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For Chicago, Property Taxes Still A No-Go As City Turns Elsewhere to Fix Pension Pains

ct-met-0129-chicago-pension-debt-gfc — Source: The Chicago Tribune and Morningstar

In Chicago, property taxes are among the most politically unpalatable ideas one can bring to the table.

But Illinois law requires the city to dramatically increase its payments to its two major pension funds to the tune of $500 million by 2016. In the past, the city has levied property taxes a year or two in advance of the payments in order to fund the required contribution.

One glance at Chicago mayor Rahm Emanuel’s actions of late, however, confirms that property taxes remain off the table. Tasked with improving the fiscal health of the city’s pension systems, Emanuel is exhausting all his policy options—without turning to property tax increases.

From the Chicago Tribune:

Since taking office in 2011, Emanuel has cut the size of the city workforce, reduced health care costs and found other efficiencies, like organizing garbage collection by grids rather than a ward-by-ward basis.

The mayor also has increased a host of fees, fines and taxes. He’s held the line on property tax hikes at City Hall, though Chicago Public Schools has increased them under his tenure. Some revenues, like real estate property taxes, sales taxes and income taxes, have rebounded slightly as the economy has slowly improved.

Emanuel previously declined to identify any way to come up with additional city revenue for the city worker and laborers funds until he had worked out an overall pension change plan this spring that lowered annual cost-of-living increases for retirees and boosted employee pension contributions. He’s taking the same approach to police and fire pensions by declining to discuss additional revenue before an overall pension change plan is worked out.

Pension360 covered earlier this week a hike in telephone fees that will net the city $50 million this year and next.

Still, Chicago’s budget gap is projected to be around $297 million in 2015. With the $500+ million pension payment looming as well, the pressure is mounting and Chicago officials may have to make some politically unpopular decisions.

City officials can still change their minds and hike property taxes—but the deadline to do so is last Tuesday of December 2015.

Private Equity Sets Sights on 401(k)s

Private equity funds have been a staple of the investments of defined-benefit plans for decades. But as the prominence of defined-benefit plans diminish and defined-contribution plans rise in their place, private equity firms now have their eyes on another prize: 401(k)s.

So said several major private equity players who spoke as part of a panel discussion at the Fifth Annual Innovative Alternative Investment Strategies Conference on Thursday.

From Financial Advisor magazine:

[Red Rocks Capital co-founder Mark] Sunderhuse sees big opportunity for private equity in the defined contribution space. “Target-date plans will use private equity,” he said. “There’s a lot of work with consultants going on, and different types of products will fit different boxes. We’ve had conversations with a number of people in more mainstream mutual fund-type formats where they’ll use it [the Red Rocks fund]. Our product is primarily used in investment models where people want private equity exposure in way where they can manage the risk and be able to reallocate it and rebalance it.”

Kevin Albert, a partner at Pantheon, a global private equity investment company, said U.S. public pension plans on average have 10 percent of their assets in private equity. But defined benefit pension plans are becoming dinosaurs both in the U.S. and abroad.

“That has motivated the best firms in the private equity industry to raise capital from other sources, and the two biggest other sources are defined contribution plans and private affluent investors,” Albert said. “And that’s a good thing because 15 years ago it was hard to convince a top 10 private equity fund to raise a feeder fund or to participate in an offering that would go to individual investors. They saw it as less prestigious, and viewed it as more complicated from a regulatory perspective.

“Now you’re seeing firms like Carlyle, KKR and Blackstone at the vanguard of this,” he continued. “So I think we’re in the middle of an amazing revolution in the repackaging of private equity to make it attractive to defined contribution plans, which have different needs and desires than defined benefit plans did. So I think that will be a meaningful difference in this industry from five, 10, 15 years ago.”

The discussion came up when the panelists were asked to explain a few key trends they see playing out in private equity in the next five years.

Photo by 401kcalculator.org

Nevada PERS to Release Member Data After Years-Long Legal Fight

A three-year legal battle concluded this week when the Nevada Public Employment Retirement System (NVPERS) agreed to release extensive data on its members, including benefits, in compliance with a state Supreme Court order from April.

The data to be released, according to a NVPERS notice (also embedded at the bottom of this post):

-Date of hire

-Date of termination

-Date of retirement

-Retirement option

-Employer name

-Contributions to system

-Service credit

-Beneficiary information

-Gross benefit amount

-Base retirement amount

-Adjustments to base

-Post retirement increase amount

-Retirement stop date and reason

-Marital status

-Fund status

-Gender

The court order forces a stark change in policy for a retirement system that had kept a notoriously tight grasp on its member and retiree records since the 1970s.

