (45% versus the present 72%).

Funds in the United States might not be in on the game yet, but insiders say they expect state-level pension funds to significantly boost their allocations to infrastructure investments. More from Benefits Canada:

American state pension funds, as well as Asian investors[…]have started to take an active interest in infrastructure investing. These two groups currently account for 20% of allocations, but based on surveys by Preqin, are expected to increase these to 48% of total infrastructure allocations. Most notably, the Government Pension Investment Fund of Japan has committed 0.2% to infrastructure, though this translates into US$2.7 billion in investments over the next five years.

It’s a very interesting trend, and one that likely won’t reverse course in the near future. The exception may be smaller funds, who will have more trouble navigating direct investments in infrastructure. They’ll have to hire third-party managers, and that may not be appetizing to some funds who are becoming increasingly allergic to fees and investment expenses.

Photo by Kyle May via Flickr CC License

Fitch Weighs In On New CalPERS Compensation Rules

This week, CalPERS approved 99 types of additional income that workers can include in their pension calculations.

The change will increase the pensions of many workers in the CalPERS system, and the fund has already drawn flak from California Governor Jerry Brown.

Now, the credit rating agency Fitch is in on the game, too. Fitch says the changes will increase pension liabilities and present additional costs to the state. From Fitch:

The expanded definition of pensionable compensation exposes public employers to higher pension liabilities and contribution expenses, and appears to be a step backward from recent reforms. The Public Employees’ Pension Reform Act of 2013 (PEPRA) narrowed the definition of pensionable compensation for public employees in an effort to address “pension spiking,” the inflation of base pay for purposes of pension benefit calculations. This decision expands the definition of pensionable compensation, in apparent conflict with PEPRA, and will increase pension costs for public employers if implemented.

The magnitude of impact from this decision is not yet clear, but it raises more questions about the sustainability of California’s pension reform efforts, which continue to face legal and institutional challenges. Particularly worrisome to Fitch is the absence of detailed information on the analysis of its projected costs. The decision has been sharply criticized by Gov. Jerry Brown, who cited its conflicts with recent state legislation intended to reduce pension costs. City-led pension reform efforts in San Diego and San Jose remain mired in litigation while this CalPERS decision appears to open up a new front for challenging reform efforts.

Gov. Brown was actually open to most of the 99 “special pay items”. But he adamantly opposed the measures that contradicted the reform law Brown passed in 2012.

“Today Calpers got it wrong,” Brown said in a statement on Wednesday. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

CalPERS Board Member Facing Stiffer Penalty After Latest Failure To File Campaign Documents

What do the years 2002, 2007, 2008, 2010, 2012 and 2013 all have in common?

Those are the years that Priya Mathur, Vice President of the CalPERS board, failed to submit campaign finance documents or conflict of interest statements in a timely manner.

She was fined three times by the Fair Political Practices Commission over that period for those violations. Now, another fine is coming for her latest transgressions. From the LA Times:

At issue in the recent enforcement action was the failure to file four semiannual campaign financial statements for 2012 and 2013 in a timely manner.

In a recent email, she described the missed reports as an oversight. “I had inadvertently failed to file the proper forms in 2012 to close my campaign committee,” she said.

The proposed fine of $1,000 was announced Aug. 11 after she and FPPC attorneys reached an agreement to settle the charges. In turn, Mathur and her board reelection committee pledged not to contest the punishment.

But the panel reversed course on the $1000 dollar fine and decided they should quadruple it—raising it to $4000. The Sacramento Bee reports:

Mathur, the pension fund’s vice president, had agreed to a $1,000 fine with the staff of the state Fair Political Practices Commission. But the commissioners refused to accept the fine Thursday, arguing that Mathur should get a higher penalty because she had been fined several times before by the FPPC.

Gary Winuk, the agency’s chief of enforcement, said commissioners sent the case back to the FPPC’s staff and suggested the fine be increased to $4,000.

“Given her history … they felt it warranted a higher penalty,” he said. He said the matter could be brought back to the commission next month.

At this point, Mathur and the ethics panel probably know each other on a first name bases. But repeated disciplinary actions haven’t changed Mathur’s behavior. From the Sac Bee:

The FPPC has already fined Mathur a total of $13,000 for earlier transgressions, including late filing of campaign documents and her conflict-of-interest statements. The most recent fine came in 2010, prompting the CalPERS board to punish her by removing her as chair of the health benefits committee and suspending her from traveling on pension fund business.

In the latest case, Mathur was late filing four campaign finance statements in connection with her re-election bid. Mathur told The Sacramento Bee last week that the late filing was the result of a paperwork mix-up.

The FPPC staff, in its report to the commissioners, said it took “numerous requests” from investigators to get Mathur to finally file the documents. That conduct played a role in the commissioners’ desire for a stronger penalty, Winuk said.

The board’s election takes place next week. The election is conducted by mail.

Photo by Blake O’Brien via Flickr CC License

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