Author: Ted Ballantine

Unions Sue Puerto Rico, Bank Over Mismanagement of Retirement Funds

Two Puerto Rico-based unions representing teachers and state workers on the island have filed suit against the Puerto Rican government and local bank over the mismanagement of their retirement accounts. The American Federation of Teachers (AFT) and the American Federation of State, County and Municipal Employees in Puerto Rico claim that their trust has been betrayed.

Here is an excerpt from report in Caribbean Business:

“By the commonwealth’s own admission, it—along with the Retirement Board of the Government of Puerto Rico, the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF), and their responsible officials—has failed to create and administer Law 106’s promised defined-contribution accounts, and instead has taken hundreds of millions of dollars of employee pension contributions and stashed more than $300 million in government accounts at Banco Popular that earn virtually zero interest,” the release reads.

Puerto Rico’s government, the AFT said, “has been aided and abetted in this violation of statutory and fiduciary duties” by the Financial Oversight and Management Board and Banco Popular. “As a result, thousands of public servants have been deprived of untold millions of dollars in interest and investment income that they should have been earning over the past year.”

Defendants include the commonwealth; its governor; its chief financial officer and secretary of the treasury; the retirement system and its voting members; AAFAF and its executive director; the oversight board; and Banco Popular.

Public Pension Plans Return Assumptions Fall To Record Low

From a median average of 8% in 2010, the return assumptions of public pension plans have fallen to record low of 7.45% as of November this year, according to a report from the National Association of State Retirement Administrators (NASRA). The trend has placed even more pressure on the finances of state governments.

Here is an excerpt from a report filed in Chief Investment Officer:

Since 1987, public pension funds have accrued approximately $7 trillion in revenue, said NASRA, of which $4.3 trillion, or 61%, is from investment earnings, with 27%, or $1.9 trillion, coming from employer contributions, and the remaining 12%, or $844 billion, coming from employee contributions. Because public pensions rely on investment returns for a majority of their revenue, the lower the investment returns are, the more governments will have to spend to cover the shortfall.

Of the 128 public pension plans tracked by NASRA, only six still have investment return assumptions at the 2010 median of 8.0%, which is the highest assumed rate of return among the plans, and only 22 have assumed rates of returns of 7.5% or higher. A majority of the plans (69) have assumed rates of return that range between 7.0% and 7.5%, and 37 plans have assumed rates that are 7.0% or lower. Kentucky’s Non-Hazardous Employee Retirement System pension registered the lowest assumed rate of return at 5.25%, and was the only plan among the 128 with an investment return assumption below 6.25%.

Mismatched Incentives: Are Trustees to Blame for Pension Underfunding?

Public pension boards are tasked with supervising the investment of the funds raised from the contributions from state employers and employees. But the way the pension boards are staffed discourages a focus on the long term health of public pension plans.

Manhattan Institute Fellow Daniel DiSalvo elaborates on the Pension Board Problem in this excerpt from Governing:

The problem is that both the political appointees and the elected representatives have incentives to ignore the long-term health of the funds. Political appointees are responsive to constituencies, such as the governor who appointed them or local businesses, (which) distract them from managing the fund strictly in its beneficiaries’ long-term interest. Meanwhile, public employees and their union representatives are tempted to trade pension savings tomorrow for higher salaries today.

How do these incentives play out? To hold down short-run costs, political appointees are likely to favor high assumed rates of investment returns, which keep employer contributions lower and avoid throwing a wrench in the governor’s budget. Political appointees also tend to favor investing in local industries — whether or not they are actually profitable. Two Texas funds were heavily invested in Enron before it went bankrupt, for instance. And in 1990, Connecticut’s state-employee fund lost $25 million investing in Colt’s, the firearms manufacturer, to preserve local jobs.

Likewise, public employee representatives respond to workers’ demand for higher salaries today by keeping the assumed rate of investment returns high. In a recent study, political scientists Sarah Anzia and Terry Moe found that elected representatives of public employees did not seek to impose more realistic — that is, lower — assumed rates of investment returns. Rather, they found, more worker representation on boards and stronger public unions led to more fiscally irresponsible decisions.

The larger consequence of the misaligned incentives of pension boards is that they don’t protect employees and taxpayers from major financial risks. Poorly managed pension systems are now consuming the politics – and much of the budgets — of Connecticut, Illinois, New Jersey and other states.