But a state Supreme Court order—an order issued last December but not clarified until this month—made it clear that, while individual retiree records will remain confidential, any reports based on that data produced by NVPERS are not confidential. In the words of the court:

Where information is contained in a medium separate from the individuals’ files, including in administrative reports generate from data contained in individuals’ files, such reports or other media is not confidential merely because the same information is also contained in individuals’ files.

That means NVPERS now must turn over what it calls its “actuarial feed”, or the detailed reports—containing substantial amounts of member data—it gives to its actuarial consultants. The consultants use the data to determine benefits and make projections.

More on the “actuarial feed” from WatchdogWire:

The agency described the “actuarial data feed,” which now is to be made public, as “an extensive report always thought to be confidential between the System and our actuarial consultant protected through a confidentiality agreement which has now been determined in part to be public information.”

Geoffrey Lawrence, director of research and legislative affairs at the Nevada Policy Research Institute, said the data-feed information is vital if researchers are “to build a clear understanding about how public pension liabilities have accrued in Nevada.

…

Under Nevada public records law, personal information remains confidential. Thus, PERS emphasized, it “will NOT release any Social Security numbers, contact information (addresses, phone numbers, or email addresses), bank information, or minor child information.”

This legal fight began in 2011, when the Reno Gazette-Journal filed a public records request asking NVPERS to release data on its members, including benefit payments and work history.

NVPERS denied that request, a move consistent with the System’s long-standing interpretation of the Nevada Public Records Act—the interpretation being that all individual member and retiree records are confidential.

The Gazette-Journal subsequently filed a petition to bring the case in front of a District Court. The court eventually ruled that NVPERS did indeed have to turn over the names of its retirees and the benefits they receive, among other data.

NVPERS appealed that decision all the way to the state Supreme Court, which issued its ruling in December. But NVPERS requested another hearing, held in April, to have the court clarify exactly what records it wanted NVPERS to disclose.

The results of that hearing were released just this month.

The data to be released by NVPERS can eventually be found on Transparent Nevada.

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Photo by Bruce Fingerhood via Flickr CC License

In Louisiana, A Behind-Closed-Doors Pension Tweak Could Carry Significant Costs

It was the closing hours of Louisiana’s legislative session, and a seemingly routine bill was whizzing through the Senate and House as lawmakers were preparing to leave for their recess.

But lost in the shuffle was the fact that this bill was anything but run-of-the-mill. That’s because it included an earmark, written behind closed doors and tacked on at the last minute, increasing pension benefits for two state police officers to the tune of $300,000.

Since the pension provision was attached to a larger, unrelated bill, the provision wasn’t debated and didn’t go through the traditional legislative process of passing through committees before seeing the floor for a vote.

From the Associated Press:

In the final hours of the legislative session, state lawmakers crafted a pension law change that gives Louisiana’s state police superintendent and one other trooper a sizable retirement boost, with no public debate of the implications or the cost.

The price tag is estimated to be $300,000.

The deal was struck in a six-person legislative committee behind closed doors, with the bill’s sponsor saying he had no understanding what the law change would do and no one directly taking ownership of the proposal.

“Either somebody’s not being candid or somebody didn’t read this bill. That much is clear,” said state Treasurer John Kennedy, who has raised concerns about the legislation.

The superintendent, Col. Mike Edmonson, says the change in the way his retirement benefits will be calculated was about fairness.

However, that argument was never given a public vetting because the merits of the law change didn’t go through the traditional hearing process for legislation. Instead, it was tacked into a bill dealing with a different subject and rushed through the House and Senate as they were getting ready to go home.

The board for the Louisiana State Police Retirement System is now investigating whether the pension provision went through the proper channels before being tacked on to the larger bill and subsequently passed.

The bill’s sponsor, Senator J.P. Morrell (D-New Orleans), wasn’t aware of the details of the earmark until his staff told him. From AP:

Morrell said he doesn’t know who sought the add-on to his bill, which initially dealt with the rights of law enforcement officers under investigation. He said he was told by legislative staff that the new language was an innocuous retirement fix for law enforcement officers.

But he acknowledges he didn’t follow up.

“When someone’s hitchhiking on your bill at the last minute of session and the hitchhiker was seemingly innocuous, it was my responsibility to make sure it was innocuous and I didn’t do that,” Morrell said.

