Ted Ballantine | Pension360

Auditors Asking Questions About “Illegal” Pension Benefits at Pennsylvania Fund

Pennsylvania’s top auditor claims that the city of Carbondale boosted pension benefits for certain top cops close to retirement, an action that–due to the nature of the benefit increases–violated state law.

In Pennsylvania, pension benefits can only equal up to 50 percent of a worker’s final year salary. But the city offered to sweeten benefits for four city police officers, who are now earning benefits equal to 65 percent of their final salary.

The auditor says those benefits are a clear breach of state law, but the city says it avoided breaking the law by using a loophole of sorts. From the Times-Tribune:

Last year, Mayor Justin Taylor and city solicitor Frank Ruggiero said the higher benefits were legal because the 15 percent extra for the three officers and 10 percent additional for the disabled officer come from the city’s annual budget rather than the police pension fund. Mr. Taylor said the city would save almost $550,000 during the next four years by replacing the officers with lower-paid full- and part-time officers.

The additional benefits are costing the city an extra $2,326 a month, the auditor general says, or $27,912 a year.

Mr. Taylor said city officials still think they’re right and don’t plan to stop making the payments. The city is weighing its options and might appeal the findings because of a fundamental disagreement over the nature of the payments, which are retirement incentives not pension payments, the mayor said.

“We’ve been disagreeing from day one,” he said.

Auditors informed the city of their concerns back in February. The auditors say the city told them they would respond in 10 days. But the city never called them back.

Now, auditors are threatening punishment. Specifically, they are prepared to withhold all state contributions to the pension fund.

Susan Woods, a spokeswoman for the auditor general, said it may not come to that, but auditors are prepared to take action.

“It hasn’t risen to that level,” she told the Time-Tribune. “If they continue to do this, we do have the ability to withhold.”

Auditors took issue with other areas of the city’s handling of pensions, as well. From the Times-Tribune:

The auditor general also criticized other areas in the city’s pension funds:

The city’s provision of cost-of-living increases in pension benefits for firefighters who retired as of Jan. 1, 1993. These firefighters receive a 2.5 percent raise in benefits on the third anniversary of their retirement and every year after that, but the auditor general says the maximum pension should be only 50 percent of the highest salary of an active firefighter.

This criticism was actually a repeat of criticism in an earlier audit.

City officials told auditors they were unable to change the provision through bargaining with the firefighters’ union.

The city’s failure to calculate and contribute the interest on its late 2011 minimum pension payments and did not pay its 2012 and 2013 payments. In response to the criticism, the city contributed more than $666,000 to cover the payments and interest.

The Pennsylvania Commonwealth Court ruled in 2001 that cities must abide by the benefit limits imposed by state law.

Fixed-Income ETFs Gain Traction With Canadian Funds

Exchange-traded funds are becoming an increasingly popular investment vehicle for institutional investors around the world, but that trend is especially true among Canadian pension funds, according to a new study.

One type of ETF was particularly popular: fixed-income.

The study, which interviewed public and corporate pension funds as well as foundations and endowments, found that 57 percent of institutional asset managers are using fix-income ETFs in 2014. In 2013, that number was 45 percent.

The report, produced by Greenwich Associates, offered some reasons for the growing popularity of bond ETFs. From the Financial Post:

“Increasingly, institutional funds and asset managers are viewing ETFs not simply as useful tools for making tactical adjustments to portfolios, but rather as efficient methods for implementing new investment strategies.”

“In particular, ETFs appear to be steadily gaining traction in fixed income — a trend that could reflect investors’ search for better and more efficient approaches to the asset class in a shifting interest-rate environment.”

“Institutions’ heavy usage of passive strategies is helping to drive the growth of ETFs in fixed income,” the study said. “Virtually all the institutional funds and asset managers employ passive strategies in fixed income, and nearly a quarter invest more than half of fixed-income assets in index strategies.”

Interestingly, this is a relatively recent phenomenon. Of the Canadian institutions holding fixed-income ETFs, more than 20 percent said they had started using the vehicles less than two years ago.

