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Christie Dismisses Conflict of Interest, Pay-to-Play Allegations as “Garbage”

Journalist David Sirota has written a series of reports since over the last five months detailing the possible conflicts of interest and pay-to-play violations under the surface of the New Jersey pension system.

On Monday, Christie gave his first extended response to the allegations and denied them categorically. From Politicker NJ:

“There’s no appointed people in my administration that make those decisions,” Christie responded when asked about the allegations, reiterating an earlier defense of his administration and brushing off the accusations as innaccurate. “Those decisions are all made by folks in the Department of Treasury who are career employees. And the appointed folks on the pension board, both Republicans and Democrats, don’t make decisions about individual investments.”
[…]

“So all of those are just factually incorrect,” Christie said. “Nobody in my office had any input or discussion in any way with anybody from Treasury or the pension board for that matter about how we invest our pension funds.”

He also said “nobody should be complaining” when it comes to the state’s pension fund, lately burdened with millions in underfunded liabilities, given a high rate of anticipated returns– 7.9 percent — on the fund’s investments.

“And over my fours years as governor we’ve made 12 million over the 7.9 percent,” he added. “So the investments have gone very well.”

A major New Jersey union filed an ethics complaint against the pension system earlier this summer. The union said in the complain that the chairman of the State Investment Council “violated the Division’s own rules barring politics in the selection and retention of such funds and investments, and has further created an appearance of impropriety.”

Providence Pension Funding Could Be Worse Than Advertised

Providence Pension Funding, Analysis of Michael G. Riley — Analysis by Michael G. Riley

Sometimes, a pension plan’s official funded ratio can be deceptive. That’s because there are many different assumptions that play into that final number, including the fund’s assumed rate of return.

Michael G. Riley, vice chair at Rhode Island Center for Freedom and Prosperity, has done some number-crunching to see what Providence’s pension funding would look like if the city lowered it’s return assumption, which currently stands at 8.25 percent.

The results of the analysis can be seen in the table above. Riley’s methodology can be read below. From Go Local Prov:

I have calculated the TRUE pension liability given certain relevant assumptions. Let me first say that if Bondholders did not currently have first lien on Tax revenues, due to a 2011 law passed by the assembly placing public workers and taxpayers at the end of the line, then Providence, Rhode Island would already be rated “junk” by Moody’s, S&P etc. and would have very little flexibility to finance anything.

Mayor Taveras uses among the highest discount rate in the country 8.25%. Moody’s will use and analyze using between 5.5% and 6%. We will use 6% for their analysis and a blended rate based on crossover points indicating 70% muni rate and 30% the providence assumption for returns. The 2012 CAFR is used and assets were then reported as $421 million dollars ( even though assets in the fund were only $247 million) First we will adjust assets down by $57 million based on the auditors admonition against Taveras accounting gimmick, next we will use market value as prescribed by gasb 67.

This table reveals the truth through analysis, if you want to believe Taveras lies then keep reading the Projo and WPRI. If you are an accountant or actuary including those employed by Providence please refute these numbers in public.

According to NASRA research, the average pension fund in 2013 assumed a rate of return of 7.72 percent.

NASRA used a sample of 126 public pension plans. Only four plans had return assumptions higher than 8 percent.

Pennsylvania Pension Chairman Defends Hedge Funds; Says “Strategy Is Working”

Pennsylvania’s top auditor has publicly wondered whether Pennsylvania’s State Employees Retirement System (SERS) should be investing in hedge funds.

SERS has released formal statements defending their investment strategy, which currently allocates 6.2 percent of assets toward hedge funds.

But today, we got the pension fund’s most in-depth defense yet of the asset class.

Glenn E. Becker, chairman of the SERS Board, wrote a letter to the editor of the Patriot News which was published today in the paper. The letter, in full, reads:

I feel it is important to correct the record and explain how our hedge fund exposure has been working for the state’s taxpayers.

Industry experts generally agree that while hedge funds are not for every pension system, the unique needs of each system must shape their individual asset allocation and strategic investment plans. Therefore, the actions taken by one system may not be appropriate for all systems. Investors need to consider many factors including their assets, liabilities, funding history, cash flow needs, and risk profile.