Public Pension Group Sets Investment Guidelines For Firearms Companies

Some of the biggest state retirement systems from states such as California, Florida, Maryland, Oregon, and Connecticut have joined other institutional and private investors in coming up with a guide to the touchy subject of investments in the civilian firearms industry.

Given the massive potential for backlash over investments in gun makers amid growing mass shootings in the United States, the coalitions has arrived at five principles that will be applied to investments in companies that manufacture, sell, and distribute firearms to civilians.

Here is excerpt from a report in PlanAdviser:

According to an announcement from Connecticut State Treasurer Denise L. Nappier, the five principles include:

Principle 1: Manufacturers should support, advance and integrate the development of technology designed to make civilian firearms safer, more secure, and easier to trace.

Principle 2: Manufacturers should adopt and follow responsible business practices that establish and enforce responsible dealer standards and promote training and education programs for owners designed around firearms safety.

Principle 3: Civilian firearms distributors, dealers, and retailers should establish, promote and follow best practices to ensure that no firearm is sold without a completed background check in order to prevent sales to persons prohibited from buying firearms or those too dangerous to possess firearms.

Principle 4: Civilian firearms distributors, dealers, and retailers should educate and train their employees to better recognize and effectively monitor irregularities at the point of sale, to record all firearm sales, to audit firearms inventory on a regular basis, and to proactively assist law enforcement.

Principle 5: Participants in the civilian firearms industry should work collaboratively, communicate, and engage with the signatories of these principles to design, adopt, and disclose measures and metrics demonstrating both best practices and their commitment to promoting these principles.

CalSTRS To Divest From Firms Operating Private Prisons

CalSTRS took its time deciding but in the end the pension fund chose to follow the steps taken by other state pension funds to pull their investment out of companies that operate private prisons.

Mary Childs filed this report in Barrons:

New York state’s pension plan became the first to withdraw fully from the industry when Comptroller Tom DiNapoli sold the last of the pension’s shares in private prison companies in July. The next month brought divestment, or votes to divest, from the New Jersey Pension Fund, Trenton, and the Chicago Teachers Pension Fund. New York City and Philadelphia have divested, and Cincinnati may be on its way.

CalSTRS worked to engage with CoreCivic (ticker: CXW) and the GEO Group (GEO) about their business practices, visiting detention facilities and meeting with senior management. CalSTRS staff confirmed that facilities run by those two companies are not separating children from their parents or families, and are not housing unaccompanied minors, the pension said.

“Based on all the information and advice we were provided, the board decided to divest,” Investment Committee Chair Harry Keiley said in a press release on Wednesday.

The process of divesting starts immediately, and should be completed in six months. The decision affects about $12 million in assets held between CalSTRS’s equities and fixed-income portfolios.

Illinois TRS Wants $400M Budget Hike

The Illinois Teachers Retirement Systems will ask the state for more money, an additional 10.6% more in state contributions for 2019 fiscal year which starts July 1, even though its investments yielded more than 8.45% this year.

Here is an excerpt from the report filed in Chief Investment Officer:

The $51.7 billion Teachers’ Retirement System wants about $400 million to be added to the budget, which would see total contributions rise to more than $4.8 billion. The pension fund’s executive director, Dick Ingram, said the organization “had a good year.” And it did, returning 8.45%. But, he added, it simply cannot “invest our way out of this problem.”

That problem is the Teachers’ Retirement System’s 40.7% funding ratio. “The unfunded liability is too large and grows every year,” Ingram said. The plan has more than $75 billion in liabilities, the highest of the $130 billion total among the state’s five systems. The other four are the State Universities Retirement System, the State Employees Retirement System, the General Assembly Retirement System, and the Judges Retirement System.

According to Ingram, the principal and interest on the debt accounts for 76% of the state’s annual contribution to the fund. Absent the debt service, the state would only need to pay $1.2 billion the following budget year.

Michigan Installs New Board to Oversee $70 Billion Public Retirement Fund

A newly-created State of Michigan Investment Board will now exercise supervisory functions over the state’s $70 billion investment fund. The Board will hold open meetings four times a year to make investment decisions, evaluate the fund’s performance ,and set funding goals.

Here is part of the AP report in Crain’s Detroit Business:

State Treasurer Nick Khouri was previously the sole fiduciary of the investment, with the help of an advisory committee, but he told the Lansing State Journal that such arrangements are increasing a thing of the past. “This idea of having a single person responsible for the investments has really gone out the window in the last few decades,” Khouri said.