Even more popular than fixed-income are equity ETFs, which are employed by the vast majority of Canadian institutional investors. From FP:

Despite this growing penchant for bond funds, equity-related issues remain the most popular ETF investment among institutions, with nearly 80% using the funds in their domestic stock portfolios and 85% employing them to gain U.S. equity exposure.

ETFs are primed to continue their upward trend. According to the study, 40 percent of institutions are planning to increase their allocation to ETFs next year. Only 2 percent of respondents said they plan to reduce allocations.

As Some Pension Funds Phase Out Hedge Funds, Others Phase Them In

There were big headlines earlier this month when CalPERS announced its decision to chop its hedge fund allocation by 40 percent. The news was big not just because it was CalPERS, but because the decision followed in the wake of similar decisions made by smaller funds around the country.

The Los Angeles Fire & Police Pension System might not be a mammoth like CalPERS, but it was still a big deal when the $18 billion fund decided to phase out hedge funds entirely. The fund says it will save around $13 million in fees annually as a result of the decision, which re-allocated $550 million from hedge funds into other asset classes.

“We need to show that we are willing to walk away from managers that are charging us exorbitant fees,” Emanuel Pleitez said in a video interview with Pensions & Investments.

But it’s not just fees. Past experiences inform future investments, so when the Louisiana Firefighters Pension Fund drastically chopped its hedge fund allocation, it was hard to blame them.

That’s because the Firefighters Fund in 2008 had made a $15 million investment in Fletcher International Ltd, a Cayman Islands-based hedge fund.

Sometime in 2012, Fletcher stopped picking up their phone. The Firefighters later found out that was because Fletcher had gone bankrupt. Just like that, they’d lost 100 percent of their $15 million investment.

As a result, the Firefighters Fund reduced its hedge fund investments by nearly 90 percent. Now, only 0.6 percent of the fund’s assets are dedicated to hedge funds, according to Pensions & Investments.

Anecdotal evidence aside, there’s very little indication the movement away from hedge funds is a larger trend.

In fact, if there is a trend, it may be moving towards more hedge fund investments, not fewer. Sticking with anecdotes for a moment, Pensions & Investments reports that a handful full of pension funds are looking to make their first foray into hedge funds:

Among recent first-time hedge fund investors and searchers:

-Illinois State Universities Retirement System, Champaign, will soon begin a search for either hedge fund or fund-of-funds managers for a new 5% allocation for the $16.9 billion defined benefit plan it oversees;

-The $5.1 billion City of Milwaukee Employes’ Retirement System hired Allianz Global Investors to manage $62.5 million in an absolute-return strategy in July;

-The $1.1 billion St. Paul (Minn.) Teachers’ Retirement Fund Association hired EnTrust Capital Management LP to manage $55 million in a customized hedge fund-of-funds separate account in May.

A recent survey revealed that institutional investors are planning on increasing their alternative allocations by 5 percent annually, as opposed to 1 or 2 percent for traditional investments.

McKinsey, the firm behind the survey, said the prevailing sentiment among respondents was that the bull market won’t last forever. But pension funds’ assumed annual rates of return—which usually sit between 7 and 8 percent—won’t change anytime soon.

It’s for precisely that reason that institutional investors are turning to hedge funds, writes McKinsey & Co:

“With many defined-benefit pension plans assuming, for actuarial and financial reporting purposes, rates of return in the range of 7 to 8% — well above actual return expectations for a typical portfolio of traditional equity and fixed-income assets — plan sponsors are being forced to place their faith in higher-yielding alternatives.”

That doesn’t necessarily translate to investing with hedge funds. But often, it does.

And it’s not just about chasing high returns, the report said:

“Gone are the days when the primary attraction of hedge funds was the prospect of high-octane performance, often achieved through concentrated, high-stakes investments. Shaken by the global financial crisis and the extended period of market volatility and macroeconomic uncertainty that followed, investors are now seeking consistent, risk-adjusted returns that are uncorrelated to the market.”

Only time, and piles of financial reports, will reveal which direction the trend ultimately goes.

Christie Vetoes Early Retirement Incentives for Teachers

Chris Christie used his conditional veto power to reject one portion of a broader bill that would make it easier for privately run schools to operate in New Jersey.

