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Fitch Downgrades New Jersey Credit Rating For Second Time in Five Months

On Friday, New Jersey was dealt another fiscal blow when rating agency Fitch downgraded New Jersey’s credit rating. The agency said New Jersey exacerbated “a key credit weakness” when it decreased its payments to the state pension system. From the Star-Ledger:

Wall Street analysts at Fitch Ratings today downgraded New Jersey’s bond rating for the second time this year, citing the state’s poor economic performance, Gov. Chris Christie’s rosy revenue forecasts — which failed to materialize — and his decision to plug the resulting budget gap by cutting $2.4 billion in funding for the state’s strained pension system.

Fitch said Christie’s decision to cut the pension payments this year marked a “repudiation” of a bipartisan plan he signed to fix the beleaguered retirement system for public workers, which is underfunded by nearly $40 billion, according to state estimates.

Instead of pumping bigger cash infusions every year into workers’ retirement accounts to save them from collapse — as Christie and lawmakers agreed to do in his first term — New Jersey is now stepping away from its plan, Fitch said.

“Following significant revenue underperformance, the state relied upon the repudiation of its statutory contribution requirements to the pension systems to return to budgetary balance, exacerbating a key credit weakness,” the Fitch analysts wrote in a note to investors, lowering their rating on the state’s debt from A+ to A.

New Jersey’s Treasury department responded to the downgrade by defending Christie’s decision to divert much of the state’s pension payment into the general budget. From The Star-Ledger:

A spokesman for the state Treasury Department said Christie “acted responsibly” by shrinking two pension payments that had been scheduled for the current and previous fiscal years.

“Without raising taxes on an already overburdened populace, Governor Christie has already contributed more to the pension system than any previous governor,” said the Treasury spokesman, Chris Santarelli, in an emailed statement.

“As rating agencies and ratings expectations have been recalibrated following the financial crisis of the late 2000s, the state Treasury and Office of Public Finance have worked tirelessly to ensure that New Jersey is rated fairly and equally by the Wall Street rating agencies; and will continue to do so.”

This is the second time in five months Fitch has downgraded New Jersey’s credit rating.

Photo by Walter Burns via Wikimedia Commons

Berkshire Hathaway Sued By Subsidiary Over Retirement Benefit Cuts

Workers at Acme Brick Co. say Berkshire Hathaway promised not to scale back retirement benefits when it bought the company in 2000.

Since then, Acme Brick employees have had their pensions frozen and been subjected to other rollbacks in retirement benefits. So they have sued Hathaway, the holding company run by Warren Buffett, for breaching its alleged promise. Reported by the Star Telegram:

Two employees and a retiree of Fort Worth-based Acme Brick Co., including the company’s chief financial officer, have sued the company and its parent, Berkshire Hathaway, alleging the company improperly reduced the company match on its 401(k) retirement plans and froze its pension plan.

The class action suit, filed Aug. 15 in U.S. District Court in Fort Worth, says Berkshire Hathaway, run by multi-billionaire Warren Buffett, broke a pledge it made when it acquired Acme with Justin Industries in 2000 not to reduce benefits in the company’s retirement plans.

“Since that time, the employees have stuck with the company through good times and bad, in anticipation that their benefits under the Retirement Plans would ultimately compensate them fairly,” the lawsuit says. “Now, almost 14 years later, Berkshire Hathaway has broken its promise.”

Acme Brick’s senior management on July 15 voted to make changes to the retirement plans urged by Buffett, Berkshire’s chief executive officer, and Marc Hamburg, its chief financial officer. Otherwise “Berkshire Hathaway intended to divest itself of Acme as a subsidiary,” the lawsuit says.

The class-action lawsuit alleges that Berkshire Hathaway violated the Employee Retirement Income Security Act (ERISA) when it cut benefits.

Trustees Express Fears About San Diego Fund’s Risky Strategy

The San Diego County Employees Retirement Association (SDCERA) made headlines this summer with its decision to embrace a high-risk investment strategy including extensive use of leverage and derivatives.

