Pension360 | The Complete View of Public Pensions

Pennsylvania Pension Reform Not Likely As Election Draws Closer

The election for Pennsylvania governor draws closer, but pension reform seems farther away than ever.

Gov. Tom Corbett has made pension reform his campaign cry. But he remains down in the polls as the urgency to pass pension reform dwindles around him—both from inside and outside the capitol. ABC 27 reports:

A typical late-August day and all is quiet at the Capitol.

But this silence is not golden for a governor who has criss-crossed the state begging/cajoling/shaming/pleading with lawmakers to give him pension reform.

“We have a bill out there right now that I want the legislature to come back and finish,” Governor Tom Corbett said a week after the legislative exodus in early July.

The governor has poster boards calling pensions a $50 billion problem that will burden future generations of Pennsylvanians.

There is disagreement among lawmakers on how to fix pensions and disagreement as to whether there’s even a problem.

“The word crisis is being used for ideological reasons, not any mathematical reasons,” insists Senator Rob Teplitz (D-Dauphin).

Teplitz, and most Democrats, believe the problem was created by the state failing, for years, to pay what it owed toward pensions and now it’s time to pay the consequences and pay up.

“It does feel more painful,” Teplitz said. “But just like any family that delays making its credit card payment, sooner or later you gotta make that payment.”

There’s no urgency among lawmakers because there’s not urgency among voters, said one pollster. Education funding is on the mind of the electorate, not pension reform. From the Philadelphia Daily News:

[Pollster Terry] Madonna said that for voters the pension-funding increase is “not something they relate to,” while Pennsylvania school districts raise local property taxes, lay off staff and curtail programs.

Other high-level observers agree that voters aren’t as engaged on pension issues. From ABC 27:

“It’s something that the public still hasn’t been able to get its arms around,” said Lowman Henry, a conservative commentator with the Lincoln Institute. “As a result, you’re not seeing that type of collective pressure on lawmakers that is going to push them to make what are very difficult decisions in an election year.”

The latest poll shows Corbett trailing his Democratic challenger, Tom Wolf, by 25 points. Wolf currently holds 49 percent of the vote, while Corbett holds 24 percent. Twenty-five percent of voters remain undecided.

Quitting CalPERS Comes With Price For California Cities

City officials from a handful of California cities—Canyon Lake, Pacific Grove and, most recently, Villa Park—have publicly weighed the option of leaving the CalPERS system as their memberships become more costly.

But leaving CalPERS got a lot less enticing when the cities learned about the fee that would be levied on them upon their departure—a termination fee that could be as high as $3.6 million for Villa Park alone. From Reuters:

Villa Park fears that pulling out of its contract with the California Public Employees’ Retirement System could be prohibitively expensive because of a termination fee that could exceed the city’s annual budget.

Calpers, America’s biggest public pension fund with assets of $300 billion, last provided the city with a hypothetical termination fee of nearly $3.6 million as of June 2012. The city’s annual budget is $3.5 million.

“Getting out of Calpers is like getting out of jail,” said Rick Barnett, mayor of Villa Park, population 5,800. The City Council will vote next month on a resolution to begin the process of quitting Calpers.

Calpers recently voted to raise rates roughly 50 percent over the next seven years, citing its responsibility to maintain the fiscal soundness of the fund.

Now Villa Park is following the trajectory as California cities who have tried, but ultimately declined, to leave CalPERS in the past. Reuters reports:

Two other California cities, Pacific Grove and Canyon Lake, tried to quit Calpers last year, but both balked when they learned the termination fee.

If a city quits, Calpers continues to administer pension payments for the current and retired workers already on the books at the time of termination.

To do that, Calpers generally asks for an up-front sum to pay for potential future pension costs for all current and retired workers on city rolls.

Canyon Lake, with an annual budget of $3.6 million, was handed a termination bill last year of $1.3 million.

Keith Breskin, Canyon Lake’s city manager, said: “It would have been a serious depletion on our reserves, so the city decided not to proceed.”