Our current plan was designed to structure a well-diversified portfolio to meet the needs of a system that is currently underfunded, steadily maturing (has more retirees than active members) and, in the near term, will receive employer contributions below the actuarially required rate.

Those unique characteristics mean we need liquidity, low cash flow volatility, and capital protection. We must plan to pay approximately $250 million in benefits every month for the next 80-plus years. We continuously monitor fund performance, the markets and cash flows for any needed plan adjustments. At this time, our plan uses hedge funds as an integral component of a well-diversified portfolio that is expected to provide risk-adjusted returns over all types of markets.

To date, the strategy has been working. As of June 30, 2014, our diversifying assets portfolio, or hedge funds, made up approximately 6.2 percent of the total $28 billion fund, or approximately $1.7 billion. In 2013, that portfolio earned 11.2 percent or $197 million, after deducting fees of $14.8 million, while dampening the volatility of the fund. That performance helped the total fund earn 13.6 percent net of fees in 2013, adding more than $1.6 billion to the fund.

Certainly, caution is warranted when examining one short period given SERS’ long-term liabilities. Over the long term, as of December 31, 2013, the total fund returned an annualized, net of fees return of 7.4 percent over 10 years, 8.4 percent over 20 years and 9.7 percent over 30 years.

Over the past 10 years, more than 75 percent of the funds’ assets have come from investments. In terms of making up for the past underfunding, that is money that doesn’t have to come from the taxpayers.

Think Tank Director: Corbett’s Pension Proposal Would Increase Pension Debt and Reduce Benefits

Stephen Herzenberg, the executive director of the Keystone Research Center, took to the newspaper on Monday to counter Pennsylvania Gov. Tom Corbett’s argument that the best bet for saving the state’s pensions would be to switch new hires into a 401(k)-type plan.

Herzenberg claims in an op-ed that such a plan would provide no savings for the state, reduce benefits for retirees and actually increase the state’s pension debt.

Herzenberg starts by talking about the fees and other costs associated with 401(k) plans. From the op-ed, published in the Patriot-News:

For two years, Governor Corbett has advocated a shift from pooled, professionally managed, defined-benefit pensions to a system where each employee manages an individual account, similar to a private sector 401(k) plan.

[…]

How does the efficiency of today’s defined benefit pensions system translate, in bottom-line terms, measured by the level of contributions required to fund retirement? According to the National Institute on Retirement Security, individual 401(k)-style accounts cost 45% to 85% more than traditional pooled pensions to achieve the same retirement benefit. That’s a big efficiency gap.

A lot of this efficiency gap results from the fees that financial firms charge holders of individual accounts – for administration, for financial management and trading stocks, and for converting savings at retirement into a monthly pension check guaranteed until the end of life – an “annuity.” In essence, these fees are transfer from Main Street retirees to Wall Street. In an economy with stagnant middle-class incomes and all the gains for recent growth already going to the top, such a transfer seems like the last thing we need.

Given the high fees and low returns of 401(k)-style accounts, it is hardly a surprise that actuaries who have studied the Governor’s proposal for an immediate switch to them – or a more gradual switch under a new “hybrid” proposal that the Governor now supports – don’t find any savings.

Far from providing savings, in fact, this switch could result in a large upfront transition costs – because the investment returns on the existing pension plans would fall as the plans wind down. The Governor’s plan was projected to have a $42 billion transition cost.

He goes on to write that Corbett’s plan would be “highly inefficient” and would actually reduce retirement benefits. From the op-ed:

The switch would also reduce retirement benefits. This is not only bad for teachers, nurses, public safety personnel, and other public servants. It could also require a future wage increase to enable the state and school districts to attract and retain high-quality staff – another cost to taxpayers.

In his recent book on inequality, economist Thomas Piketty worries that high returns and low financial management costs are only accessible to massive pools of wealth. This means that the assets of the wealthiest individuals and families grow faster than the wealth of the rest of us. It reinforces the drfit back towards Gilded Age levels of wealth inequality.