He will be the chair of the new five-member investment board, which also includes the state budget director and three gubernatorial appointees. The executive order that created the board specifies that the unpaid board members will serve four-year terms.

(Michigan Governor Rick )Snyder recently announced that the appointees are Dina Richard, senior vice president of treasury and chief investment officer for Trinity Health; James Nicholson of Detroit, chairman of PVS Chemicals Inc.; and Reginald Sanders of Portage, director of investments for the W.K. Kellogg Foundation.

CalSTRS Appoints New Director Of Corporate Governance

Kirsty Jenkinson will be director of corporate governance for the California State Teachers Retirement System starting in January 2019. She replaces Anne Sheehan who retired in March 2018.

More information on Ms. Jenkinson can be found in this report from BusinessWire:

Ms. Jenkinson comes to CalSTRS from Wespath Benefits and Investments in Illinois, where she has led Wespath’s sustainable investment strategies team since 2014. She also directs Wespath’s environmental, social, governance (ESG) integration, corporate engagement, portfolio screening and proxy voting activities.

“Ms. Jenkinson brings great value to CalSTRS via her stellar experience and rich global perspective,” said CalSTRS Chief Executive Officer Jack Ehnes. “CalSTRS commitment to long-term sustainability for California’s educators is bolstered by having Kirsty onboard.”

At CalSTRS, Ms. Jenkinson will lead an ESG portfolio of more than $4.1 billion. “Kirsty is the ideal person to lead CalSTRS’ ESG investment policies into the future,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “It is a high-performing team forged by her predecessor, Anne Sheehan, and I’m confident Kirsty is poised to lead our ESG efforts as we grow, adapt and change to meet the investment challenges ahead.” “It has been an honor to work with Wespath, and I feel privileged to lead the dynamic team at CalSTRS, one of the world’s most respected leaders in ESG investing and corporate governance,” said Ms. Jenkinson.

Pew: Investment Performance Falls As Alternative Allocations Rise

Seeking to boost returns on their investments, many state pension funds turned to hedge and private equity funds for help. Alternative investments grew from 11% to over 26% of the average public pension plan.

A Pew study reports that as of fiscal year 2016 (latest available data), state pension funds now have a combined $1.4 trillion deficit, up $295 million from 2015. State pension plans now have total pension liabilities of $4 trillion while having only $2.6 trillion in assets.

John Schoen filed this report in CNBC:

To try to make up that deficit, state pension fund managers have shifted investments away from the traditional mix of stocks and bonds to a greater reliance on alternative investments like hedge and private equity funds. Between 2006 and 2016, the average plan has raised its share of alternative investments from about 11 percent of assets to 26 percent.

[…]

Despite paying higher costs, pension plan performance has fallen. Among the funds Pew studied, none met its investment target. The shortfall has left many retirement systems owing more in liabilities than they can afford to pay out, in some cases much more.

Pension fund systems in New York, South Dakota, Tennessee and Wisconsin had enough to cover at least 90 percent of their liabilities in 2016, while pension funds in Colorado, Connecticut, Illinois, Kentucky and New Jersey were less than 50 percent funded, according to Pew.

Another 17 states had less than two-thirds of the assets needed to pay future retirement benefits. Kentucky and New Jersey had the lowest funded ratios among states at 31 percent and Wisconsin had the highest at 99 percent.

Meng Returns To CalPERS As New CIO

After three years in China as the deputy chief investment officer for the State Administration of Foreign Exchange, former employee Ben Meng will return to CalPERS as Chief Investment Officer (CIO). He will succeed Ted Eliopoulos who was CIO since 2014.

Adam Ashton filed this report in the Sacramento Bee:

”We are pleased to have (Meng) back,” CalPERS Board of Administration member Henry Jones said Monday. “He has deep understanding of our investment operations. We look forward to introducing him personally to our members, employers (and) stakeholders in the future when he returns to the United States.”

Meng, 48, worked at CalPERS from 2008 to 2015, including a term as head of asset allocation. State salary records show he earned almost $500,000 in his last year at the fund. He’ll be able to earn up to $1.77 million in salary and bonuses as CalPERS chief investment officer.

[…]

“Ben’s strong investment background makes him well-suited to lead our investment strategy,” CalPERS Chief Executive Officer Marcie Frost said in a news release. “He understands the need to drive investment returns to help us achieve a fully funded system.”


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