If a city quits, Calpers also places that city’s funds in a more conservative risk pool, which lowers the potential return rate on its investments and in turn boosts the termination fee.

Villa Park Mayor Rick Barnett said this week that the termination fee hasn’t completely deterred the city from their plan to leave CalPERS. He did, however, leave open the possibility that the termination fee would be too burdensome to even consider leaving the System.

Retirees Blast Mass. City Retirement Board For “Criminal” Cutbacks

Retirees, labor group leaders and even a city councilman are upset at the Leominster, Massachusetts Retirement Board after the Board voted to eliminate a cost-of-living increase in pension payments for the fifth straight year. Reported by the Sentinel and Enterprise:

“We think it’s unconscionable that our local retirees haven’t received a (cost-of-living increase) which they need,” Shawn Duhamel, the legislative liaison for the Retired State, County and Municipal Employees Association of Massachusetts, said Wednesday. “They are largely reliant on their pension as their sole income, so not having a cost-of-living increase for five years really hurts retirees, and we think it’s unnecessary.”

Out of 105 retirement systems in the state, Leominster is the only community to deny a cost of living increase in recent years, according to the association’s monthly newsletter. Somerville is the only other community to miss a cost of living increase dating to 1998.

Mayor Dean Mazzarella defended the retirement board’s decision not to increase benefits while it works to reinvest and fully fund its post employment financial requirements.

Critics have lashed out, in part, because the COLA denial comes in the wake of the Board’s above-average investment returns and the recent decision to lower its assumed rate of return.

The Board’s investments returned 21 percent in 2013, and the assumed rate of return was lowered from 6.5 percent to 5.5 percent. From the Sentinel and Enterprise:

If the retirement board maintained projects of 6.5 percent rate of return based on 2013 earnings the city’s post employment benefits obligation would be fully funded, Duhamel said.

Leominster should be proud of its long success, which is outperforming almost all others in the state, but instead of sharing the wealth with retirees is taking a different approach, Duhamel said.

The retirement board’s projection of lower returns puts a bigger burden on taxpayers to fund the program, Duhamel said.

The board’s rate of return on investments should justify a cost-of-living increase, said at-large City Councilor Bob Salvatelli.

“With that kind of impressive return we’re making off this thing, and not giving retirees a 3 percent raise, is criminal,” Salvatelli said. “It’s not even funny; it’s criminal.”

According to city estimates, giving retirees a 3 percent cost-of-living increase would cost the city $145,000 up front and would cost $900,000 over the life of the retirees who received it.

Pension Limbo Leaves Illinois Schools, Creditors Uncertain

The Illinois Supreme Court will soon rule on the constitutionality of the state’s sweeping pension reforms. But no one knows what the decision will ultimately look like—or when it will happen.

That uncertainty is weighing heavily on institutions that won’t know exactly what their fiscal future looks like until a court ruling comes down. From WUIS:

Tucked into the flurry of reports issued by credit rating agencies, one phrase has been appearing again and again, undercutting the financial outlook for many public schools and community colleges across Illinois. Under headings such as “Challenges” or “What could make the rating go down,” there’s often a warning along the lines of “increased budgetary pressures due to a shift in pension costs from the state.”

Tom Aaron, with Moody’s Public Finance Group in Chicago, says that’s because of “the likelihood that the state may have to search for additional pension answers.”

Despite prognostications by Quinn and others, Aaron says it’s not certain whether last year’s pension overhauls will be upheld by the Supreme Court.

“So in the event they are not, there is a risk that the state is going to have to go back to the drawing board in terms of trying to solve its pension issues,” he said.

And that could include a shift in pension costs from the state onto individual school districts, colleges and universities.

If the court overturns the state’s reform law, lawmakers will be sent back to the drawing board to draft a different set of solutions for cutting pension costs.

