Author: Ted Ballantine

Detroit shifts $100 million to pension funds after bond deal

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For Detroit’s bondholders, hope was fading fast—after the city went bankrupt, it was suggested that it could cut bond recoveries to as little as 15 cents on the dollar.

But Detroit agreed yesterday to pay bondholders as much as 74% of what they are owed, in a deal that means as much to bondholders as it does to the city’s retired workers.

That’s because the remaining 26% of bond payments will go straight into the pension system—a cash infusion that will total $100 million.

The deal is part of an effort to keep the city’s pensioners above the poverty line. But they will still face sharp cuts in their benefits, according to Bloomberg:

Under a plan submitted to the court in February and revised last month, pensions for police and firefighters would be cut about 6 percent if they vote for the plan, 14 percent if they don’t. Pensions for other city workers would be cut by about 26 percent if they vote yes and by about one-third if they don’t.

About 20 percent of current pensioners would be pushed below the poverty line by the plan, according to a committee of retirees that has been negotiating with the city.

The deal still requires the approval of Judge Steven Rhodes of the US Bankruptcy Court for the Eastern District of Michigan.

 

Photo Credit: University of Michigan via Flickr Creative Commons License

New Jersey, facing pension crisis, slapped with credit downgrade

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Standard & Poors downgraded New Jersey’s credit rating today, and—surprise, surprise—the state’s pension funds were a major factor.

S&P downgraded New Jersey’s credit rating one notch. It has gone from what S&P considers a “high grade” (A+) to a “medium grade” (AA-).

The downgrade comes despite efforts by lawmakers, including Gov. Chris Christie, to curb the state’s pension woes. Those efforts included mandating higher annual payments by the state, raising retirement ages, freezing cost-of-living-adjustments and increasing employee contributions.

From the New Jersey Spotlight:

In explaining the decision to lower New Jersey’s credit rating from AA- to A+– a rating higher than only California’s A and Illinois’s A- among the 50 states – S&P’s analysis specifically cited a “trend of structurally unbalanced budgets that include only partial funding of pension obligations and the reliance on one-time measures that are contributing to additional pressure on future budgets; a large and growing unfunded pension liability; significant postemployment benefit obligations; and an above-average debt burden.

Notice the bolded statements—that’s a whole lot of ways for S&P to say that pensions are crippling the state’s finances.

And you can’t blame them. New Jersey’s pension fund remains underfunded by about $52 billion.

 

Photo Credit: Bob Jagendorf  via Wikimedia Creative Commons

Consultant rips North Carolina for “over-the-top” pension fund fees

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The State Employees Association of North Carolina (SEANC) smelled something fishy going on at the North Carolina Treasurer’s office even before they hired a consultant to investigative the fees paid to the Wall Street money managers who handle the state’s pension funds.

The ensuing investigation found that North Carolina isn’t just paying sky-high fees—the state is hiding them, as well.

According to the hired consultant, North Carolina paid a whopping $416 million in fees to Wall Street last year alone; the fees went primarily to Franklin Street Advisors, the firm that manages much of North Carolina’s pension fund assets.

The consultant hired to investigate, Edward Siedle, provides more details at Forbes:

Indeed, it appears that the massive hidden fees she’s not disclosing dwarf the excessive fees she has. For example, the fee information provided to SEANC indicates that…the pension paid $1.8 million in asset-based fees and $800,000 in incentive fees, or a total of approximately $2.6 million for managing approximately $360 million. This amounts to an apparent 50 basis point asset-based fee and a 5 percent incentive fee. (To date the Treasurer has failed to provide the investment advisory contracts which recite, in part, the fees money managers charge the pension.)

Since Franklin Street is a fund of funds, the underlying hedge fund managers are generally paid a 2 percent asset-based fee and a 20 percent incentive fee. It appears that the Treasurer is not disclosing the significant fees paid to the underlying hedge fund managers actually managing the money—fees which are far greater than Franklin’s fees for simply overseeing them.

It appears that the undisclosed underlying fees related to the Franklin investment alone—just one of the hundreds of funds in which state pension has invested—amount to $7.2 million in asset-based fees and $3.2 million in incentive fees or $10.4 million in 2013.

Since it appears that Franklin has managed this account for approximately 12 years, the undisclosed asset management fees paid to this manager alone appear to exceed $120 million.

However, based upon a review of relevant SEC filings, it appears that there may be additional significant fees, amounting to an estimated $3 million annually, paid to Franklin that are not disclosed.

A spokesman for the state’s Treasurer’s office claimed the consultant, Siedle, drew his conclusions by making assumptions that are “not based on conventional industry standards.”

The spokesman also said the fees paid to its money managers are in line with what other states pay.

A recent study by the Maryland Public Policy Institute examined the relationship between the performance of public pension funds and the investment fees they pay. The study found that, over the last 5 years, the pension funds of the 10 states that paid the least amount of fees all outperformed the funds of the 10 states paying the highest fees.

 

Photo Credit: Manu-H via Flickr Creative Commons License

Curbing the Incentive for Pension Padding: Correcting the Employer Contribution Mismatch

ABSTRACT: An often overlooked issue in the debate over New York‘s runaway pension costs is the practice of pension―padding or spiking, whereby a public employee works overtime during his final years of employment, inflating his total compensation during his peak earning years and, more significantly, distorting his pension calculation.

Shrouded Costs of Government: The Political Economy of State and Local Public Pensions

ABSTRACT: Why do public-sector workers receive so much of their compensation in the form of pensions and other benefits? This paper presents a political economy model in which politicians compete for taxpayers’ and government employees’ votes by promising compensation packages, but some voters cannot evaluate every aspect of promised compensation.

Task force to Jacksonville: raise taxes to save pensions

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When it comes to funding its pension system, Jacksonville doesn’t have the best track record. In fact, it has just about the worst: only Chicago and Philadelphia run pension funds that are unhealthier than Jacksonville’s.

With that in mind, the city put together a task force to recommend ways to improve the solvency of its pension system. That’s no easy task, considering that most solutions are bound to be unpalatable to a large segment of the population.

In a 51-page report released today, the task force called for shared sacrifice—higher employee contributions, higher retirement ages for some and higher taxes for all.

The specifics, from the Florida Times-Union:

Taxpayers — The City Council would increase property taxes and give voters a choice whether to replace the higher property taxes with a half-cent sales tax. The extra money would pay down faster what the city owes the Police and Fire Pension Fund.

Police and firefighters — Their share of money from their paychecks going to retirements would rise to 10 percent from the current 7 percent rate. New hires would work longer to get pensions. Current workers would have smaller cost-of-living adjustments on portions of their pensions.

Police and Fire Pension Fund — The board would appoint an investment advisory committee. The board would have greater leeway to make investments that are riskier but can generate higher returns to support pension obligations.

Jacksonville’s pension system is only 39% funded.

 

Photo Credit: BUSD via Flickr Creative Commons License


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