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Memphis Weighs Two Pension Reform Measures

The Memphis City Council meets two times in December, and at one of those meetings they are expected to vote on the two pension reform measures that sit before them.

Details on the reform measures, from Memphis Daily News:

One version is Memphis Mayor A C Wharton Jr.’s proposal that would move new city employees and those with less than 10 years of service to a separate retirement account that equals the unvested employees’ contributions in the existing pension plan plus a multiplier.

The second version, by council member Myron Lowery, would move new city employees only to a pension plan that is the “hybrid” plan Wharton proposed in October for new hires as well as unvested city employees. The hybrid is a combination of a cash balance plan and a defined contributions plan.

The motive behind the reform measures is simple: the city is looking to save money. In particular, it is looking to cut down on its actuarially required contribution, the annual payment it pays to the pension system. From Memphis Daily News:

The city’s target in the new plan is how it affects the city’s annual required contribution toward the pension liability. Joyner estimated that by applying a new pension plan to new hires only, the city saves an average of $2 million a year over 25 years.

There would be more savings on the ARC, as it is called, if the city includes unvested employees with five years or service or up to the 10-year mark, as Wharton has proposed.

“You would have additional savings, but that savings will all be generated by taking benefits from people who are not yet vested in those benefits,” Joyner said.

City Finance Director Brian Collins said the administration is sticking by its recommendation of including unvested city employees as well as new hires.

“If you just stuck with the mayor’s plan, that’s where you get the most savings of $10 million,” he said. “If you just looked at it with five years, it is closer to $3 million or $4 million a year off the status quo ARC.”

The council will hear final readings of the two reform measures during their December 2 meeting.

Jacksonville Poised to Pass Amended Pension Reform Plan

After months of debate, the Jacksonville City Council is as close as ever to passing an oft-amended pension reform bill.

The bill originally was designed to force the city to pay higher annual payments into its Police and Fire Pension Fund. But new amendments will likely force pensioners to shoulder some of the burden, as well.

Details on the new amendments to the bill, from the Florida Times-Union:

One amendment favored by City Council would give the city the power to unilaterally impose changes in pension benefits in three years if there is an impasse between the city and police and firefighter unions in future collective bargaining talks.

Gulliford said that would put Jacksonville in the same posture as other Florida cities.

Another amendment would change the cost-of-living adjustments that current police and firefighters would get for pension benefits earned after a new agreement takes effect. Instead of a guaranteed 3 percent COLA annually, the COLA would float based on Social Security’s cost-of-living index, with a maximum COLA of 4 percent.

That change would reduce the city’s pension cost in years when Social Security is less than 3 percent, but the city’s cost would be higher if inflation pushes that index above 3 percent.

According to the calculations of the Times-Union, the bill, amendments included, is likely to pass a vote by City Council:

Most Finance Committee members previously backed the amendments during an initial round of voting last week.

Though nothing would be final until the full council meets Dec. 9, the votes so far show an emerging majority of council is lining up to approve the pension legislation, albeit with significant differences from the tentative agreement put forward by Mayor Alvin Brown.

In the Rules Committee, the unanimous votes for the amended bill were cast by Bill Bishop, Johnny Gaffney, Bill Gulliford, Warren Jones, Robin Lumb, Don Redman and Matt Schellenberg.

[…]

In addition to the seven City Council members who voted to move forward with the amended bill Monday, the amendments drew support at last week’s Rules-Finance committee meeting from council members Richard Clark, Lori Boyer, John Crescimbeni and Jim Love. City Council President Clay Yarborough also supported the amendments.

That would add up to at least 12 members voting for the bill, which would exceed the 10 votes needed to get a majority on the 19-member council.

The city’s Police and Fire Pension Fund is 43 percent funded.

Ontario Teachers’ Pension Names New Director of Europe, Middle East and Africa Investments

The Ontario Teachers’ Pension Plan has appointed private equity veteran Jo Taylor to the post of Managing Director for Europe, Middle East and Africa (EMEA). Taylor will also head the pension fund’s London office.

From an OTPP release:

In his new role, Mr. Taylor retains primary responsibility for Teachers’ Private Capital and private equity investments in the region while assuming oversight for the full cycle of opportunity origination, analysis, value creation and execution of investment activities across asset classes.

In addition to setting the tone and direction of Teachers’ investment activities in the EMEA market, Mr. Taylor, who joined the organization in 2012, will guide all advisory relationships within the region and becomes a member of Teachers’ Investment Committee.

