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Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

A second appeals court panel has unanimously ruled that the public pension offered at hire can be cut without an offsetting new benefit, broadening support for what pension reformers call a “game changer” if the state Supreme Court agrees.

The new ruling on Dec. 30 in a state firefighters suit on pension-boosting “airtime” purchases made several references to a groundbreaking ruling last summer in a Marin County pension “spiking” suit.

“The law is quite clear that they are entitled only to a ‘reasonable’ pension, not one providing fixed or definite benefits immune from modification or elimination by the governing body,” wrote Justice Martin Jenkins.

The two appeals court rulings are contrary to previous rulings known as the “California rule”: The pension offered at hire becomes a vested right, protected by contract law, that can only be cut if offset by a comparable new benefit, erasing any savings.

Most pension reforms are limited to new hires (who are not yet vested), taking decades to yield significant savings. To get major savings, some reformers want to cut the pensions of existing workers, protecting what’s already earned but reducing future pension earnings.

A key to the California rule is a 1955 Supreme Court ruling (Allen v. City of Long Beach) that “reasonable” pension changes should be related to the theory and “successful operation” of a pension system and any disadvantage “should be accompanied by comparable new advantages.”

The Marin appellate ruling argued in detail that “should” have comparable new advantages, which is only advisory, had somehow become a mandatory “must” have comparable new advantages in the series of California rule cases.

“We agree with this conclusion reached by our colleagues,” Jenkins wrote.

Unions argued in the Marin and firefighters suits that the California rule prevented the bans on “airtime” and “spiking” for existing workers in a pension reform enacted four years ago by Gov. Brown and the Legislature.

Cal Fire Local 2881 (formerly known as CDF Firefighters) sued the California Public Employees Retirement System to resume employee airtime purchases, citing CalPERS’ own publication saying vested pension rights begin when members start work.

“Public employees obtain a vested right to the provisions of the applicable retirement law that exists during the course of their public employment. Promised benefits may be increased during employment, but not decreased, absent the employees’ consent,” said the CalPERS publication.

Critics of the California rule argue that if the employee’s job and pay can be cut, why can’t the pension legally regarded as “deferred compensation” be cut? The brief 1955 Allen ruling gives no rationale for a “comparable new advantage.”

The CalPERS response to the firefighters said the pension system could not resume airtime purchases without a determination that the ban is unconstitutional. The trial court held airtime “was not a vested right,” said CalPERS, “and even if it were, the Legislature could eliminate it.”

Legislation sponsored by the California Professional Firefighters and the Service Employees International Union (AB 719 in 2003) allowed employees in CalPERS to increase their pensions by purchasing up to five years of additional service credit, the maximum allowed by federal tax law.

The program intended to have no cost to employers was informally called “airtime” because no work was performed for the service credit. Airtime yielded a lifetime monthly retirement payment, with no risk of investment losses, based on the earnings forecast assumed by CalPERS at the time of purchase.

The earnings forecast was 8.25 percent a year when the program began in 2003, but had dropped to 7.5 percent by the time the program ended in 2012. The CalPERS board acted last month to gradually drop the earnings forecast to 7 percent over the next eight years.

“It’s a tremendous investment,” Dan Pellissier, president of California Pension Reform, a former gubernatorial and legislative aide who purchased airtime, said in 2012. “I think all of the investment advisers say it’s a no-brainer.”

As it turned out, airtime was an even better deal than the purchasers thought. The trial court ruling in the firefighters suit said CalPERS discovered some time after April 2010 that it had been charging purchasers less than the actual cost of airtime.

The CalPERS “Review of Additional Retirement Service Credits” study said in effect “that in selling Airtime to state employees CalPERS was selling $1.00 worth of benefits for between $0.72 and $0.89,” wrote Alameda County Superior Court Judge Evelio Grillo.

The study was not available from CalPERS last week. A CalPERS spokeswoman said about 61,217 members purchased airtime from Jan. 1, 2004, when the program began through Dec. 31, 2012, when it ended.