But in the context of public sector retirement plans, defined-benefit pensions give taxpayers and the middle class the ability to grow their pooled retirement savings in the same manner as Warren Buffet and Bill Gates.

If define benefit pensions are poorly managed, as they have been in Pennsylvania, they do create some challenges. As with paying a credit card bill, if you don’t put in the required contributions you can run up a large expensive debt. But the way to fix that problem is to pay the required contributions, not to switch to a highly inefficient retirement savings vehicle.

Read the entire column here.

New Jersey Lawmaker: Turn Pension Management Over To Unions

New Jersey Senate President Steve Sweeney (D-West Deptford) offered up a new idea for pension management during an interview on Monday: let unions manage their members’ pensions. The verbal proposal was short on details, but it would certainly be a dramatic change.

From NJ Biz:

“I think we need to turn the pensions over to the unions, where they’re responsible for managing it,” he said. “I think that they would be willing to do that if there was a funding source that made the payments.”

Sweeney said having the public worker unions manage their own pensions would put the unions in a position to succeed — or fail —on their own.

Sweeney says unions, not legislators, would have a better handle on how to manage their workers’ pensions and “should control the future of their retirement.”

“If they screw up the investments, they’re responsible,” he said. “Just because they would manage it, doesn’t mean they’d screw it up. In fact, they’d probably manage it better because there would be no politics in it, because it would be completely removed from politics.”

Sweeney, noting that it was the first time he had publicly voiced the idea, did not offer any additional insight on implementation strategy or plans to formalize the proposal.

Several union leaders, including the director of New Jersey’s largest public union, said the idea was interesting but hard to evaluate given the lack of details. From NJ Biz:

Hetty Rosenstein, state director for the Communications Workers of America, New Jersey’s largest public union, was intrigued by the idea, adding that she was in favor of more “genuine oversight” of pension management. But what that would actually look like under Sweeney’s proposal is yet to be seen, she said.

“Without more details, it’s difficult to respond,” Rosenstein said.

Steve Baker, associate director for public relations for the New Jersey Education Association, the state’s largest teachers union, declined to comment without first having more information.

Gov. Christie’s office hasn’t issued a statement or given a comment on the idea.

Major Pension Fund Backs London Mayor’s “Megafund” Idea

We covered yesterday the plan proposed by London Mayor Boris Johnson to merge the country’s 39,000 public sector pension plans into one scheme, which would invest in building and updating the UK’s roads, airports, railroads and other infrastructure.

Today, one of the UK’s largest pension funds has come out in support of the plan. From the Financial Times:

The £4.9bn London Pensions Fund Authority (LPFA) said it supported the London Mayor’s call for tens of thousands of public sector schemes to merge, with the money used for infrastructure investment.

[…]

“The overhead costs of running a large number of pension funds can run into billions of pounds,” said Edmund Truell, chairman of the LPFA.

“We have been trying to go direct with our investments and cut the layers of costs. I would consider it ‘job done’ if we were absorbed into a sovereign wealth fund.”

Pension investment advisers said it was far from perfect that so many small funds manage their investments individually but they would be concerned about the creation of one enormous fund.

“Many local authority funds are too small to be able to make individual investments in alternative assets or to have a bespoke liability-driven risk management strategy,” said Ros Altmann, a pensions expert.

“However, I would be concerned about too much concentration as well and would prefer to see a number of large funds, not just one or two.”

The Mayor originally proposed his plan in a weekend op-ed in the Telegraph, which can be read here.

Photo By Andrew Parsons/ i-Images

Chart: Asset Allocation Over Time and the Rise of Alternatives

Check out the fascinating graphic [above] detailing the different between alternatives allocations between 2006 and 2012. In six short years, alternative investments as a percentage of pension assets have doubled.

Now, compare that to the allocation of a public pension fund in 1980 [below].

Today, no pension system in its right mind would adhere to the allocations we saw in 1980, and for good reason. Still, it’s an interesting exercise to look back at how things have changed.