“Jo’s expanded role reflects our commitment to growing our global presence and deepening our long-term relationships with our partners in key markets. His experience, relationship-building skills and his deal and market knowledge make him the ideal person for this new position,” said Neil Petroff, Teachers’ Executive Vice-President and Chief Investment Officer.

Teachers’ will be opening an expanded London office at Portman Square in 2015 to accommodate a larger, multi-asset-class team. Teachers’ established its London office in 2007. It has a diverse portfolio of assets in the region valued at approximately $21 billion as of December 31, 2013.

The Ontario Teachers’ Pension Plan manages $140 billion in assets.

Big Raise on Horizon for Massachusetts Pension Investment Head

On Tuesday, the Massachusetts PRIM Board will vote on whether to give a big raise to PRIM CIO and Executive Director Michael G. Trotsky.

The raise, not including bonuses, would bring his annual salary from $295,000 to $360,000.

It’s a big raise, but the Boston Globe’s Steven Syre makes the case that the salary bump represents a “prudent investment” for taxpayers:

That is certainly a lot of money, nearly twice what Jackson’s commission thinks the governor should be paid. It would put Trotsky’s salary above average — but hardly on the top shelf — among people holding comparable public-sector positions around the country. He will remain wildly underpaid compared with people who do similar work for private companies.

[…]

Like many states, Massachusetts does not have enough money saved to cover pension payments due in the years ahead. The state has made some progress in closing that gap but the investment performance of the existing pension fund is a big part of the equation.

The dollars involved are huge. If the people running the pension fund can add a single percentage point to investment performance in a year, they will contribute an extra $600 million to the state. Mistakes can be equally expensive.

Pension fund executives do not manage money themselves. They allocate it to many different kinds of assets and then choose a long list of private firms to do the investing. This year, they have been moving money to become more conservative after years of strong financial markets.

Trotsky left the hedge fund world to become executive director of the state pension fund four years ago. Two years later, the fund’s chief investment officer left, and Trotsky took over those duties, too. He was paid another $50,000 for the added job, which would have cost well over $200,000 a year to fill, but otherwise has not gotten a raise since he arrived.

The fund’s investment performance has been good over the last four years, averaging more than 13 percent annually in strong financial markets. One point of reference: The investments outperformed Harvard’s endowment in each of those years.

Taxpayers have a lot at stake in the state pension fund. It’s a prudent investment to pay the people who manage your money.

The Pension Reserves Investment Management (PRIM) oversees management of $60 billion of the state’s pension assets.

New York City Council Members Urge State Lawmakers to Overturn Governor’s Veto of Veteran Pension Bill

Last month, New York Governor Andrew Cuomo vetoed a bill that would have granted certain war veterans a “jump-start” toward drawing a state pension.

Some members of New York’s City Council are calling on state lawmakers to overturn that veto.

From the Queens Chronicle:

Members of the City Council’s Veterans Committee are urging state lawmakers to overturn Gov. Cuomo’s veto of a bill that would allow veterans who served during peacetime or undesignated conflicts to purchase up to three years of credit toward a state pension plan.

“We firmly believe that all military service is public service and therefore all honorably discharged veterans deserve access to the additional retirement credits this bill would afford,” a written statement by the members of the committee states.

The committee on Nov. 20 wrote to both Senate Majority Leader Dean Skelos (R-Nassau) and Assembly Speaker Sheldon Silver (D-Manhattan), urging the two to direct their respective houses to vote in a special session of the state Legislature to override the veto of the governor.

Councilman Eric Ulrich (R-Ozone Park), chairman of the Veterans Committee, said the two leaders should “not allow Gov. Cuomo’s veto to essentially close the door on helping thousands of veterans who deserve the help the most.”

Cuomo’s thoughts on the bill:

Cuomo on Nov. 7 vetoed the bill, stating that it would “run rough-shod over systemic reforms carefully negotiated with the Legislature to avoid saddling local property taxpayers with additional, unmanageable burdens.”

“It is disheartening to see the Legislature reverse course only two years after it overwhelmingly agreed to avoid tossing these burdens onto local taxpayers in cities, towns, counties and school districts,” Cuomo added.

“But the Legislature has chosen to ignore its commitment to shield property taxpayers from the costs of the new statewide pension enhancements.”

The estimated first-year cost to city employers would be about $18 million, according to the bill.