There was no significant increase or rush to purchase airtime between the passage of the reform legislation in October 2012 and when the ban took effect at the end of that year, the spokeswoman said. There were 363 airtime purchases in October, 376 in November and 386 in December.

CalPERS members could pay the full cost of airtime with a lump sum or select a payment plan of up to 15 years. Interest was charged on the unpaid balance at the current “crediting rate,” which was 6 percent compounded annually in 2003.

The elimination of airtime was part of Brown’s 12-point pension reform plan issued in 2011.

“Pensions are intended to provide retirement stability for time actually worked,” said Brown’s point No. 10. “Employers, and ultimately taxpayers, should not bear the burden of guaranteeing the additional employee investment risk that comes with airtime purchases.”

The ruling in the Marin suit allows the county, with no offsetting new benefit, to impose the spiking ban in the 2012 reform legislation that prevents existing workers from continuing to boost pensions with standby pay, call-back pay, and other things.

The state Supreme Court has agreed to hear an appeal of the Marin ruling. But the high court will wait until an appeals court rules on three similar spiking ban suits consolidated from Alameda, Contra Costa, and Merced counties.

Last month, yet another three-justice appeals court panel upheld a denial of a claim by San Joaquin County correctional officers that the 2012 pension reform prevented an end to county payments toward their cost-of-living adjustments until 2018.

This appeals court ruling included lengthy quotes from the Marin ruling about how the 2012 pension reform was a response to a pension funding “crisis” that will force cuts in local government services and layoffs if not corrected.

“We express no view about the Marin Assn. court’s interpretation of precedent regarding the validity of changes to retirement benefits,” said a footnote in the San Joaquin ruling. “We merely agree with its account of the historical backdrop animating recent pension reform legislation in California.”

Asset management and espionage are both high stakes games. So when they come together, it simply must be written about.

Here’s the weird story out of Utah this week:

The Utah Retirement System is (maybe?) in the process selling a hotel in its portfolio to Chinese buyers.

But one California Congressman is urging the pension fund to nix the deal due to espionage concerns: the hotel is a frequent stop for U.S. officials, and sits next to several U.S. customs buildings.

The Salt Lake Tribune summarizes:

[The Congressman and union] say the pension fund for 200,000 public employees is considering selling the Westin Long Beach Hotel — which URS owns as an investment in California — to Chinese buyers. The critics further suggest that the Chinese might use the property to spy on next-door U.S. agencies at the busy port of Long Beach or on federal officials who have contracts with the hotel and use it often.

“The sale of the Westin Long Beach raises national security questions,” Rep. Alan Lowenthal, D-Calif., who represents the Long Beach area, wrote last month to Treasury Secretary Jacob Lew.

[…]

Lowenthal noted in his letter that the hotel is at the second-busiest port in America and next door to customs offices there that house sensitive information.

Also, “U.S. government clients with sensitive national security information” have contracts with the hotel and use it often, he said, including the Defense Department, Homeland Security, Justice Department and the Drug Enforcement Administration.

We’re treating this story a little flippantly, but it’s not an unreasonable request by the Congressman. The U.S. has a committee, comprised of members of various federal agencies, that reviews foreign investments in the U.S. for precisely this reason.

URS, as is standard practice, isn’t disclosing whether they are selling the hotel. It’s also possible the Chinese buyers have made an offer even as the hotel sits off the market.

Pension giant CalSTRS is already leading a lawsuit against Volkswagen in German court.

Back on U.S. soil, a judge has OK’d a lawsuit brought by investors, including a number of smaller pensions, accusing the car company of not informing the market soon enough about financial liabilities related to the emissions scandal.

From Reuters:

The plaintiffs, mostly U.S. municipal pension funds, have accused VW of not having informed the market in a timely fashion about the issue as well as understating possible financial liabilities, according to the 41-court document seen by Reuters.