The portion of the bill vetoed by Christie would have given certain teachers–specifically, those likely to face layoffs in the near future–a range of perks to retire early. From NJ.com:

Gov. Chris Christie has rejected changes to the Urban Hope Act, specifically taking exception to language that would allow Camden public school teachers to retire early.

The change, he wrote in his conditional veto Monday, would put too much of a strain on an already floundering state pension system.

“The bill … authorizes early retirement incentives to certain school district employees, and may exacerbate the solvency of the pension system,” Christie wrote.

Christie asked the Legislature to reconsider the bill without the retirement incentives.

Specifically, the vetoed portion would have offered early retirement incentives to school employees in Camden, New Jersey.

The Urban Hope Act, if passed, would open the door for charter schools to operate in Camden. But the city has already had to lay off nearly 250 public school employees, and more layoffs are likely on the way.

That’s why public teacher’s unions negotiated the line item in the bill giving teachers a chance to retire early as opposed to being laid off. From NJ Spotlight:

The bill had included an expansive early retirement package that had irked some on both the Democratic and Republican sides.

Assemblyman Troy Singleton, D-Camden, had said the package was only fair in the face of expected layoffs and other cuts in Camden. The New Jersey Education Association supported the early retirement piece, but nonetheless opposed the bill overall.

But Christie called the early retirement package hypocritical at a time when the state is grappling with a pension liability crisis.

The bill now goes back to the Senate. If the legislature approves Christie’s changes, the bill will go back to Christie. He is expected to pass the bill if it stays intact.

CalPERS Responds To Criticism Of Plan To Boost Pensions

CalPERS is holding a hearing today seeking public comment on a set of potential rules that would open the door for many workers to increase their pensions.

The rules would introduce 98 new forms of “pensionable compensation”, or income that is counted when calculating a worker’s ultimate pension benefit.

But many interested parties didn’t wait until the hearing to voice their opinions. California Gov. Jerry Brown was among the first to voice his displeasure at the potential rules, as they contradict certain sections of the reform law he passed in 2012.

“This disregards the rule that pensions will be based on normal monthly pay and not on short-term, ad hoc pay increases,” Brown wrote in a letter to the CalPERS board. “I urge the board to vote against these regulations and instead request a new draft that excludes temporary pay upgrades from employee pension calculations.”

Other big players weighed in as well. Jon Ortiz writes:

Public pension-change advocates, including Democratic San Jose Mayor Chuck Reed, say the proposal is another sign that the union-dominated CalPERS board “is doing what they can to resist reforms. … They’re in favor of anything that expands benefits.”

Elk Grove City Manager Laura Gill said including temporary upgrade pay “really does invite spiking” and threatens to erode savings from pension changes the Sacramento suburb has enacted the past couple of years, such as city employees paying their share of pension costs.

If such practices became standard, “it would put us backward from all the work we’ve done to have a sustainable and sound pension system,” Gill said.

Unions responded as well, but they were receptive to CalPERS’ plan. From the Sacramento Bee:

Mike Durant, president of the union-backed Peace Officers Research Association of California, dismissed those kinds of concerns. If a city or the state needs pension relief, he said, “they can bargain it.”

Instead, he said, government employers expect CalPERS to save them from themselves.

“They want to put it on the backs of someone else to make those decisions rather than making it themselves,” he said.

You can bet CalPERS is listening to all this. And the pension fund responded to the criticisms in a statement sent out to numerous newspapers, including the Daily Bulletin:

CalPERS has approached this issue with full transparency and sought stakeholder input along the way, including employee and employer feedback. The purpose of the public hearing is to seek even greater input on what compensation should and should not be counted toward pensions.

While reasonable people may disagree about what aspects of a public servant’s compensation should count toward a pension, an editorial should stick to the facts and not try to inflame readers with inaccurate terms like pension spiking. Pay for a service is still compensation at the end of the day. Our staff made a recommendation based on a good-faith interpretation of the law. If changes need to be made, we welcome the public’s input.

CalPERS is holding a hearing today to gather the public’s comments on the proposed rules. Once the hearing is wrapped up, the full CalPERS board will vote on the rules, likely on Wednesday.

