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Providence Mayor Tries to Stall Deposition Until After Election in Lawsuit Over Pension Actuarial Errors

Early in 2013, Providence filed a lawsuit against the actuarial firm, Buck Consultants, that had served as the city’s actuary for the previous 90 years.

It takes a pretty serious falling out to break off such a long-standing relationship, but Providence is alleging that Buck made a serious mistake when crunching the numbers behind the city’s recent set of pension reforms.

When the city was designing its pension reforms, it asked Buck to calculate how much the city would save from various policies, namely the suspension of cost-of-living increases. So that’s what Buck did.

But the city alleges that Buck made serious mathematical errors in its estimations, overstating the city’s savings by $700,000 a year and in turn boosting its pension liabilities by $10.8 million over the next 28 years.

The court case is now underway, and the time has come for Mayor Taveras to be deposed. But Taveras says he needs to wait until after the Sep. 9^thgubernatorial primary to answer questions under oath. Buck says “no way.” From the Providence Journal:

The city last week filed an emergency motion for a protective order seeking to postpone until after the primary election Taveras’ questioning under oath about his decisions regarding changes to the city’s retirement system. It asked, too, that U.S. District Chief Judge William E. Smith limit his deposition to three hours, given the “press of city business.”

…

Buck Consultants LLC — which performed financial analyses for the city since 1920 — argues that Taveras’ deposition is imperative to its defense against the city’s lawsuit.

Buck looks to question Taveras, who it identifies as the central witness in the case, not only about his decision-making in pushing for an ordinance suspending cost-of-living increases for retirees but also statements he has made in the course of his campaign for governor. Buck asserts that its lawyers should be allowed to depose Taveras “while the campaign is ongoing” based on his comments.

“Mayor Taveras is not a mere bystander to this dispute,” Buck writes. “As the City’s highest elected official, he is a critically important witness.”

What could Taveras be worried about? For one, Taveras is saying the he wouldn’t have passed the reforms if he’d known about the math errors.

But Buck accuses Taveras of signing off on the series of reforms after he was aware of the errors.

According to Buck, Taveras is using the actuarial mistakes as a campaign ploy to save face on a policy that took money out of the pockets of many voters.

Taveras and his challenger, Gina Raimondo, have been see-sawing back on forth in the polls since last year.

Screen shot 2014-08-13 at 10.48.29 AM — Credit: Wikipedia

Photo: “Angel Taveras headshot” by City of Providence, Office of the Mayor – City of Providence, Office of the Mayor. Licensed under Public domain via Wikimedia Commons

Director of South Carolina Pension Investment Commission Abruptly Resigns Two Months Into Tenure

The executive director of the South Carolina Retirement System Investment Commission has abruptly resigned after just two months on the job.

Sarah Corbett, who was named executive director on June 3, reportedly submitted her resignation earlier this month. News didn’t break of the resignation until Wednesday afternoon.

The Investment Commission invests and manages all assets for the South Carolina Retirement System. In all, the Commission manages nearly $30 billion worth of assets.

New Transparency Requirements For Colorado Schools Will Shed Light On Pension Costs

Colorado is known for its Rocky Mountains. But the state’s rocky pension funding situation is well known, too, and lawmakers spent a chunk of the last legislative session trying to smooth out that area.

Colorado recently passed House Bill 14-1292, also called the “Student Success Act.” Most of the law deals with increasing state funding for public schools.

But a small portion of the law imposes stringent, all-encompassing financial reporting and transparency requirements on all public schools. Schools will have to report salary schedules, financial audits, and investment performance reports, among other things.

(The suggested template for all schools to follow can be seen at the bottom of this post.)

Many lawmakers are hoping that new transparency standards help shed light on the state’s pensions funding and cost issues.

Colorado’s largest pension system, the Public Employees’ Retirement Association, was only 63.25 percent funded as of 2013.

There are five sub-sets in the system; of all the sub-sets, the “school division”—the division that caters to almost all the state’s public school employees—is by far the largest. It’s also one of the unhealthiest parts of the system, as it only has enough assets to cover 62 percent of its liabilities.

Screen shot 2014-08-12 at 1.02.30 PM — Credit: Ballotpedia

Critics of the state say that part of the reason for the underfunding issues is that Colorado has been paying less and less of its Actuarially Required Contribution (ARC).