U.S. Supreme Court Won’t Hear New Orleans Pension Case

New Orleans has failed to pay $17.5 million in required pension contributions to the city’s firefighters’ pension fund since 2010. A state court last year ruled that the city had to repay the fund in full, and an appeals court affirmed the ruling.

But New Orleans tried to appeal the case to the U.S. Supreme Court – the city argued that it shouldn’t have had to shoulder the cost of the pension fund’s failed investments, which led to a decreased funding ratio and required higher payments from the city.

But today, the U.S. Supreme Court said it wouldn’t hear the case. From NOLA.com:

The U.S. Supreme Court has decided to stay out of the ongoing legal feud between the Mayor Mitch Landrieu and the New Orleans firefighters’ pension board, leaving the city to cover disputed payments to the firefighters’ collective retirement account over the past four years.

The high court refused on Monday to hear an appeal from Landrieu arguing that state Judge Robin Giarrusso overstepped her authority when in March 2013 she ordered City Hall to immediately pay $17.5 million to the firefighters’ pension fund for shortfalls in 2012. Her ruling was upheld by the state’s 4th Circuit Court of Appeal in December.

The Supreme Court’s decision likely will have little bearing on the case, considering that Landrieu and the pension board have begun work on a compromise. On Friday, the two sides agreed to refinance the city’s debts to the fund, a shift that would considerably lower the city’s monthly payments should Giarrusso agree to it. That $17.5 million bill, for instance, would be lowered to $9.2 million under the proposed arrangement.

The two sides go back to District court on October 21.

Photo by Mark Fischer via Flickr CC License

Video: CFO of Canada’s 2nd Largest Pension Asset Manager Talks Investment Strategy

Here’s a 24-minute talk with Maarika Paul, chief financial officer at Caisse de Depot et Placement du Québec, Canada’s second-largest pension fund.

Paul touches on infrastructure, e-commerce and real estate investing, as well as investing in Europe.

The video was taken at the Bloomberg Canadian Fixed Income Conference in New York.

Think Tank: Pennsylvania Lawmakers Need To Reform Pensions – Now

Katrina Anderson, a senior policy analyst and director of government affairs for the Commonwealth Foundation, has published an op-ed in today’s Patriot-News urging Pennsylvania lawmakers to “reform the [pension] system now”.

Ms. Anderson explains her support for a solution similar to Gov. Corbett’s plan, which would move new hires into a 401(k)-style plan. An excerpt from the op-ed:

The first step lawmakers need to take is changing state-level retirement plans for themselves and new teachers and government workers. This would not erase our $50 billion pension debt, but it would prevent the problem from getting worse while protecting families from higher taxes and preserving the system.

Our current pension system has a huge flaw: It’s too easy to boost benefits when times are good and skip payments when they aren’t.

Moving new employees to a well-designed 401(k)-style plan would prevent deliberate underfunding and make “kicking the can down the road” impossible.

Reform would also benefit employees. As workers change jobs—an average of 10 times in a career—retirement portability and personal ownership of investments have never been more important. Such flexibility simply can’t be found in the current system.

But flexibility is the hallmark of 401(k)-style plans, which are also always fully funded—meaning they carry no debt—and offer predictable costs.

Not only has most of the private sector already left the old system behind—including the Wolf Organizaiton, founded by Democratic gubernatorial candidate Tom Wolf—but many states have as well. Since 1996, 18 states have converted to plans which build on the 401(k) model.

There are several bills in the General Assembly that would address this crisis for new employees, including plans that combine aspects of the current system and 401(k)s into what’s commonly called a hybrid plan, as well as reforms addressing the municipal pension crisis.

Conventional wisdom says lawmakers won’t do anything significant shortly before an election. But many statesmen in the legislature are fighting on behalf of retired teachers like Bill Frye to address this issue now.

They should understand—as property tax payers already do—that the stakes are too high to play politics and ignore real reform.

Anderson points out that pension costs have risen more than $600 per household since 2008—and are projected to rise another $550 per household in the next five years.

Read the entire column here.

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