One proposal that gas gained steam in the past—and likely would be among the first policies proposed—is to shift pension costs from the state onto schools, colleges and universities. WUIS reports:

The cost-shift was once a key component of pension proposals. House Speaker Michael Madigan decried the “free lunch,” in which school boards set employee pay without worrying about future pension costs, since those would be borne by the state.

Even as recently as March 2014, Senate President John Cullerton mentioned it in a speech at the Union League Club of Chicago:

“We’ve suggested to the suburban and downstate areas, ‘You’ve got to start paying a little bit of your employers’ portion of the pensions.’ It’s called a cost-shift. … It’s important. This makes good public policy,” Cullerton said.

Moody’s doesn’t think schools can afford to wait. Moody’s Public Finance Vice President Rachel Cortez says the agency asks whether districts are bracing themselves for the possibility of a cost-shift:

“The stronger credits, the stronger management teams tend to be aware that that could be coming, and are preparing for it, making contingency plans,” she added.

The cost-shift would be particularly heavy fiscal burden on schools because state funding to schools has been chipped away in recent years.

New Jersey Pension Panel Reiterates That Politics “Not Part of Process”

State-level financial decisions don’t have to be political, but they often are anyway.

So when New Jersey Gov. Chris Christie put together a panel to come up with proposals for reforming the state pension system, many critics said the panel was constructed in a way that satisfied Christie’s political needs.

Columnist Charles Stile put that sentiment to paper earlier this month, and his words echoed the thoughts of many of Christie’s critics:

In reality, the nine-member panel has a short-term political objective — salvage Christie’s latest crusade to squeeze cost-saving concessions from New Jersey’s 770,000 public workers and retirees.

This new panel, whose members have résumés reaching from Wall Street to the Ivy League, will give Christie some much-needed cover, a chance to say that dramatic ideas to cut pension and retiree health benefits are not the ideas from a potential Republican presidential candidate, but the ideas of some of the nation’s best and brightest technocrats.

But Christie, as well as the panel members, have held steadfast to the idea that their proposals will be removed from anybody’s personal politics. The Star-Ledger reports:

[Panel Chair Thomas J.] Healy stressed that the commission is evenly split — three Republicans, three Democrats, and three independents — and that politics won’t be part of its process.

“We’ve got a group of people who are very smart,” he said. “We’re balanced. The two meetings and two conference calls we’ve had so far have been enormously apolitical. Which is the goal.”

[…]

Kevin Roberts, a spokesman for Christie’s office, defended the panel.

“The entire commission, Tom Healey included, is a group of extraordinarily well-respected and accomplished professionals who are free from politics,” Roberts said.

“Tom’s only charge is to take a cold hard look at the facts and he has helped call on some of the foremost experts on these matters to do just that.”

The panel has said its recommendations could come as soon as October, but it could be later. Their first report is due in September.

Harvard Endowment Fund Under Fire For Bonuses, Other Investment Expenses

A group of Harvard alumni are voicing concern and anger over the compensation packages of investment managers who run the school’s endowment fund. From Chief Investment Officer:

Harvard Management Company (HMC), which runs the $32.7 billion fund, paid $132.8 million in salaries, bonuses, and benefits in the 12 months to June 30, 2013. This was more than double the $63.5 million it paid in 2010, according to Bloomberg.

HMC staff salaries and benefits were “increasing at a much faster rate than the endowment, which still has a long way to go before it reaches its pre-crisis peak”, they said in the letter.

A spokesperson for the Ivy League university told Bloomberg: “HMC’s unique hybrid model has saved the university more than $1.5 billion in management costs compared to what an equivalent external management strategy would have cost over the past decade.”

The nine alumni, who aired their concerns in a letter to Harvard’s president, said it’s not just the compensation packages that rub the, the wrong way. It’s also the performance. From Chief Investment Officer:

They criticized the pay hikes, which had come despite the endowment underperforming many of its peers. It has still to reach its pre-financial crisis peak of $36.9 billion in assets after losing 27% in the 12 months to June 30, 2009—although its 11.3% return for the fiscal year ending June 30, 2013 marked an outperformance of its benchmark.