[…]

The lawsuits said VW and its executives misled the investing public “assuring them to the contrary — namely, that the diesel vehicles met all applicable emissions standards” and it “understated the liabilities that it would suffer as a result of its known emissions non-compliance.”

[…]

U.S. District Judge Charles Breyer rejected a request by VW brand chief Herbert Diess to have the proposed securities fraud lawsuits tossed out of a California court.

Volkswagen argued that German courts were the proper place for investor lawsuits.

Breyer said in his ruling that “because the United States has an interest in protecting domestic investors against securities fraud” the lawsuits should go forward in a U.S. court.

 

 

CalSTRS Chief Investment Officer Chris Ailman appeared on CNBC on Wednesday to talk about interest rates and the markets reaction to Trump’s win.

He said this about markets currently:

“Wall Street’s gotten very excited about a change in government, but we haven’t seen anything yet,” he said. “I think the markets have gotten a bit ahead of themselves. I like the trend, but I think we’re going to see more of a flat market once we get past January.”

Video credit: CNBC

Members of the Iron Workers Local 17 Pension Fund will vote this month whether to cut the average pension benefit by roughly 20 percent. If the cuts are voted down, fund officials say they could run out of money in less than 10 years.

The Iron Workers pension fund last month was the first fund whose proposal for pension cuts was given the go-ahead by the Treasury Department.

Now, the cuts go to a vote among members.

More from the Washington Post:

The cuts proposed by his pension plan, a small Cleveland-based fund with about 2,000 members, were approved by the Treasury Department on Dec. 16. It is the first time the agency has given the green light for a private pension plan to cut benefits for its members.

The leaders of the Iron Workers Local 17 Pension Fund say the cuts are necessary to keep the fund afloat. If no changes are made, the fund is expected to run out of money by 2024. At that point, the pension plan would need to rely on a federal insurance program that is supposed to back up struggling pension plans.

By then, however, there may be no backup plan in place. The multi-employer pension fund for the Pension Benefit Guaranty Corporation, which is meant to back up plans like the Iron Workers fund or the Central States fund, is also running out of money. The program is on track to become insolvent by 2025, if not sooner.

Some retirement advocates worry that the Iron Workers fund cuts will usher in more cuts to private plans:

Critics of the pension law worry that the cuts may open the door for other troubled pension plans to shrink retirees’ benefits. At least five other pension plans are currently waiting for the Treasury Department to review their applications to scale back benefits. The proposals could affect tens of thousands of employees and retirees who earned pensions as bricklayers, furniture workers and autoworkers.

“This could just open the flood gates for approval for all of them,” said Karen Ferguson, director of the Pension Rights Center, a nonprofit that focuses on retirement issues.

Shortly before the New Year, Dallas Mayor Mike Rawlings requested a criminal investigation into the past administration of the city’s Police and Fire Pension fund, which has become one of the most underfunded pension funds in the country after years of investment flops.

The poor investments were made by previous administrations, but still haunt the pension fund.

The Texas Rangers will be investigating the fund.

Details from KERA:

In a press release, Rawlings says the past administration of the troubled pension fund “committed a grave breach of trust with our first responders with serious ramifications impacting current and former police and fire personnel and their families, as well as Dallas taxpayers.”

The mayor also says he has been “in close cooperation” with the FBI on the matter. A FBI spokesperson didn’t immediately respond to a KERA request for comment; the FBI typically doesn’t comment on investigations.

The pension board released a statement this afternoon: “The Dallas Police and Fire Pension Board and staff have been working with and fully cooperating with the FBI for more than a year on its ongoing investigation of previous activities. Meanwhile, we remain focused on working with city and state officials to find long-term solutions that will safeguard previously earned and future retirement funds for Dallas first responders.”

 

New Jersey Senate President Steve Sweeney has sponsored a bill, currently sitting in the state legislature with some bipartisan support, that would allow the state’s pension funds to buy bonds from New Jersey Transportation Trust Fund.