Police Col. Mike Edmonson, the beneficiary of the pension tweak, said the change in benefits was fair. But he also expressed reservation about the process that led to the change.

“I do agree that the timing, the way it comes out at the end like that, it looks like it’s something that shouldn’t have happened,” Edmonson told the Associated Press. “It was fair. It’s just unfortunate that it came out in the last point of the session like that.

The previous formula used to calculate the two officers’ benefits was left over from a now-defunct retirement plan. The new tweak in the benefits formula for the officers puts them more in line with how other current state employees’ benefits are calculated.

Photo by Daniel Foster via Flickr CC License

Lawmaker Comes Out in Support of Seven Counties in Kentucky Pension Dispute

Video courtesy of CNJ2

Pension360 has previously covered the story of the Kentucky-based non-profit, Seven Counties Services, leaving the Kentucky Retirement System due to the increased contributions that would have been required from the group to stay in the system.

A judge ruled last month that Kentucky-based non-profit Seven Counties Services could legally remove itself from the state’s pension system. But lawmakers weren’t happy with the pension obligations—allegedly to the tune of $90 million—that the organization was leaving behind.

In response, lawmakers chose not to renew Seven Counties’ contract with the state.

“This sends a signal that we are not happy with an agency that contracts with the state and leaves us a bill for $90 million,” said Rep. Brent Yonts, D-Greenville.

But at least one lawmaker says Seven Counties is getting the short end of the stick in the situation.

“Going forward they should be allowed to continue the good works they’ve always done,” said Rep. Julie Raque Adams, R-Louisville.

She also defended the non-profit against claims that they were leaving the system with a massive lump of pension debt.

“I think that the $90 million is in dispute as well. Seven Counties has made every single contribution required of them to this point — before they had to file for bankruptcy,” Adams said. “The problem is we have these agencies that are so vital to our most vulnerable citizens, because you can’t pay 40 cents of every dollar into a pension system and think they’re going to be able to keep serving the most vulnerable in our communities.”

Watch the full video of the exchange above.

A great refresher of the lead-up to this situation, from Leo Weekly:

Seven Counties was one of many nonprofits allowed to join KRS over the past few decades, hoping to lure qualified employees who would overlook meager salaries due to the security of a good pension after retirement.

Up until 2006, this arrangement appeared to work, as the employer contribution rate for pensions was only 5.9 percent of payroll. However, after a decade of Frankfort severely underfunding the required employer contribution, the growing unfunded liability of KRS — especially the Kentucky Employee Retirement System, which houses those nonprofits and is now the worst-funded public pension in the country — led to ballooning costs. By 2012, the contribution rate grew to 20 percent; last year it was 27 percent, and for the current year, it is almost 39 percent.

While the pension reform legislation SB 2 passed in 2013 aimed to solve this crisis by requiring full payment by employers, for nonprofits such as Seven Counties, it only exacerbated the problem. Unable to make such pension payments and stay afloat financially, they declared bankruptcy and filed suit to pull out of KRS. In May, the judge ruled in their favor, saying that the state is obligated to pay out KRS pension benefits to the employees of Seven Counties who paid into it.

Seven Counties Services was granted leave from the pension system in June through bankruptcy proceedings as their portion of the pension payments grew to nearly 40 percent of payroll. In the 2014 budget process the General Assembly provided $19 million to other mental health agencies — not counting Seven Counties — to help them meet increased pension costs.

The Kentucky Retirement Systems actuaries estimate that Seven Counties owes roughly $90 million in liabilities to the system.

Pension360 will keep you updated on subsequent developments.

North Carolina Ends Pension Spiking By High-Paid Officials

As of January 1, 2015, highly paid government workers in North Carolina will no longer be able to “spike” their pensions, thanks to a law signed yesterday by North Carolina Gov. Pat McCrory.

Pension spiking happens when public workers accumulate sick leave, vacation time, bonuses and other benefits until the year before they retire. In their final year on the job, they cash out all those benefits—inflating their final year salary.

Since final year salaries play a big role in calculating a worker’s pension benefits, spiking can increase a retiree’s annual pension by thousands of dollars per year. The practice is currently legal in most states.

But the practice is now outlawed in North Carolina for all state and local workers who make $100,000 or more annually. From the News & Observer:

The new law, which takes effect Jan. 1, comes after The News & Observer in November reported how four community college presidents and their boards converted tens of thousands of dollars in perks to pay as they neared retirement age, creating pension boosts the retirement system will have to subsidize. The retirement system is funded by contributions from employees, taxpayers through employer contributions, and investment returns.