According to AI-CIO, Princeton University also shoveled out the dough to its investment managers. They received $8.3 million in bonuses last year, which was a 39 percent increase over 2012.

Photo by Chaval Brasil

Chattanooga City Council Votes to Close Pension Contribution Loophole…For Most

Earlier this year, some Chattanooga city council members were surprised to learn that two of their colleagues, along with another city worker, were using a loophole to contribute to the city’s pension plan using pension checks they were already receiving from another plan they had from previous jobs.

If it sounds convoluted, that’s because it is. Regardless, the council voted Tuesday to ban the practice—for everyone but the two council members and the city worker. The Times Free-Press reports:

The Chattanooga City Council voted Tuesday to keep future retirees who are re-employed by the city from dipping into their current retirement while contributing to a new city pension.

But first council members gave an exemption to two of their colleagues and one other city employee.

The ordinance was drafted after the General Pension Board discovered Councilmen Moses Freeman and Yusuf Hakeem were drawing checks from their city pension, contributing to a new pension plan and making a salary that totaled close to $100,000. Another city employee in the Economic and Community Development Department, Countess Jenkins, was also drawing nearly $40,000 from her pension and paycheck.

After months of studying the discrepancy, the board voted that any future retirees re-employed by the city won’t be eligible to contribute to a new pension and draw their current pension.

But Hakeem, Freeman and Jenkins were allowed to keep drawing their pension and told to decide if they wanted to make the mandatory contributions of a new hired employee —2 percent of their salaries — toward a new pension plan. Or they could opt out of the plan and receive a refund for any contributions already paid.

The council voted yesterday 7-0 to pass the ban, along with the exemption for the three city workers. The council members who were exploiting the loophole did not participate in the vote.

One of the councilmen in question, Moses Freeman, had this to say about the vote:

“That was not the time to say you couldn’t [draw from your pension]. The way you do it is what they did now, it’s for anyone in the future,” Freeman said. “It’s fair and it’s appropriate. It’s moral. It’s legal and it’s ethical.”

Photo by Brent Moore

Moody’s Report Reveals Cost of Seven Counties Departure From Kentucky Pension System

Seven Counties, a mental health agency, removed itself from the Kentucky Employees Retirement Systems Non-Hazardous Plan earlier this summer in an attempt to avoid the mounting pension obligations it claimed would leave it insolvent.

Soon after, a judge affirmed that Seven Counties could indeed leave the system—a decision that sent shockwaves through Kentucky because of the precedent it set for similar agencies facing similar problems.

The problem for Kentucky, of course, is that it now has to contribute more money annually into the system to cover its growing funding shortfalls.

A new report from Moody’s delves deeper into the extra costs Kentucky faces in the wake of Seven Counties’ departure—and the costs that could come if other agencies follow in Seven Counties footsteps.

The Moody’s report is behind a paywall, but Insider Louisville did everyone the great justice of giving us the details:

Debt rating agency Moody’s Investor Services has just issued a new report finding the departure of mental health services provider Seven Counties Services from Kentucky Employees Retirement Systems Non-Hazardous Plan means the state now assumes an additional $1 billion or so in pension costs.

If the remaining mental health organizations leave the state pension system, that amount could rise to $2.4 billion, according to the New York City-based agency.

Which of course has sparked a big political battle, with legislators and state officials panicked at the thought all community health agencies could exit the pension systems, leading to a meltdown.

The chart at the top of this post illustrates the burden Kentucky is, and could be, facing.

Insider Louisville pulled out one jarring quote from the Moody’s report:

The Commonwealth of Kentucky (rated Aa2/stable outlook) has Moody’s third highest adjusted net pension liability for all states at 211 percent of its revenue.

But Moody’s was quick to point out that they don’t think Kentucky will be falling apart in the near future; the agency believes the state can “absorb” the mounting pension costs as a result of cost-cutting measures elsewhere.