Screen shot 2014-08-12 at 1.52.35 PM — Credit: Ballotpedia

But others say that school districts themselves could be to blame for some of the underfunding, as teacher pensions are too high. Transparency standards, they say, would shed light on those issues and make them available to remedy.

Colorado public school officials are not keen on the new reporting standards. From ChalkBeat:

A wide variety of district officials interviewed by Chalkbeat raised four main concerns about the law:

Implementation – District officials generally agree that compliance will be relatively painless for large districts but presents a greater challenge to some medium-sized and small districts. “It is going to be a lot of work for a lot of people. It depends on how big you are and how many people you have working for you,” Gustafson said.

Comparability – Even with the requirement for greater uniformity, some district officials wonder if district and school data will be fully comparable. They raise the question of likely district differences in how they account for costs borne by multiple schools – things like the salaries of special education teachers, psychologists and other staff who split their time among buildings.

Use & Misuse – District officials say they support transparency as an ideal but are openly skeptical that new financial data will see much use by the public.

“Who’s going to actually look at this website?” asked Tracy John, business manager of the 606-student Peyton School District northeast of Colorado Springs.

Anecdotally, districts say there’s little public use of financial information currently available online. “I don’t receive very many calls about transparency,” said Guy Bellville, chief financial official of the Cherry Creek Schools.

And districts are nervous that advocacy groups will use school-level financial data for their own ends, ignoring the context and nuances of why districts spend money as they do.

“Rather than build confidence in school budgeting decisions, it is more likely to provide ammunition to public education detractors who have no interest in learning the deeper context or complexity that comes with school budgeting,” argues Jason Glass, superintendent of the Eagle County Schools.

Impact on student achievement – “Tell me how this is going to impact student achievement,” Gustafson said. “This is a distraction that takes away from student achievement.” Said Boulder’s Sutter, “I’m fairly certain there are no studies about how one more accountant in the district office is going to affect outcomes.”

Below, you can see the template school districts are being asked to use to comply with the new reporting standards.

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Photo by TaxRebate.org.uk

Detroit Creditor Accuses “Agenda-Driven” Bankruptcy Mediators Of Favoring Pensioners

Another chapter has been written in the bitter fight between Detroit and one of its largest creditors, Syncora. The bond insurer has the city’s bankruptcy mediators of blatantly favoring pensioners while pushing most of the pain of the bankruptcy onto the city’s creditors.

Syncora said in a court filing today that Detroit’s grand bargain deal was “the product of agenda-driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors and, remarkably, the City itself.”

Syncora feel they are being treated unfairly in Detroit’s bankruptcy. As part of the grand bargain, public pensioners had to accept significant cuts to their benefits. But the cuts weren’t as significant as they could have been.

But much steeper cuts are being enforced elsewhere, including on Detroit’s bondholders, of which Syncora is one.

In addition to being a bondholder, Syncora insures hundreds of millions of dollars worth of pension obligation certificates of participation (COPs) issued by Detroit. Those instruments became worthless when the city declared bankruptcy.

As part of the city’s bankruptcy proceedings, Syncora stands to lose between 90 percent and 100 percent of its investment—all told, around $250 million, including the money they’ll have to pay to clients for whom Syncora had guaranteed payment from Detroit bonds. More from the Detroit Free-Press:

Bond insurer Syncora — which could lose hundreds of millions in the bankruptcy — argued that Judge Steven Rhodes must reject the city’s sweeping restructuring plan because of the “naked favoritism” of lead bankruptcy mediator Gerald Rosen and mediator Eugene Driker.

The accusations thrust the mediators into the middle of a fight between the city and Syncora that has become so bitter that Rhodes ordered the city to stop using war analogies to describe the insurer’s actions.

Rosen and Driker negotiated terms of the grand bargain, which allows the city to reduce pension cuts and transfers the DIA to a charitable trust. They helped solicit donations from nonprofit foundations, which pledged $366 million over 20 years, and convinced the DIA to contribute $100 million over 20 years from its own donors. The state of Michigan then agreed to contribute $195 million in upfront cash to the deal, which must be approved by Rhodes.

In its filing, Syncora cited several public statements by Rosen, including his statement at a press conference that the grand bargain is “about Detroit’s retirees who have given decades and decades of their lives devoted to Detroit.”

Syncora argued that Driker should have disqualified himself from mediating the grand bargain since his wife is a former member of the DIA’s board of directors.

Rosen and Driker did not immediately respond to requests seeking comment.