The bill would also eliminate a regulation that prohibits the pension funds from buying more than 10 percent of any bond offering.

From F-A Mag:

Senate President Steve Sweeney, sponsor of the bill that has bipartisan support, says the creative approach is a win-win situation that gets double duty out of the state’s money.

[…]

Transportation Trust Fund bonds guarantee a 5 percent return, therefore allowing the pension fund to buy the bonds at no risk to the pension fund, Sweeney says.

The bill also lifts the cap that prohibits the pension fund from buying more than 10 percent of any bond offering.

“Some legislators wanted to put a new cap of 20 percent on the pension fund, but the state Investment Council should be allowed to make the decision on how much the pension fund can invest in Transportation Trust Fund bonds,” Sweeney says.

“This would offer an investment strategy that is mutually beneficial for New Jersey’s underfunded pension system and the Transportation Trust Fund,” Sweeney says.

The Chairman of Korea’s National Pension Service (NPS) — the third largest pension fund in the world — was placed under emergency arrest on Wednesday as part of a corruption probe that has already ensnared the country’s president.

Prosecutors are looking into whether NPS Chairman, Moon Hyung-pyo, coerced the fund to vote in favor of a merger of two companies.

More details from Reuters:

The special prosecutor has been looking into whether Moon pressured the pension fund to support the $8 billion merger last year of two Samsung Group [SAGR.UL] affiliates while he was head of the Ministry of Health and Welfare, which runs the NPS.

Investigators are also examining whether Samsung’s support for a business and foundations backed by the president’s friend, Choi Soon-sil, who is at the center of the influence-peddling scandal, may have been connected to NPS support for the merger, a prosecution official told Reuters last week.

The NPS voted in favor of the merger without calling in an external committee that sometimes advises it on difficult votes.

[…]

 

At a parliamentary hearing this month, Samsung Group scion Jay Y. Lee denied allegations from lawmakers that Samsung lobbied to get the NPS to vote in favor of the merger, or that it made contributions seeking something in return.

Navnoor Kang, who oversaw the $50+ billion bond portfolio for the New York State Common Retirement Fund, was arrested last week and charged with accepting bribes — included cocaine and prostitutes — in exchange for steering billions of dollars of business to two different broker-dealers.

Had the Common fund called Kang’s previous employer when they hired him, they might have learned how Kang was fired for misconduct, according to the Wall Street Journal.

From the Wall Street Journal:

In hiring Mr. Kang, the fund skipped what in hindsight would prove a crucial step: It failed to call his most-recent employer to ask about his performance there, according to a person familiar with the matter.

That call may have disclosed that Guggenheim had fired Mr. Kang a year earlier for swapping trading commissions for concert tickets and other gifts, a violation of the firm’s internal reporting requirements, according to a federal complaint.

[…]

Guggenheim had fired Mr. Kang in January 2013 after the trader violated the firm’s policies, according to the SEC complaint. His troubles there had begun late in 2012, when he told colleagues he was attending a Rolling Stones concert with Gregg Schonhorn, who worked for a broker and was drawing trading commissions from Guggenheim, according to a person familiar with the matter.

State Comptroller Thomas DiNapoli has ordered a review of the hiring practices at the pension fund. Details from the Albany Times-Union:

In an interview on Talk 1300’s “Live from the State Capitol,” DiNapoli said that federal investigators had been given access to whatever they needed as they probed the alleged bribery scheme involving Navnoor Kang, but his office learned the depth of the issue when U.S. Attorney Preet Bharara announced charges against Kang on Wednesday.

“Should it have happened? Absolutely not,” DiNapoli said. “Do we need to look at our internal policies and procedures to see if there is something else we could do? Yes. Do we need to look again about vetting and hiring? We’re looking at that.”

DiNapoli has directed his office’s inspector general and the head of his office’s investigations unit to review the matter at hand and hiring procedures, which include a background check process.