Arizona Public-Safety Pension Cleared of Wrongdoing in Federal Criminal Investigation

The Arizona Public Safety Personnel Retirement System has been cleared of any wrongdoing as federal officials close an investigation into the fund’s real estate valuations.

The U.S. Attorney’s Office and the FBI were investigating whether fund staff inflated real estate values to trigger bonuses.

New York Pension Commits $50 Million to Local Private Equity

New York’s Common Retirement Fund has announced an additional $50 million will be invested in local private equity through the pension fund’s In-State Private Equity Investment Program.

Through the In-State Program, which started in 2000, the Common Retirement Fund invests in New York-based companies. Graycliff Partners will manage the new commitment.

From a press release:

“The In-State Private Equity Investment Program is proof that investing strategically in New York companies produces results,” said DiNapoli. “The program has returned nearly $300 million to the state pension fund and supported thousands of jobs across the state. This $50 million commitment to Graycliff will help to keep the state pension fund strong for the more than one million retirement system members and retirees as well as promote growth in our local economies.”

The In-State Private Equity Program is designed to meet fiduciary standards and provide investment returns to the state pension fund consistent with the risk of private equity. The program invests in New York State-based companies seeking capital for growth, to refinance ownership or for early stage investment. The program has returned $293 million to the state pension fund on 71 exited investments.

As of September, the state pension fund has invested $760 million in 292 companies and helped to create or retain nearly 4,000 jobs. Comptroller DiNapoli has more than doubled the pension fund’s commitment by adding $749 million to the In-State Program. Since 2007, three new managing partners have been added to oversee the program’s investments including Graycliff in 2014, Contour Venture Partners in 2011 and DFJ Gotham in 2009.

“Graycliff Partners has a long history of investing in and growing lower middle market businesses by supporting strong management teams and providing strategic and financial guidance,” said Andrew Trigg, managing director for Graycliff Partners. “We view New York State as a region with a great depth and diversity of corporate and entrepreneur-owned businesses poised for expansion and crucial to economic development in the state.”

The state pension fund selected Graycliff as a managing partner for the In-State Program in October, increasing the total number of partners to 19. The New York City-based firm will invest in buyout and growth equity transactions across the state.

The Common Retirement Fund manages $180 billion in assets for New York’s largest state-level retirement systems.

Kansas Pension Plans To Commit $350 Million To At Least Six Real Estate Funds

The Kansas Public Employees Retirement System (PERS) is planning to ramp up its real estate commitments in 2015. The fund will invest up to $350 million in at least a half-dozen real estate funds. More from IPE Real Estate:

The pension fund will split the capital, with $200m for core strategies and as much as $150m for non-core investments.

An increased allocation and separate-account asset sales have given the pension fund substantial core capital to deploy.

Kansas PERS will invest the core capital with its existing core managers: JP Morgan Strategic Property Fund, Morgan Stanley Prime Property Fund, LaSalle Property Fund, Heitman America Real Estate Trust, UBS Trumbull Property Fund and Jamestown Premiere Property Fund.

It could also place capital in a new, core, open-ended fund as it evaluates the merits of adding a seventh core fund.

Non-core capital would be invested in funds targeting assets in the US, as well as Europe or Asia.

Kansas PERS, which typically makes $40m commitments, would consider approving three or four commitments next year.

The pension fund said it believed non-core strategies offered the potential for attractive risk-adjusted returns.

On an unleveraged basis, value-add investments are being underwritten to premiums of 200 basis points or more above core returns, it said.

Kansas PERS said it would continue to target skilled managers focused to their core competencies, rather than those accepting additional risk and new strategies to reach for outsized returns.

The System’s real estate portfolio returned 15 percent last fiscal year.

Kolivakis on Post-GASB New Jersey and Pension Fund Compensation

Last week, the funding ratio of New Jersey’s pension system dropped 20 points. That’s because the state began measuring funding under new GASB accounting rules, which requires using market asset values instead of actuarial ones.

This new way of measuring liabilities puts New Jersey in an even deeper hole. But as Leo Kolivakis of Pension Pulse points out, this is a hole that New Jersey dug for itself – with poor pension governance, below-median investment performance and by diverting state pension payments to other parts of the budget.

Here’s Kolivakis’ take on New Jersey’s situation, the new GASB rules and compensating pension fund staff.

__________________________

Originally published at Pension Pulse:

You can read more on GASB’s new rules for pensions here. I note the background for these changes:

On August 2, 2012, the GASB published accounting and financial reporting standards that improve the way state and local governments report their pension liabilities and expenses, resulting in a more faithful representation of the full impact of these obligations.