SEC Tackles Asset Transparency, Conflict of Interest At Credit Rating Agencies

The SEC is finalizing two new sets of rules today: one that would increase the transparency of the asset-backed securities that caused much grief for investors, including pension funds, during the financial crisis.

The other set of rules would improve the reliability of the ratings issued by credit rating agencies.

Pension funds and other institutional investors were hit hard during the financial crisis in part because they purchased highly rated but opaque securities that seemed safe but eventually became worth pennies on the dollar.

The new SEC rules aim to increase the transparency of those investment instruments, as Reuters reports:

The new rules would lay out which information issuers would have to provide to investors on the underlying assets in the securities – which can bundle thousands of assets such as auto or home loans – in a standardized format.

The newly required information includes the credit quality and the collateral and cash flows related to each asset, said the SEC.

The SEC first proposed new rules on asset-backed securities more than four years ago. But it has struggled to craft rules that balance privacy concerns about the disclosure of sensitive loan-level data with investors’ desire to know more about the securities.

The new rules would also give investors a three-day waiting period to back out once they had agreed to a transaction, and in some cases remove references to credit ratings.

The SEC is also finalizing rules dealing with conflicts of interest at credit rating agencies. The rating agencies have been accused by investors and watchdog groups of letting business interests influence the AAA ratings they gave to bonds that would later lose significant value. From the News Observer:

To address the conflict of interest, the new SEC rules would prevent the sales and marketing departments of credit-rating agencies from having anything to do with firms seeking a rating for their financial product. Among the provision of the new rules are tighter look-back requirements designed to discourage ratings agencies employees from going to work for companies whose product they’ve rated. Investigations by McClatchy Newspapers and subsequently regulators showed how Wall Street firms played ratings agencies off each other, threatening to give competitors their business unless they got the AAA rating they sought.

The rules relating to rating agencies have not yet been completed, but the SEC said it hopes to have them finalized by the end of Wednesday.

Photo by the SEC

Chicago Fund Staff Racked Up Travel Bills With Trips to Las Vegas, Hawaii, San Diego

Staff members at the Chicago Transit Authority (CTA) pension fund have been hitting all the best vacation spots lately. But an investigation by the Better Government Association (BGA) raises questions about whether those trips—which were billed to the pension fund—were necessary.

The visits were work related—but they were also expensive, according to the BGA:

The newly released records show the agency’s expenses include more than $20,000 on a six-night trip to Hawaii for five people in 2010, $4,400 on a three-night trip to New Orleans for two people in 2011, $7,500 on a four-night, four-person trip to San Diego in 2012 and about $12,000 on a four-night trip to Las Vegas for six people in 2013.

The fund’s executive director, John Kallianis, was among those who went to Las Vegas and San Diego. He defended the trips, saying the conferences were “rigorous” and “very well worth the expense.”

Executive staff members at the CTA fund said that the trips were valuable because such conferences are educational for staff and trustees, and the distance travelled was necessary because the conferences don’t often come to Midwest locales.

But CTA pension officials did seem to know the travel information wouldn’t be received well if released to the public. Those officials initially refused to comply with Freedom of Information Act requests asking for the travel receipts and documents.

Eventually the BGA sued for access to the data, and CTA officials complied.

This isn’t the first time there have been questions around the governance of the CTA fund. From the BGA:

The fund’s governance came into question several times over the last year when we reported that its now-former investment adviser was under a U.S. Securities and Exchange Commission investigation and that one of the CTA pension trustees was soliciting donations for a union charity from pension advisers.

It would be helpful to see the travel expense totals for other pension funds of comparable size—it’s certainly not uncommon for staff to travel to conferences, but without seeing other data it’s hard to say whether the CTA staff’s travel expenses were excessive relative to their peers.

The CTA pension fund was 59.4 percent funded as of January 2013.

Photo by David Wilson

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712