But members of the fund’s board expressed concern at a meeting Thursday over potential losses the fund could experience if the risky strategy goes awry. Reported by UT San Diego:

At a contentious meeting Thursday, the pension fund’s board directed managers to fence in potential losses without reducing expected investment returns.

Under a revised investment strategy that took effect July 1, managers can use derivatives to put $20 billion or more at risk in financial markets, using the fund’s $10 billion in assets as collateral.

“Frankly, it scares the heck out of me,” said Dianne Jacob, a county supervisor and appointed member of the pension board, said Thursday.

The fund’s chief investment strategist, Lee Partridge of Salient Partners, said the probability of total losses was exceedingly low. The view was echoed by the fund’s chief executive and a consultant charged with risk management oversight.

Board members approved the new strategy in April, by a unanimous vote that included Jacob.

“The draft IPS does not include appropriate limits and board approval processes in the areas of asset allocation, leverage and portfolio risk monitoring,” said county Treasurer and board member Dan McAllister, in a letter given Thursday to the fund’s chief executive, Brian White.

The point was driven home by Samantha Begovich, a county prosecutor who joined the board in July.

Holding up a dollar bill, then adding a second dollar bill, Begovich asked directly whether the fund could lose its entire balance — and still owe $10 billion.

Fund officials maintained that the probability of a total loss of assets as a result of the strategy was close to zero.

Photo by dktrpepr via Flickr CC

Judge Hints Illinois Pension Case Could Be Fast-Tracked

It’s been a foregone conclusion that the lawsuit against Illinois’ pension reform law would eventually be heard in the halls of the Supreme Court. The question has always been how long it would take to get there.

But a judge indicated this week that he’d like to fast track the case through the lower courts and get it to the Supreme Court as quickly as possible. Reported by the Herald-Review:

Sangamon County Judge John Belz said Thursday that an earlier court decision that blocked changes to retiree health insurance premiums could provide a roadmap for how the pension case will be handled in the coming months.

In July, the Illinois Supreme Court ruled that a law requiring retirees to pay more for health insurance was unconstitutional, triggering speculation that the pension changes also would be tossed out.

Belz told attorneys gathered for a hearing Thursday that the court’s decision in the health insurance case was like “an elephant in the room.”

“I can’t stick my head in sand and act like it isn’t there,” Belz said.

When Belz and attorneys were initially laying out a schedule for the case, it was not expected to be resolved at the lower court level until sometime in 2015.

Now, with the health insurance case providing a path, Belz said he’d like to move the case to the Supreme Court quickly.

“As fast as we can move it along within reason the better,” Belz said.

“This can be wrapped up by the end of this year,” said attorney John Fitzgerald, who represents a group of retired teachers.

A speedy judgment would make both sides happy. But there was bad news for the state mixed into yesterday’s hearing; the judge indicated he’d heavily weigh July’s ruling on retiree health insurance when crafting his judgment on the pension reform law. The July ruling declared an increase in retirees’ health premiums unconstitutional.

Pennsylvania Lawmaker Proposes Trash Tax to Ease Pension Pains

Pennsylvania Governor Tom Corbett has made pension reform a major part of his re-election platform, but has had little luck finding lawmakers to help him push through proposals.

One lawmaker put a new idea in the ring Thursday, although it’s probably not what Corbett had in mind.

Reported by the Morning Call:

State Rep. David Milliard thinks there may be pension gold buried in the state’s landfills.

On Thursday, the Republican from Columbia County floated a bill that would impose an additional $3 tipping fee on waste haulers to reduce school districts’ rising pension costs.

The additional fee would generate an additional $51 million and be put into a new pension-only fund controlled by the state Treasury, according to a memorandum Milliard published seeking co-sponsors to his bill. The Additional Commonwealth Contributions to School Districts Account.” to be used to help districts lower pension costs. The money would be distributed to districts, but not charter schools, on a prorated basis.