For a breakdown of Detroit’s plans to repay various creditors, see Pension360’s coverage here.

Arizona Fund Gives CIO Retention Bonus, Contract Extension In Midst Of Federal Investigation

An Arizona pension fund, already embroiled in controversy, voted yesterday to sign its Chief Investment Officer to a two-year contract extension and gave him a $50,000 retention bonus. That bonus is in addition to a $75,000 bonus the CIO was already scheduled to receive later this year, on top of his $268,000 annual salary.

The move is controversial because the fund—the Public Safety Personnel Retirement System (PSPRS)—is in the midst of a federal criminal investigation over actions that happened under the CIO’s watch.

The fund’s Chief Investment Officer is Ryan Parham.

In January, the FBI began investigating the fund over suspicions that investment staff were inflating the value of real estate investments to trigger performance bonuses.

A federal subpoena, reluctantly released by the fund this week after a court order, indicates the inflated assets had to do with investments made with Desert Troon Companies.

According to the Arizona Republic, Ryan Parham was directly involved with Desert Troon Companies investments.

The Arizona Department of Administration, which approves state contracts, has already voiced its apprehension about Parham’s contract, especially in light on illegal raises given earlier this year by the fund. From the Arizona Republic:

The Arizona Department of Administration, prior to Monday’s vote, formally raised concerns about the contract. However, the state does not have the power to reject it outright. All employment contracts, however, need formal review from ADOA.

Administration Department Director Brian McNeil in a July 31 letter to the trust said he was not giving any “formal consultation” on the contract until the board clarifies its intention to extend Parham’s contract.

The board by a 3-2 vote (with two members absent) on Jan. 15, authorized Hacking to negotiate a contract extension with Parham, but Hacking did not do so. Hacking was forced out on July 16.

The trust submitted Parham’s amended contract to the state two days later.

McNeil said in the letter his department has concerns about the “significant gap” of time between the board’s action and contract submittal. In addition, McNeil said, he’s concerned about “the circumstances surrounding the days/weeks prior” to receiving the contract.

Phoenix City Councilman Sal DiCiccio is calling for the Attorney General’s Office to investigate the raises given by PSPRS over recent months.

“This is insane. They have the worst financial record of any of the (state) funds, and they are giving him a bonus?” said DiCiccio.

VP of CalPERS Board Faces Repeated Discipline from State Ethics Panel

Priya Mathur is the Vice President of the CalPERS Board of Administration, and she is currently seeking re-election to serve a fourth term on the Board. Her tenure requires her to submit semi-annual campaign financial statements and statements of economic interest.

But the Fair Political Practices Commission (FPPC), California’s political watchdog agency, says Mathur failed to submit her campaign financial statements in a timely manner four separate times in 2012 and 2013.

And it’s not the first time Mathur has failed to turn in required documentation in a timely manner—the FPPC has fined Mathur three times in the past for similar offenses after she failed to submit statements on time in 2002, 2007, 2008 and 2010. From the LA Times:

This is not Mathur’s first run-in with the ethics panel. The commission has taken enforcement actions against Mathur three other times in the last nine years, fining her a total of $13,000.

The fines could become an issue in her current reelection campaign, with mail-in balloting running from Aug. 29 to September 29.

“I find it interesting that she feels she doesn’t have to comply with these standards,” said Mathur’s opponent, Leyne Milstein, the finance director of the city of Sacramento. “We all need to be held accountable if we want to represent the public.”

The fine and settlement agreement follow a series of filing lapses by Mathur that were investigated and prosecuted. The commission fined her $3,000 in April 2010, and $4,000 in May of that year for failing to file on time legally required statements of economic interest for 2007 and 2008.

As a result, Mathur’s board colleagues punished her by stripping her of a chairmanship of the health committee and temporarily suspending her travel privileges. However, they subsequently voted to make her vice president of the board.

In 2006, Mathur paid a $6,000 fine for not properly filing financial documents after her initial 2002 election to the CalPERS board.

The FPPC is expected to formally approve the charges against Mathur at its next meeting on August 21. Mathur is not disputing the charges.

Gary Winuk, the FPPC’s chief of enforcement, had this to say:

“Failing to file a campaign statement is a serious violation of the Act because it deprives the public of important information about a candidate’s financial activities,” he told the LA Times.