“This law prevents North Carolina state employees from having to subsidize artificially inflated pensions of high earners at the end of their careers,” McCrory said in a statement. “It protects the retirement system from abuse and ensures state employees are rewarded for their important investments in our state.”

State Treasurer Janet Cowell has claimed in the past that pension spiking in the state is limited to only the highest-paid state workers. Thus, the current legislation outlaws spiking for those workers by creating a “contributions cap”. The News & Observer explains:

The law creates a new method of identifying pension spiking through a contributions cap that is based on the actual amount of money state and local employees and employers put into the retirement system. Those hired before Jan. 1 would continue to receive the difference created through the pension spiking, but it would have to be paid for by that unit of government, not the retirement system. Those hired after Jan. 1, would have the choice of the employer paying, the employee paying or a reduced benefit.

The law also returns the pension vesting period for state and local employees to five years. Three years ago it was doubled to 10 years as a cost saving measure, but Cowell’s staff said the savings were minor, roughly $1 million a year, while making the state less competitive in the job market.

“Returning to a five-year vesting period is critical step in North Carolina becoming more competitive in recruitment and retention relative to other public and private employers,” Cowell said in the release.

Unions Rev Up New Appeal In New Jersey Pension Case – Read the Full Complaint Here

Unions lost the first round in the pension case playing out in New Jersey, when a judge ruled last week that New Jersey was too cash-strapped to make its full contribution to the pension system. The state instead diverted that money, totaling over $800 million, towards balancing the state budget.

Unions were hoping, and still are, for a court ruling that would reverse state Gov. Chris Christie’s decision to divert that money.

To that end, attorneys for the labor groups amended their court filings on Wednesday to update their argument that Christie broke the law when he slashed the state’s pension contribution.

The contribution, unions argue, was legally required due to a law that Christie himself signed in 2011. From the Asbury Park Press:

The updated court filings are a step toward a new hearing, expected in August, and fuller vetting of the issue by Jacobson, who said claims about the 2015 budget and pension payments needed time to become “ripe.” Christie made changes in the new budget days after Jacobson’s prior ruling.

“The amended filings reflect the fact that the governor didn’t make the full 2014 payment and made his changes in the 2015 budget,” said NJEA spokesman Steve Baker. “Other than that, there’s no substantive difference in the arguments we’ve had all along.”

Christie spokesman Kevin Roberts pointed to the Republican governor’s past comments on the court case, when Christie called the spending cut “one of the hard choices the people of New Jersey expect me to make.”

“For our state’s families who are already overburdened by high taxes, raising taxes even further would not solve a problem created by decades of neglect and irresponsibility,” Christie also said.

The unions will have to make a stronger argument to Jacobson about Christie’s ability as governor to set fiscal priorities for such things as hospitals, nursing homes, tuition aid and other programs. In the June court hearing, the unions also failed to force Christie to turn $300 million from state surplus as a down payment on the shorted pensions. “The governor determined it would be extremely unwise to not maintain that amount,” Jacobson told the lawyers for the plaintiffs.

Read the full complaint here:

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Photo: “New Jersey State House” by Marion Touvel Licensed under Public domain via Wikimedia Commons

Philadelphia Funds Return 15 Percent As New Investment Strategies Play Out

The Philadelphia Board of Pensions, the entity that handles investments for the city’s pension funds, released its annual return data this week. The fund returned just over 15 percent for the fiscal year. From the Philadelphia Enquirer:

The total fund ended the fiscal year up 15.6 percent, outperforming its benchmarks by 1.96 percent. A more narrow portfolio, managed internally, did well, too, showing an 11.97 percent return, about 3.5 percent higher than similar benchmark funds.

The city’s pension system is severely unfunded, with only about half the money it needs to pay its $5 billion in obligations to current and future retirees.

The fund altered its investment strategy in recent years, in large part to the hiring of Chief Investment Officer Sumit Handa. From the Inquirer:

The board’s investment strategy has been revamped with the arrival three years ago of Handa and executive director Francis X. Bielli.

Investments were tweaked, Handa said, particularly the pension board’s fixed-income portfolio.

While investment firms handle the bulk of funds, the pension board staff manages a portfolio of about $260 million, or 5.3 percent of the pension fund. Known as the Independence Fund, it is designed as a “tactical” fund, Handa said, to be used to rapidly respond to opportunities the staff might see.

It strives for high returns at low risk. Since it was established in early 2012, it has been an overachiever by those standards. Outperforming its benchmark, it has shown only a third of the risk associated with investing in the S&P 500, while achieving 60 percent of the rate of return.