The proposal is meant to ease pension costs for school districts, which are subject to rising contribution rates designed to help cover the state’s pension funding shortfall. From the Morning Call:

Mandatory pension payments for school districts rose about 4.5 percent to 21.4 percent of payroll this fiscal year. The rising rates are based on Act 120, which went into effect in 2011. The law sets a increasing, fixed rates the state and school districts must pay each year to cover back pension debt, which is now approaching $50 billion. The state and school districts are having trouble keeping up with those payments even though they are lower than they would be if the law were not in effect.

So far, no other lawmakers have sponsored the bill.

McDonald’s Has Sued Russia Pension Fund 8 Times Since 2013

Russian McDonald’s employees are having trouble adding recent wages to their future pension calculations. As a result, McDonald’s has sued the Russia Pension Fund 8 times since the problem started in the third quarter of 2013. Reported by RIA Novosti:

McDonald’s has filed at least eight lawsuits against Russia’s Pension Fund, saying it refused to accept relevant documents from the company, as a result of which McDonald’s Russia employees’ pensions have not been accumulated since 2013, Russian Izvestia newspaper reported Friday.

“Starting from the third quarter of 2013 and until today, in response to submitted documentation, McDonald’s company receives refusals from Russia’s Pension Fund to accept these documents, which is a direct violation of McDonald’s employees’ rights,” Izvestia quoted McDonald’s Russia Director for Public Relations Svetlana Poliakova as saying.

But the Russia Pension Fund says McDonald’s submitted documents with too many errors, including misspelled names and incorrect wages. From RIA Novosti:

Poliakova argued that the company submits the documentation to the Pension Fund in accordance with all the requirements.

However, Russia’s Pension Fund representatives explained that the responsibility for McDonald’s employees’ rights violations lies within the company itself, as the majority of submitted documents contained mistakes, including in the names of employees, and the sums of their wages, Izvestia reported.

According to Russia’s Pension Fund, in 2013 the number of mistakes in the documents reached its maximum. The Pension Fund argues that it has repeatedly called on McDonald’s managers to correct the mistakes and resubmit the papers, but the company ignored its all requests. So, the accounts on the basis of which the pension rights are formed, were not ready.

There are currently over 400 McDonald’s restaurants operating in Russia.

Photo by Roadsidepictures via Flickr CC

Alaska Fund Sues 13 Banks Over Rate Manipulation

The Alaska Electrical Pension Fund filed lawsuits yesterday against 13 banks across the world for alleged rate manipulation. The banks include Bank of America, Citigroup and Goldman Sachs. More from Chief Investment Officer:

The Alaskan fund filed a complaint to the Manhattan Federal Court on Thursday, claiming the banks ran a “secret conspiracy” to set the ISDAfix rate at artificial levels from 2009 to 2012, Bloomberg reported. This action caused billions of dollars of investor losses, the fund claimed.

The ISDAfix is used to set rates for interest rate derivatives and other financial instruments.

The pension fund accused the banks of executing rapid trades just before the rate was set, an action referred to as “banging the close”. This caused brokerage firm ICAP, which was also cited in the filing, to delay processing trades until the banks moved the rate where they wanted, meaning it did not necessarily reflect market activity.

All of the defendants either declined to comment or did not respond to Bloomberg’s calls, the newswire said.

From the fund’s court filing:

“This could not have happened without some form of advanced coordination…even if reporting banks always responded similarly to market conditions, the odds against contributors unilaterally submitting the exact same quotes down to the thousandth of a basis point are astronomical. Yet, this happened almost every single day between at least 2009 and December 2012.”

Urban Institute Rates Pennsylvania PERS Among Worst In Nation At Covering New Hires

The Urban Institute released a report Thursday studying the pension benefits paid by Pennsylvania’s State Employees Retirement System.

The authors rated the System as the third worst in the country in terms of covering new state employees. From the report:

Pennsylvania’s pension plan for state employees receives a failing grade in the Urban Institute’s state and local pension plan report card, and ranks as the third-worst plan in the nation covering newly hired general state employees. The plan scores poorly because it is inadequately funded, it penalizes work at older ages by reducing lifetime benefits for older employees, and it provides few retirement benefits to short-term employees. Age-25 hires must work 32 years before they accumulate rights to future pension benefits worth more than their required plan contributions. Various pension reforms could distribute benefits more equitably across the workforce.