Photo by Blake O’Brien via Flickr CC License

SEC Charges Kansas With Fraud For Misleading Investors About Health of Pension System

Back in 2009, Kansas was preparing to issue $127 million worth of bonds to investors who probably knew that the state’s pension system wasn’t the healthiest in the country.

What investors didn’t know, however, was just how bad the system really was—it was the 2^nd most underfunded in the nation at the time.

But don’t blame the investors for their ignorance. They didn’t know because Kansas didn’t tell them.

That lack of disclosure is the reason the SEC today announced they are charging Kansas with fraud for misleading investors about the health of the state’s finance and, by extension, the risk associated with buying its bonds.

From Bloomberg:

The U.S. Securities and Exchange Commission charged Kansas with failing to disclose a “multibillion-dollar” pension liability to bond investors.

“Kansas failed to adequately disclose its multibillion-dollar pension liability in bond offering documents, leaving investors with an incomplete picture of the state’s finances and its ability to repay the bonds amid competing strains on the state budget,” LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Securities and Public Pension Unit, said in a statement from Washington.

A draft actuarial report provided to Kansas’s public pension found that the gap between its liabilities and assets had grown to $8.3 billion in 2008, from $5.6 billion the previous year, lowering the pension’s funding level to 59 percent, the SEC said.

The gap was the result of years of insufficient contributions by the state and school districts to cover the cost of benefits earned by public employees and their accumulated liabilities, the SEC said.

Only Illinois had a lower pension funding status than Kansas, according to a 2010 report by the Pew Center on the States.

Neither the finance authority nor the Kansas Department of Administration, which advised the authority of material changes to state finances, determined that additional disclosure regarding the pension fund in the bond offering statement was necessary, the SEC said.

The SEC has been investigating this charge for four years.

The SEC also announced today that Kansas has agreed to settle the case without admitting or denying the allegations.

No financial sanctions were imposed on Kansas as a result of the charges.

It’s likely the SEC was content with the settlement due to recent efforts by Kansas to increase the state’s compliance with federal regulations.

In addition, the state has attempted to increase the sustainability of its retirement system—the state boosted contribution rates for workers and employers in 2012, and new hires are now entered into a “cash balance” plan.

Photo by CatDancing via Flickr CC License

Investment Firm Charged With Violating SEC Pay-To-Play Rule After Making Political Donations While Working For Two Pension Funds

A Philadelphia-area private equity firm has become the first ever to be charged by the SEC for violating a pay-to-play rule set up in 2010 designed to prevent conflicts of interest when pension funds hire investment firms.

The firm, TL Ventures Inc, was charged with violating the rule after an employee at the firm made political contributions to Pennsylvania’s governor and Philadelphia’s mayor while the firm was doing work for the Philadelphia Board of Pensions and the Pennsylvania State Employees’ Retirement System.

The employee, an investment advisor, made a $2,500 campaign contribution to a candidate for Mayor of Philadelphia and a $2,000 contribution to a candidate for Governor of Pennsylvania.

The SEC says that presented a conflict of interest because the Mayor and Governor appoint a total of nine members to the two pension boards for which TL Ventures was providing investment services for at the time of the donations.

Those boards are tasked with hiring investment firms to do advisory work for the pension funds.

Bracewell & Giuliani explains the specifics of the rule:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

TL Ventures has agreed to give up the $257,000 worth of fees it earned from the state, as well as pay a $35,000 fine.

Republicans are now suing the SEC in an attempt to block the rule, saying that preventing investment advisors from making political donations is, in effect, a restriction on free speech. From Reuters:

Republican politicians sued the U.S. Securities and Exchange Commission, seeking to throw out a rule that limits political donations by investment advisers.

The Republican state committees from New York and Tennessee said the federal securities regulator had flouted due procedure when adopting its Political Contribution Rule, which they said also violated the constitutional right to freedom of speech.

“The (rule) directly harms Plaintiffs, as potential donors have informed each Plaintiff that they will not make political contributions because of the SEC’s rule,” said the complaint before a federal court in the District of Columbia, which was filed late on Thursday.

The SEC in 2010 approved the rule, which prohibits investment advisers from making campaign contributions in the hope of being awarded lucrative contracts to manage public pension funds, a practice known as “pay to play”.

The plaintiffs want the court to decide that the rule violates the law and to stop the SEC from enforcing the rule with respect to federal campaign contributions.