This marks the third consecutive year the fund has outperformed its benchmark. Previous to that, the fund has underperformed its benchmarks over the past five and ten-year periods.

The S&P 500 returned 21 percent over the period (July 1- June 30) that the Board of Pensions reported their annual return.

Video: The Evolution of Allocating to Hedge Funds

Bloomberg TV sat down with Agecroft Partners founder Don Steinbrugge to talk about pension fund investments in hedge funds and what it means for both sides.

Other topics touched: hedge funds facing the reality of having to settle for less fees and more transparency to play ball with pension funds, and paying pension fund staff market rates. Watch the video here:

Pension360 has also covered the recent counter-evolution of hedge fund allocation, a trend in which many pension funds across the country are pulling back their hedge fund investments.

CalPERS, for instance, plans to pull back 40 percent of their hedge fund investments in the near future.

Photo by Simon Cunningham via Flickr CC License

Chicago Proposes Telephone Tax to Shore Up Pension Funding

Chicago politicians have been putting their heads together in recent months, trying to come up with ways to solve—or at least head off—the outstanding pension obligations that threaten to cripple the city’s finances.

A recent law mandates that the city make lump sum payments into the System each year to the tune of hundreds of millions of dollars. It’s up to lawmakers to find that money.

The first idea to increase was property taxes. But the move is so politically unpalatable that Illinois Pat Gov. Quinn struck a deal with Chicago: in exchange for the promise of no property tax increases, Quinn signed a bill that increased employee contributions to the city’s pension systems while also reducing employee benefits.

Now, many alderman have thrown their support behind a new idea for raising money: a telephone tax. More specifically, a 56 percent increase of the current telephone tax. From the Sun-Times:

Effective Sept. 1, the City Council’s Finance Committee agreed to raise the surcharge from $2.50 to $3.90–$1.40 more-per-month or $16.80-a-year–for every land line and cell phone in Chicago. The tax applied to pre-paid phones will rise from 7-to-9 percent, effective Oct. 1.

A family of four with four cell phones and a land-line would end up paying $84 in additional taxes each year. That’s $34-per-year more than the $50 price of Mayor Rahm Emanuel’s original plan to raise property taxes by $250 million over a five-year period to shore up two of Chicago’s four city employee pension funds.

On Tuesday, the Finance Committee honored the mayor’s promise without a single dissenting vote. That’s how eager they all are to avoid a property tax increase — the third rail of Chicago politics—seven months before the election.

The new revenue–$10 million this year and $40 million in 2015–will be used to “fully-fund” Chicago’s 911 emergency center and the Office of Emergency Management and Communications that runs it, thereby freeing up $50 million “to be contributed for the first payment” to reform the Municipal Employees and Laborers pension funds.

Taxing telephones is politically preferable to raising property taxes, which was the other option to raise funds to pay down Chicago’s outstanding pension obligation. Raising property taxes is a political no-no in the city.

But the telephone tax might turn out to be more costly, to both Chicago residents and the city itself. And some alderman have publicly wondered whether the city and the state are playing a political game. From the Sun-Times:

The fact that some Chicago families could end up paying more did not seem to bother most aldermen.

“Even though it may cost a little more because you have more lines and phones, I’d rather come up with an additional $5 or $10 than to come up with $150 [all at once]. It may not be as much pain monthly as it would be at one time,” said Budget Committee Chairman Carrie Austin (34th).

Budget Director Alex Holt added, “For some people, it may be more costly [than a property tax hike]. For others, it will be less costly. It’s going to be different for every home.”

Emanuel has emphatically denied that the phone tax was part of a political “shell game” to get past the Nov. 4 gubernatorial election and the Feb. 24 city election for mayor and aldermen, then sock it to taxpayers.

Ald. Scott Waguespack (32nd) said Tuesday he doesn’t buy it.

“We had this whole property tax issue on the table. Then, I thought I saw somebody [Emanuel] specifically say we’re holding it off for a year. Which means, it’s back on the table after the election,” Waguespack said.

“So, this is just to me sort of a short-term fix. It doesn’t solve the bigger structural problems we have. And it doesn’t put any other solutions on the table that we’ve had three years of talking about and haven’t proposed anything.”

Chicago’s largest fund, the Chicago Municipal Employees Annuity & Benefit Fund, was only 37 percent funded as of December 2012, according to the fund’s most recent annual report.

Photo: Pete Souza [Public domain], via Wikimedia Commons

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