The guidance contained in these Statements will change how governments calculate and report the costs and obligations associated with pensions in important ways. It is designed to improve the decision-usefulness of reported pension information and to increase the transparency, consistency, and comparability of pension information across state and local governments.

For example, net pension liabilities will be reported on governments’ balance sheet, providing citizens and other users of these financial reports with a clearer picture of the size and nature of the financial obligations to current and former employees for past services rendered.

In particular, Statement 68 requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits.

The new GASB rules will impact all state and local pensions, not just New Jersey. This will be another important measure to determine whether U.S. public pensions are indeed on solid footing.

As for New Jersey, back in March, I commented on its pensiongate scandal and didn’t mince my words:

The article doesn’t capture the real problem at U.S. public pension plans, namely, lack of proper governance. You basically have politicians appointing political bureaucrats in charge of public pensions, paying them peanut salaries and getting monkey results. There are exceptions but this is typically how U.S. public pension funds are mismanaged.

And who benefits most from this? Of course, the Paul Singers, Dan Loebs, Steve Schwarzmans, and all the rest of the who’s who managing hedge funds and private equity funds. It’s one big alternatives party — for the big boys. Everyone is making a killing except for these public pension funds, praying for an alternatives miracle that will never happen. These alternatives managers and their sophisticated marketing are milking the public pension cow dry. They basically have a license to steal.

And why not? There are plenty of dumb institutions listening to their useless investment consultants who are more than happy to recommend the latest hot hedge fund or private equity fund to their ignorant clients. It’s a frigging joke which is why the Oracle of Omaha is 100% right when he warns us that the worst is yet to come for U.S. public pensions.

As far as New Jersey, Gov. Christie has done some good things on pension reform but a lot more needs to be done. Double-dipping pensioners are bleeding New Jersey dry. Unions can bitch all they want about rich alternatives managers meddling in their state’s politics but they must accept shared risk of their plan, which includes raising the retirement age and cuts in benefits as long as the plan is chronically underfunded. The state of New Jersey, however, should make sure it tops up its public pension plan which it neglected to do for years (the major cause of the pension deficit).

The biggest factor explaining the pension deficit in New Jersey and other states is how successive state governments failed to make their pension contributions, using the money to fund other things (no doubt in an effort to buy votes).

But there are plenty of other factors that didn’t help, like lack of sensible pension reforms, lousy investment performance and poor governance.

On this last point, Michael B. Marois of Bloomberg reports, California Pension Fund Bonus Payouts Climb 14% From Prior Year:

The $300 billion California Public Employees’ Retirement System, the largest U.S. public pension, paid $9 million in bonuses last fiscal year, up 14 percent from a year earlier as earnings exceeded benchmarks.

The fund, known as Calpers, paid $8.7 million in bonuses to investment staff in the year ended June 30, and almost $300,000 to four non-investment executives, according to data provided by the system. The rewards are based on three-year performance verses a benchmark, as well as the earnings of each asset class and individual portfolios, said spokesman Brad Pacheco.

“These awards are part of the overall compensation we provide to recruit and retain skilled investment professionals needed to ensure success of the fund,” Pacheco said.

Public-pension funds are recouping investment losses suffered during the 18-month recession that ended in June 2009, which wiped out a third of Calpers’ value. Still, the crisis left U.S. pensions short more than an estimated $915 billion needed to cover benefits promised to government workers. Taxpayers have been asked to make up the shortfall.

The biggest bonus earner was Ted Eliopoulos, the chief investment officer who recorded a $305,810 bonus last year in addition to his $412,039 base pay.

Top Job

That bonus was paid when Eliopoulos was acting chief investment officer after his predecessor Joe Dear died in February from cancer. Prior to that, Eliopoulos headed the fund’s real estate portfolio. He now earns $475,000 in base pay after he was tapped for the top investment job in September.

Eliopoulos announced in September that the fund was divesting all $4 billion it had in hedge funds, saying they were too expensive and too complicated and not worth the returns.

The pension fund earned 18.4 percent last fiscal year, 12.5 percent a year earlier and 1 percent in 2012. It estimates it need 7.5 percent annually to meet its long-term obligation to pay benefits promised to state and local government workers.

Calpers is still short $103.6 billion needed to cover those promises based on market value as of June 30, 2012, the latest figure that was available. That shortfall is up 19 percent from a year earlier.