Specifically, Republicans are arguing that the SEC violated the Administrative Procedures Act when drafting the law. The Act requires specific procedures to be followed when drafting rules.

The Administrative Procedures Rules has been used successfully to strike down previous SEC rules.

Photo by jypsygen via Flickr CC License

Federal Reserve: One In Five People Nearing Retirement Have No Retirement Savings

The Federal Reserve released its Report on the Economic Well-Being of U.S. Households last week, and one statistic stood out starkly from the rest: 19 percent of people between the ages of 55 and 64 have no retirement savings and don’t have a pension lined up.

The Federal Reserve surveyed 4,100 people last year and retirement savings were one of the major topics. The report shed light on the dire state of retirement savings in the United States.

Across all age groups, 31 percent said they had zero retirement savings. When asked how they planned to get by after retirement, 45 percent said they would have to rely on social security. Eighteen percent plan to get a part-time job during “retirement”, and 25 percent of respondents said they “don’t know” how they will pay the bills during retirement.

Screen shot 2014-08-11 at 11.23.21 AM — Source: The Federal Reserve

Pension360 has previously covered how income inequality rears its head when retirement approaches, and this report provided further evidence: 54% of people with incomes under $25,000 reported having zero retirement savings and no pension. Meanwhile, only 90% of those earning $100,000 or more had either retirement savings or a pension, or both.

As 24/7 Wall St. points out, these trends could have a broader affect on the economy. What’s certain, however, is that retirement is no longer a certainty for many people:

This is no simple report to ignore, and this can affect the future of many things in America. It can affect Social Security, it can affect the financial markets via contributions and withdrawals of retirement funds, and it can affect the future workforce demographics in that older workers may simply not be removing themselves from the workforce, making it impossible for younger workers to graduate or move up.

Another retirement scare is a tale you have heard, but this quantifies it. The Fed showed that although the long-term shift from defined-benefit to defined-contribution (from pension to 401(K) and IRA) plans places significant responsibilities on individuals to plan for their own retirement, only about one-fourth appear to be actively doing so.

The researched that conducted the survey noted that the lack of retirement savings is due partially to poor planning. But many of those surveyed said they “simply have few or no financial resources available for retirement”.

Photo by RambergMediaImages via Flickr CC License

Survey: Pensions Funds Will Continue To Increase Alternative Investments

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Often, media narratives don’t properly reflect the reality of a situation.

For example, news has been breaking over the past few weeks of pension funds decreasing their exposure to hedge funds and alternatives. That includes CalPERS, who plan to chop their hedge fund investments dramatically. The reason: high fees associated with those investments are eating into returns.

But according to a new report, pension funds are planning to increase their allocations toward alternatives, more than any other asset class, for years to come.

Consulting firm McKinsey & Co. surveyed 300 institutional investors about their future plans investing in alternatives. (McKinsey defines “alternatives” as hedge funds, funds of funds, private-equity funds, real estate, commodities and infrastructure investments.)

As for the question of whether funds will continue to invest in alternatives, the answer was a resounding yes: the respondents indicated they would like to increase their exposure to alternatives by 5 percent annually.

The reportnotes that pension funds believe their traditional investments, which have been garnering great returns as the bull market saunters on, run the risk of not meeting actuarial return assumptions in the medium-term, or when the market comes down off its high. At that point, pension funds want to be invested in higher-yielding instruments to meet return assumptions. From CFO Magazine:

McKinsey suggests that the bull market, now more than five years old, can’t be expected to continue indefinitely. Indeed, the report says institutional investors that manage money for pension plans are moving more money into alternatives out of “desperation.”

“With many defined-benefit pension plans assuming, for actuarial and financial reporting purposes, rates of return in the range of 7 to 8% — well above actual return expectations for a typical portfolio of traditional equity and fixed-income assets — plan sponsors are being forced to place their faith in higher-yielding alternatives,” McKinsey writes.

But, the consulting firm notes, the rapid growth of alternatives is not simply the result of investors chasing high returns. “Gone are the days when the primary attraction of hedge funds was the prospect of high-octane performance, often achieved through concentrated, high-stakes investments. Shaken by the global financial crisis and the extended period of market volatility and macroeconomic uncertainty that followed, investors are now seeking consistent, risk-adjusted returns that are uncorrelated to the market.”

The Los Angeles Fire and Police Pensions fund is at least one fund going against the grain here: it recently took 100 percent of its money out of hedge fund investments.

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