Author: Ted Ballantine

Connecticut officials are mulling ways to ensure the state’s lawmakers keep up with pension funding requirements: making full annual contributions, and delivering them on time.

A constitutional amendment is one way to do that. But State Comptroller Kevin Lembo is weighing a different idea: a pension obligation bond with a twist.

From the Hartford Business Journal:

In a recent interview, State Comptroller Kevin Lembo said he wouldn’t necessarily support a constitutional amendment, but he’s not opposed to other tactics that could force legislators to keep up with annual pension payments, including borrowing money in the form of a pension-obligation bond (POB) with restrictive bond covenants.

The state teachers’ pension system used a similar strategy in 2008, issuing a $2 billion POB with covenants that require the state to pay its full ARC each year, which it has done.

The strategy could be replicated for the state employee pension system, known as SERS, which is currently underfunded by $14.9 billion, Lembo said. Such a borrowing would likely be in the range of several hundred million dollars.

“So in the years when the legislature needs $100 million, they would realize pretty quickly” that they couldn’t forgo the pension payment to create budget savings, Lembo said. “We can lock them out of that. I’m open to talking about it because of the value it has in locking in good behavior.”

Asked for her opinion, State Treasurer Denise Nappier said she is in favor of at least discussing a POB, but that it would require an analysis of whether the returns on invested bond funds would meet or exceed the cost of debt.

“We also must consider the impacts of such a transaction on the state’s credit rating and debt levels,” Nappier said. “That said, a modestly sized and prudently structured transaction could be a powerful tool if it includes a bond covenant to improve fiscal discipline going forward — as was done with the POBs issued for the Teachers’ Retirement Fund in 2008.”

When issuing a POB, the state is making a bet that investment returns exceed the interest paid on the debt over the life of the bonds.

 

Photo by thinkpanama via Flickr CC License

The International Monetary Fund on Thursday published a blog post, penned by the official handling Greece’s bailout, positing that the country needs to implement steeper pension reforms for its finances to be sustainable in the long-term.

Greece has already proposed some significant reforms; that package will soon be altered further after objections by creditors. The alterations will almost certainly lead to further benefit cuts.

More from the Greek Reporter:

Poul Thomsen, the Deputy Director of the Fund’s European Department who handles the Greek bailout, says that the Greek pension system is “unaffordably generous” and only pension cuts can make the security funds system sustainable.

In an article entitled “Greece: Toward a Workable Program” posted on the IMF official blog on Thursday, the Danish economist denies the criticism that the Fund is pushing for “socially draconian reforms”. He counter-argues that in Greece pensions cost about 10 percent of gross domestic product every year when the average in the Eurozone is 2.5 percent. Only deep pension reforms can make the pension system sustainable:

“Why the focus on pension reforms? Despite the pension reforms of 2010 and 2012, Greece’s pension system remains unaffordably generous. For instance, the standard pensions in nominal Euro terms are broadly similar in Greece and Germany, even though Germany—measured by the average wage—is twice as rich as Greece. Add to this that Greeks still retire much earlier than Germans and that Germany is much better at collecting social security contributions. The result is that the Greek budget needs to transfer some 10 percent of GDP to cover the gaping hole in the pension system, compared to a European average of some 2½ percent. Clearly, this is unsustainable,” he writes.

As a condition of its bailout, IMF instructed Greece to construct a pension reform package that generated savings equal to 1 percent of the country’s GDP.

 

Photo credit: “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:Flag-map_of_Greece.svg#/media/File:Flag-map_of_Greece.svg

A New Jersey pension commission, assembled by Chris Christie last year, issued a report on Thursday outlining the savings that would be realized if the state froze its defined-benefit pension plan and cut worker health benefits.

The panel’s mandate is to study ways to lower the state’s pension-related costs.

New Jersey Gov. Chris Christie may include the measure in his budget proposal next week.

More from NJ.com:

The proposal calls for freezing the pension system and moving active public employees onto a cash balance retirement plan, but it hinges largely on reducing health care costs to free up cash.

[…]

While the proposed changes are quite involved, broadly, active employees would be moved onto health care plans equivalent to gold plans under the Affordable Care Act, and retirees would be given retiree reimbursement accounts to cover the cost of purchasing coverage through a private exchange.

In total, the state would save $2.23 billion, including $1.42 billion through lower-cost benefits and $810 million by shifting the cost of retired teachers’ benefits to their employers (the commission assumes that will be offset by benefit changes at the local level).

While the report stressed that the plan reduces the total cost of the system, rather than just shifting those costs to members, active and retired workers would still have to pick up an additional $190 million.

The commission estimated premiums will fall 30 percent, and the state will save $510 million.

Christie submits his budget proposal next Tuesday. If it includes the panel’s recommendations, the package will likely face stark opposition in the Senate.

 

Photo by Bob Jagendorf from Manalapan, NJ, USA (NJ Governor Chris Christie) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

After breezing through the state Senate, a proposed overhaul of Arizona’s public safety pension system will face a tougher crowd in the House.