More details on the report’s findings, as reported by TribLive:

The study, published Thursday, said SERs, the state employee retirement system fund that serves about 120,000 retirees and 105,000 state workers, has an $18 billion shortfall and deficits that result in dramatic inequities in pension benefits.

The plan ties benefits to years of service. Researchers found 76 percent of all state-financed pension benefits go to the 25 percent of employees with the largest pensions, and the top 5 percent of recipients receive 22 percent of all benefits.

Those who leave after five years, the minimum time to vest in the system, fared poorly.

Only Massachusetts and New Jersey scored worse than Pennsylvania in terms of covering new state employees, said economist Richard W. Johnson, a senior fellow with the Washington-based Urban Institute and lead author of the study.

Read the full report here.

Michigan Gov. Snyder Defends Pension Tax

Michigan Gov. Rick Snyder’s tax on pension benefits, levied in 2011, has become a legitimate campaign issue over the last few days. Snyder took to the radio this morning to defend the policy and cast the tax in a different light. Reported by Detroit News:

Democrats have made Snyder’s changes to the way pensions are taxed a major issue in the election campaign, calling it a tax on seniors — a characterization the governor challenged Friday during the live radio show.

“That’s a misstatement when it says seniors,” Snyder told radio show host Rick Pluta. “It was really about essentially removing the exclusion on pension income.”

In 2011, Snyder first proposed ending all income tax exemptions on pension income. Previously, only retirees with large pensions from private employers were subject to the income tax.

[…]

The governor noted a new exemption of up to $40,000 was carved into the tax code for all forms of income for senior citizens.

“Now it’s fair between people who had retirement income and people who had working income,” Snyder said.

Under the changes Snyder signed into law, all pension income is subject to the 4.25 percent income tax for residents born after 1952.

“It’s still one of the top 10 most generous schemes in the country,” Snyder said of Michigan’s tax on retirement income.

Snyder reiterated his longstanding argument that making more pension income subject to the income tax was a matter of fairness to other workers.

“If you say retirement income isn’t taxed, you’re shifting your taxes to your kids to say ‘we want you to carry us,’ and that’s not a fair answer,” Snyder said.

The pension tax is especially controversial because Snyder simultaneously cut taxes for businesses by $1.8 billion.

Snyder countered that, although he cut taxes for businesses, he also “wiped out” tax credits for those businesses.

Someone Is Stealing The Campaign Signs Of CalPERS Board Candidates

Two candidates running for a spot on CalPERS’ board—David Miller and Theresa Taylor—have noticed one similarity in their campaigns: their signs are disappearing. From the Sacramento Bee’s State Worker blog:

In an email to The State Worker, Taylor suggested that Miller’s signs may have been taken down by CalPERS for violating election rules. And she forwarded a cordial email exchange between her campaign consultant and Miller about vanishing signs on both sides:

“… Just a friendly heads up that there seem to be some campaign sign thieves operating in the downtown area,” Miller wrote in a Wednesday email that Taylor forwarded to The State Worker. “Quite a few of my campaign signs have disappeared over the last few days and my campaign workers confronted a couple of the sign thieves just today while working for me downtown. It doesn’t appear that your signs have been targeted but I thought I would let you know so your folks can keep a lookout as well.”

Taylor consultant Scott Adams replied to Miller’s email: “… We too are experiencing our signs disappearing from posted locations. Unlike your guys, we have not spotted any sign thievery in progress. We just started noticing the removal of our signs so it appears to be a recent development. I can’t imagine anyone wanting to collect these as souvenirs – but you never know. Thanks for the note. I will pass it on to Theresa.”

On Friday, Miller said that he doesn’t believe Taylor’s campaign is responsible for the thefts.

“I think it most likely that some overzealous supporters took it upon themselves,” Miller said, “to help their candidate by removing my signs.”

Taylor suggested that some of Miller’s signs could have been removed by none other than CalPERS. The fund might have taken down the signs if they were placed on the fund’s property, which violates election guidelines.

Photo by Dvortygirl via Flickr CC License

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