Colorado Supreme Court Won’t Hear Lawsuit Seeking Release of Pension Data

Colorado Treasurer Walker Stapleton has for years pushed the state toward initiatives designed to improve the health of its pension system, and open pension data was a big part of Stapleton’s plans.

Back in 2011, Stapleton filed a lawsuit seeking the release of retirement benefit data for Colorado’s highest-earning pensioners. But the state’s pension fund, the Public Employees Retirement Association (PERA), said the information was confidential and refused to release it.

Since then, two lower courts have sided with the pension system on the issue. Stapleton appealed the rulings all the way to the state Supreme Court—but the Court announced today that they wouldn’t be hearing his case. From the Associated Press:

The Colorado Supreme Court has decided not to hear a lawsuit from state Treasurer Walker Stapleton seeking information about employee benefits in the state’s pension system.

Stapleton, a Republican, has sought non-identifying information about the top 20 percent of the pension’s beneficiaries and their annual retirement benefit. He says the information would help him to assess the health of the state pension’s program and how to keep it solvent.

Neither Stapleton nor the Court have released statements addressing the turn of events.

Last year, Stapleton convinced the Board of the PERA to lower its assumed rate of return from 8 percent to 7.5 percent. The Denver Post:

Colorado’s Public Employees’ Retirement Association voted 8-7 to lower its expected rate of return on investments to 7.5 percent, down from 8 percent.

State Treasurer Walker Stapleton has urged the board for three years to lower its rate of return, warning of an eventual collapse and bailout of the pension system for 300,000 teachers and state workers.

[The] vote means the pension fund’s unfunded liability will increase by about $6 billion to $29 billion, Stapleton estimated.

“In the short term, that’s not a good thing,” Stapleton said. “But it makes it all the more imperative that we find a way come together … and commit ourselves to fixing this problem sooner rather than later.”

The vote was a shift in philosophy from three years ago, when the board voted 10-5 to keep its rate of return at 8 percent.

The rate is used to predict investment growth over the next 30 years. Numerous economists have suggested a realistic expectation is 6.5 percent to 7.5 percent for state funds nationwide.

PERA’s average actual rate of return over the last decade has been over 8 percent. But over a different ten-year period—2001 through 2011—it returned only 3 percent annually on average.

Photo: “Denver capitol” by Hustvedt – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

CalPERS Is Proposing 98 Ways To Boost Member Pensions

CalPERS is drafting new regulation that could boost worker pensions, but critics say the rules would fly in the face of much of Gov. Jerry Brown’s 2012 reform efforts. CalPERS is holding a public hearing on the issue tomorrow (Tuesday August 19) to seek the public’s feedback.

The new regulations could increase pension benefits for many workers by adding 98 new types of “pensionable compensation”—or, in other words, types of pay that can be counted toward pension benefits.

For example, workers would receive pension boosts for holding various professional certifications, for being bilingual or for working at the same job for a long period of time.

[Read the full list of types of pensionable compensation at the bottom of this post].

From a CalPERS press release:

The proposed new regulation is intended to clarify the types of pensionable compensation items that state, public agencies, and school employers report to CalPERS as part of a new member’s retirement benefit. The most common items excluded as pensionable for new PEPRA members are bonuses, uniform allowance, and any ad hoc payments. Members who were hired on or after January 1, 2013 are considered new members under PEPRA.

Compensation that is reportable for classic members is unaffected under the new regulation.

One category of pensionable compensation would be Incentive Pay.

A few other interesting special pay items:

As the CalPERS released indicates, these changes would only apply to new hires. But critics say the new rules would directly undermine California 2012 pension reforms, which also only dealt with new hires. From a LA Daily News editorial:

At issue is what counts as income on which pensions are calculated. The 2012 law was clear: Pensions for new employees should be based on their “normal monthly rate of pay or base pay.” Whereas current employees can boost their pension calculations by also including “special compensation” for “special skills, knowledge, abilities, work assignment, workdays or hours, or other work conditions,” the Legislature didn’t include those sorts of extra pay items for new employees.

The hearing over the draft regulations will be held on Tuesday at 9:30 am pacific time.

It will also be live-streamed at www.calpers.ca.gov.