The bill passed the Senate unanimously last Thursday by a 28-0 vote.

But a top House lawmaker has come out in opposition to the legislation. From the Arizona Daily Star:

The No. 3 Republican in the state House lashed out Wednesday at a plan to revamp the pension funds for police and firefighters, saying it’s a bad deal and should be scrapped.

Majority Whip David Livingston, R-Peoria, said there’s no need to ask voters to alter the system that determines what benefits are available to current and retired public safety employees.

[…]

Despite the objections, the House Insurance Committee approved the plan on a 7-1 vote. That sends the package to the full House, where there are likely more than enough votes for it.

But even if Livingston and Harris cannot kill the legislation, they have another remedy.

They could persuade voters to reject the required constitutional amendment to make the change. And that defeat would change the dynamics of the package — and the savings to the system.

A brief recap of the measure from the Arizona Republic:

Besides changes to cost-of-living adjustments, major provisions include a new tier for newly hired police and firefighters that limits maximum pension payments and requires employers and employees to share equally in payments to retirement accounts. New hires also would be given a choice of opting for a 401(k) style retirement plan rather than a plan with a guaranteed pension.

Current employees pay about 11 percent of their pay into the retirement plan, but employer contributions aren’t capped.

If the bill clears the House, it will have to be approved by voters at the ballot box.

 

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under CC BY-SA 2.5 via Wikimedia Commons

Federal prosecutors are seeking $16.8 million in restitution – to be paid out to pensioners and beneficiaries of Detroit’s public retirement systems – from an ex-pension trustee who spearheaded the kickback scheme that led to corrupt pension investments.

Paul Stewart, who has already been convicted of public corruption, ran a pay-to-play scheme in which he accepted bribes in exchange for approving investment deals.

The Detroit Police and Fire Retirement System and the city’s General Retirement System lost $95 million in the corrupt deals, according to prosecutors.

More details from Detroit News:

Federal prosecutors want former Detroit pension fund trustee Paul Stewart to pay more than $16.8 million in restitution to the victims of his crimes, including pensioners, beneficiaries and employees who paid into Detroit’s retirement system.

[…]

In a restitution memo filed Jan. 11 in Stewart’s case, prosecutors say Stewart caused $14.25 million in losses from a Texas land deal and $1.18 million in losses from a deal tied to ICG Leaseback. Stewart also caused losses by voting in favor of a 33 percent salary increase to Zajac, the memo says.

In the memo, Assistant U.S. Attorney David Gardey wrote his office is not using Stewart’s gain as a basis for restitution — as federal prosecutors in Detroit had done when seeking restitution from disgraced former Detroit Mayor Kwame Kilpatrick for his conviction on public corruption charges.

Judges from the 6th Circuit vacated the $4.5 million restitution Kilpatrick was ordered to pay the Detroit Water and Sewerage Department, saying the figure was incorrectly calculated.

Instead, Gardey wrote, his office is asking only for a restitution award in three areas where the amount of the losses can be “directly and proximately attributable to Stewart’s criminal conduct.”

Some background on the case:

Stewart was a trustee on the city’s Police & Fire Pension fund from 2005-11.

During that time, businessmen pitching investments to the pension funds paid bribes and kickbacks for his vote totaling $63,750, including a Christmas basket with hidden cash, a $5,000 casino chip, trips to Florida for Stewart, limousine rides, drinks, meals and entertainment, prosecutors said.

In return, the bribe payers received $5.2 million from money-losing investments approved by Stewart that cost cops, firefighters and beneficiaries more than $47 million, prosecutors said.

[…]

In 2014, Stewart was convicted in a public corruption case alongside former Detroit Treasurer Jeffrey Beasley and ex-pension fund lawyer Ronald Zajac, who has since died.

Two Detroit pension funds lost more than $95 million in the deals, weakening a pension system that faced takeover during the city’s landmark bankruptcy case.

Last year, Stewart was sentenced to 5 years in prison for his role in the scheme.

 

Photo by jypsygen via Flickr CC License

 

A panel was split this week over whether to recommend that Japan’s Government Pension Investment Fund – the world’s largest pension fund – begin managing most of its equities in-house.

The CIO of GPIF said last month he was “sick of” outsourcing most of the fund’s investment management.

But the panel did propose the dismantling of rules prohibiting GPIF from investing in derivatives.

More from Bloomberg:

A panel advising on Japan’s Government Pension Investment Fund deferred a decision on whether to allow in-house investment on stocks.

Also, rules banning GPIF from investing in derivatives should be eased, the committee told reporters in Tokyo on Monday. The panel will present the two proposals to Health Minister Yasuhisa Shiozaki.

The health ministry advisory panel began debating in-house investments in earnest this year, the latest step in an unprecedented overhaul under Prime Minister Shinzo The 19-member group was divided over the proposal, with opponents saying that the fund will have too much influence over Japan Inc. if it directly owns voting rights.