The California fund says it must grant bonuses to help compete with the pay that employees could make if they went to work on Wall Street. Pacheco said spending money on in-house investment management saves about $100 million a year that otherwise would be paid to Wall Street in fees.

Wall Street bonuses, which rose 15 percent on average last year to $164,530 — the highest since 2007 — may climb again as a result of payments deferred from previous years, New York Comptroller Thomas DiNapoli said last month.

Four executives outside the Calpers investment office were paid a total of $295,930 in bonuses last year, the fund said. Anne Stausboll, chief executive officer, got $113,679; Chief Actuary Alan Milligan earned $75,748 and Chief Financial Officer Cheryl Eason was paid $89,703, almost double a year earlier.

Calpers paid a total of $7.9 million in bonuses in the prior fiscal year.

Compensation is part of pension governance and if you ask my expert opinion, CalPERS’ compensation is fair and accurately reflects the market, their performance and their ability to attract and retain professionals to manage billions. The only thing I would change is base it on four-year rolling returns, like they do at Canadian public pension funds.

All this hoopla on compensation at U.S. public pension funds is totally misdirected. I happen to think most U.S. public pension fund managers are grossly underpaid, just like I think some Canadian public pension fund managers are grossly overpaid (read my comment on PSP’s hefty payouts and the subsequent ones on its tricky balancing act and its FY 2014 results which were likely padded by skirting foreign taxes).

Getting compensation right is critical to the long-term health of any public pension fund but supervisors of these funds should make sure they’re paying their senior investment staff properly based on benchmarks that truly reflect the risks they’re taking. I believe in paying people for performance, not for taking dumb risks to trounce their silly benchmark (that contributed to Caisse’s ABCP disaster which the media is still covering up).

Ruling on Jury Trial for Rhode Island Pension Lawsuit Could Come This Week

Will it be a jury or a judge deciding the legality of Rhode Island’s 2011 pension reforms?

That’s a question that could be answered as soon as tomorrow, when a judge will decide whether to grant the state’s request for a jury trial in the long-running lawsuit against the state’s pension reforms.

From the Providence Journal:

The lawyers in the state’s high-stakes pension case are headed back to Superior Court on Tuesday to hear Judge Sarah Taft-Carter’s anticipated decision on whether to let a jury decide the legality of the state’s sweeping 2011 pension overhaul.

[…]

The treasurer, the governor and the state retirement system have requested a jury trial in the long-running fight over the legality of pension cuts that Governor-elect Gina Raimondo crafted — and shepherded to passage in 2011 — in her current role as state treasurer, and earlier cost-cutting moves dating to 2009.

The phalanx of unions that filed the central lawsuit in June 2012 contend the cutbacks — which include the temporary suspension of the annual “cost-of-living adjustments” (familiarly known as COLAs) for retirees — are illegal.

Even though the pension benefits at issue are dictated by state law, not contract, the unions argued — and Taft-Carter agreed as a starting point for the case — that there was an implied contract.

The defendants want a jury, not a single judge, to decide whether the 2011 rewrite of state pension law impaired a contract, whether the impairment was substantial and “whether there was a legitimate public policy purpose behind the legislation that is sufficient to justify the impairment of the alleged contractual rights.”

Even if the plaintiffs who brought the six linked lawsuits establish “beyond a reasonable doubt a substantial impairment of a contractual relationship,” the state’s filing says: “It must be decided whether there is a legitimate public purpose behind the government action and whether that purpose is sufficient to justify the impairment of contractual rights.”

But a lawyer for the plaintiffs, Douglas L. Steele, told the court at an earlier juncture that the case isn’t about monetary damages. The unions want the court to use its discretion and injunctive powers to put the law back the way it was.

Carly Beauvais Iafrate, an attorney representing about 7,000 retirees, said: “We’re asking you to reinstate our benefits as they existed on June 30, 2012. That means we are asking you to take the law and just put it back. That, to me, is equitable.”

In short, the lawyers for the unions — and the retiree groups — that filed the legal challenges contend: “There simply is no right under Rhode Island law to a jury for impairment of contract claims” or any of the other alleged violations of the “takings” and “due process” clauses of the Rhode Island Constitution.

The state’s 2011 reforms applied to all workers and retirees, not just new hires. The changes included suspending COLAs and moving employees into a hybrid pension plan with elements of a 401(k)-plan.

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