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Court: Washington Acted Within Law When It Repealed Pension Benefits

The Washington Supreme Court unanimously sided with the state on not one, but two pension-related decisions over this past weekend.

The court affirmed the legality of two actions by Washington in recent years: in 2007, the state repealed a “gain-sharing” policy that had given retirees a bonus when pension fund investments exceeded return expectations. Then, in 2011, Washington eliminated automatic COLAs for certain classes of retirees.

Gain-sharing and automatic COLAs were originally implemented in the mid-1990s. But when the lawmakers repealed the policies in recent years, public employee unions were quick to sue the state for breaches of contract.

Lower courts had previously sided with unions on these issues, but the case was appealed all the way to the state Supreme Court.

The high court found that, in both cases, the state acted legally when they repealed the policies. The actions weren’t a breach of contract, the court said, because the legislature had reserved the right to reverse those policies at any time.

But public employees claim they were duped—they say the state put workers in pension plans that provided less benefits, but came with promises of “gain-sharing” and automatic cost-of-living adjustments. From the Seattle Times:

Public-sector unions and others who sought to maintain the benefits concede they are pricey. But, they argued, the state had dangled the promise of the pension enhancements in the late ’90s when officials persuaded tens of thousands of workers to give up their defined-benefit retirement plans for cheaper plans.

The cheaper plans reduced the defined benefits by half while adding a mix of defined contributions and gain-sharing, which occurred when investment returns exceeded 10 percent for four straight years.

James Oswald, a Seattle lawyer who represented state ferry worker Cheryl Costello and others who sued over repeal of the gain-sharing benefit, said that when the state Department of Retirement Systems provided written material encouraging workers to give up their more expensive plans, it never informed them gain-sharing could be repealed. The workers could not have known unless they had parsed the fine print of the statute creating the benefit, he said.

“Tens of thousands of employees gave up their benefits based on representations about what they’d receive,” Oswald said. “They were never told that these benefits could be repealed, and that’s very troubling to me. That’s the kind of bait-and-switch the court would never permit a private employer to do.”

A bit of background of the “gain-sharing” policy, from the Bonney Lake Courier Herald:

The Legislature enacted gain-sharing in 1998. Gain-sharing gave certain public employee retirees (members of Plans 1 and 3) a share of extraordinary investment gains whenever the pension trust funds had average investment gains of more than 10 percent over the prior four years.

When enacting gain-sharing, the Legislature made clear that it “reserves the right to amend or repeal this chapter in the future and no member or beneficiary has a contractual right to receive” this pension provision not granted prior to the time of the repeal.” (Former RCW 41.31.030 and former RCW 41.31A.020)

The Legislature repealed gain-sharing in 2007, after paying gain-sharing benefits already earned.

When the legislature enacted automatic COLAs for retirees, they gave themselves an identical way out—writing that they “reserve the right to amend or repeal this chapter in the future and no member or beneficiary has a contractual right to receive” this pension provision not granted prior to the time of the repeal.”

Photo: “Washington Wikiproject” by Chetblong. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

San Diego Pension Fund Pays “Big” Price For Big Office Space

One of California’s largest city pension funds is not only paying a “big” sum for its huge, high-end office space—it’s also locked into a long lease.

An investigation by a ABC10 found that the San Diego City Employees’ Retirement System is locked into a 10 year lease for the office space it rents, and the System will pay over $10 million in rent over that period. From ABC10:

The San Diego City Employees’ Retirement System manages a $7 billion fund. A review of office leases by Team 10 found SDCERS will spend $10.1 million renting office space at 401 West A Street in downtown San Diego. The lease is for 26,000 square feet over 10 years, and an SDCERS spokeswoman said 58 employees use the space — which breaks down to roughly 450 square feet per employee.

“I have to wonder why more than 20,000 square feet. Forget whether you own or lease it. Why that big a space?” real estate appraiser and San Diego State University lecturer Dana Kahn asked after reviewing the SDCERS lease.

Those numbers fall roughly in line with what SDCERS has reported publicly for years; according to its latest financial report, the System spent $998,000 on rent in 2013.

The investigation also looked into office space rented by the California Public Employees Retirement System.

CalPERS—the nation’s largest public fund—has eight offices around the state, although its staff is much larger than that of SDCERS.