Susumu Makihara, from Japan’s biggest business lobby Keidanren, said in previous panel meetings that GPIF will become a vehicle for the government to influence private company management. Proponents for change argue that GPIF would reduce the amount it spends on hiring external managers and be better-equipped to obtain real-time market information and investment knowledge.

[…]

The law governing GPIF currently prohibits the fund from investing in stocks directly as well as trading in derivatives. The health ministry may use the panel’s recommendations to create a bill proposing any change in the current diet session. The bill will also include a plan to install a board of mostly independent directors to oversee its investments.

GPIF oversees a portfolio of $1.2 trillion.

 

Photo by Ville Miettinen via Flickr CC License

A budget proposal, approved by a Kansas Senate committee on Monday, would allow Kansas governor Sam Brownback to delay contributions to the state’s pension systems.

Under the bill, the delayed payment would be paid gradually over the course of 2 years and with 8 percent interest.

More from the Kansas City Star:

HB 2365 includes a provision that would enable the governor to delay contributions to the state’s pension system. It would require that he pay the withheld payments at an 8 percent interest rate over 24 months.

“It’s not a loan,” said Sen. Jim Denning, R-Overland Park, the lawmaker who offered the amendment. “… It smells like one, but it’s not.”

Denning said the provision was meant to free up capital for the state in the short term, but also ensure that the pensions system would be on stronger financial footing over time through the interest rate.

The provision does not limit the amount of money the governor can withhold.

The move was condemned by both the Kansas Organization of State Employees and the Kansas chapter of the American Federation of Teachers.

Both unions took to social media to express doubt that the delayed payments would be fully repaid and to voice concern that allowing the governor to use the pension system as a source of extra cash would endanger its stability.

Sen. Laura Kelly, D-Topeka, asked whether the repayment would be guaranteed. Sen. Ty Masterson, R-Andover, replied that it would be, “to the extent that anything in statute is guaranteed.”

The budget proposal currently floating around in the House also allows the Governor to delay payments.

 

Photo credit: “Seal of Kansas” by [[User:Sagredo|<b><font color =”#009933″>Sagredo</font></b>]]^{[[User talk:Sagredo|<font color =”#8FD35D”>&#8857;&#9791;&#9792;&#9793;&#9794;&#9795;&#9796;</font>]]}

Greek workers launched large protests last month against a pension reform package that would cut retirement benefits and require higher contributions from both employees and employers.

But it was ultimately creditors who may have convinced the Greek government to tweak parts of the planned overhaul – although the changes may lead to steeper benefit cuts than before.

From Kathimerini English:

The government is prepared to concede ground to its lenders over their objections to proposed pension reforms and, in a double-pronged strategy, also offer incentives to opposition parties through a change in the electoral law.

The first week of negotiations surrounding the bailout review made it clear that the creditors object to plans to raise social security contributions by 1.5 percentage points and to change the structure of income tax.

With regard to the hike in contributions, the coalition seems prepared to lower the rise to 1 percentage point and to make the remaining savings by slashing supplementary pensions and limiting some high-end basic pensions.

Greece needs to come up with a pension overhaul that leads to savings equal to 1 percent of the country’s GDP; it’s a condition of the country’s $93 billion bailout.

 

Photo credit: “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons

The funded status of the typical U.S. corporate pension plan fell nearly 4 percent in January – marking the third consecutive month in which funding status has decreased, according to the BNY Mellon Institutional Scorecard.

[You can view the full scorecard here.]

More from the scorecard:

The funded status of typical U.S. corporate pension plans fell by 3.8 percent in January, to 79.7 percent. The S&P pension deficit is also estimated to have increased by $83 billion, to $411 billion over the month—as assets fell to $1.61 trillion, and liabilities rose to $2.02 trillion. Despite asset returns of negative 5.2 percent over the past year, the funded status of the typical U.S. corporate pension plan have still increased by 2.0 percent over the last 12 months, up from 77.7 percent.

“Plan sponsors are beginning to lose their patience with the onslaught of negative news surrounding their pension plans,” said Andrew Wozniak, head of BNY Mellon Fiduciary Solutions. “Whether it is increased longevity driving liabilities higher, poor investment returns or the negative impact of lump sum payments on their funding percentage, some sponsors are beginning to think that the only solution to their problem is proactively funding their plans.”

Public DB plans and foundations & endowments also performed poorly in January, as they failed to meet the Scorecard’s monthly return targets, by 4.2 and 4.0 percent, respectively. Assets dropped by 3.6 percent for both investor types.

The typical public DB plan is now 12.6 percent behind its one-year return target as assets have, in total, dropped 5.1 percent over that time period. Similarly, foundations & endowments are short of their annual return target by 12.0 percent, despite modest inflation over the past year.

The BNY Mellon Institutional Scorecard tracks the funding of corporate plans, public DB plans and endowments over time.

 

Photo by Sarath Kuchi via Flickr CC License