CalPERS is a bit more secretive about its rental costs, as its financial reports don’t specifically disclose the cost of rent for its offices.

Its latest financial report does disclose that the System pays $3,789,000 for “facilities operations”, which may include rent as well as utility costs associated with its office spaces.

ABC10 managed to get a hold of SDCERS’ spokesperson over email, and she answered a few questions.

1. Why did SDCERS choose to rent office space?

SDCERS has been renting office space for many years. We’ve been in the current locating for the past seven, and then rented space in other downtown office building locations for many years before that.

2. Did SDCERS considering buying space?

No. The only investments in real estate done by SDCERS are as part of the fund’s real estate holdings in our investments portfolio.

3. How many employees work in the office?

There are 58 budgeted staff positions at SDCERS.

4. How much of SDCERS portfolio consists of real estate?

Real estate holdings in our investments portfolio account for 9.1 percent of the fund, or approximately $630 million.

5. Who negotiated the lease?

The original lease for SDCERS’ space at 401 West A Street was signed in April 2007. Signing for SDCERS were its then CEO and Board President. SDCERS was assisted in finding space by broker Irving Hughes. The first amendment to the current lease was signed in October 2013, again by its current CEO and Board President. SDCERS was assisted in negotiating the amendment by broker Hughes Marino.

Photo by Justin Brown via Flickr CC License

Gen X Retirements At Risk? Not So Fast, Says EBRI

Even smart people can disagree with each other. Who knew?

A great example of that sentiment is playing out right now, as a handful of nationally renowned retirement research groups have found each other at odds with the other’s conclusions about the retirement security of the next few waves of retirees.

Retirement savings (or a lack there-of) have been getting a lot of press lately. The Federal Reserve recently released data that suggested 20 percent of people aged 55-64 had zero money saved for retirement. All in all, 31 percent of people surveyed said they had no retirement savings at all.

Two other recent studies make similarly striking claims—a 2013 Pew Charitable Trusts study found that newer retirees would have far less income during retirement than their baby boomer predecessors. Likewise, a 2012 study by the Center for Retirement Research (CRR) found nearly half of households in their 50’s were “at risk” for a rocky retirement.

But the Employee Benefit Research Institute doesn’t think the situation is so dire. In fact, the EBRI has gone so far as to rebuff the findings of those latter two studies. From ThinkAdvisor:

EBRI recently challenged a pair of studies that concluded Gen Xers’ retirement prospects were in worse shape than boomers’ prospects, pointing out also that the oldest Gen Xers are only 49, with many earnings years left before they reach traditional retirement age.

EBRI charges that some studies used flawed assumptions or bad methodologies to reach their conclusion that investors born between 1965 and 1974 had a smaller likelihood of saving enough for retirement than older investors born between 1948 and 1964.

“Calculating retirement income adequacy is very complex, and it’s important to use reasonable assumptions and current data if you want credible results,” Jack VanDerhei, EBRI research director and author of the report, said in a statement.

More on the “flawed assumptions” used in the Pew and CRR studies:

EBRI took issue with a 2013 study by Pew Charitable Trusts that found the median replacement rate for Gen Xers who retire at 65 would be 32 percentage points lower than early boomers’ and nine points lower than later boomers’.

However, that finding “explicitly ignores future contributions,” EBRI argued. “EBRI’s analysis concludes that ignoring decades of potential future contributions (as the Pew study does) exaggerates the percentage of Gen X workers simulated to run short of money in retirement by roughly 10 to 12 percentage points among all but the lowest-income group,” according to the report.

An earlier study, conducted in 2012 by the Center for Retirement Research (CRR) at Boston College, found 44% of households in their 50s were “at risk,” compared with 55% of those in their 40s and 62% of those in their 30s.

In that report, CRR failed to consider the effect of automatic enrollment and escalation features, which were widely adopted following the Pension Protection Act of 2006. Gen X is the first generation to have a full working career in a defined contribution environment, EBRI noted.

EBRI says all its recent research points to very different conclusions than other studies: Generation Xers are facing approximately the same retirement prospects as the Boomers’.

EBRI concludes that 60 percent of Generation X won’t run out of money in retirement.

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