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

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

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

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

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

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

Bracewell & Giuliani explains the specifics of the rule:

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

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

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

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

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

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

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

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

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

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

Photo by jypsygen via Flickr CC License

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

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

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

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

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

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

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

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

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

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

Photo by RambergMediaImages via Flickr CC License

Survey: Pensions Funds Will Continue To Increase Alternative Investments

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

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

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

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

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

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

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

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

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

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

Meet the Nine People Tasked With Reforming New Jersey’s Pension System

When it comes to pension reform, this isn’t New Jersey Gov. Chris Christie’s first rodeo.

Christie signed his state’s initial pension overhaul back in 2010. A major part of the law was the requirement that New Jersey slowly work its way up to paying its full actuarially required contribution into the state pension system.

But that plan never came to fruition, as Christie is using a large portion of the state’s pension contributions this year and next to fill budget shortfalls elsewhere.

Now, Christie says he’s going to give pension reform another shot. Last week, he announced plans to create a panel to analyze the state’s pension system and brainstorm ideas for cutting costs. From the NJ Star-Ledger:

The Pension and Health Benefit Study Commission will review the history of New Jersey’s public retirement system, which has been neglected by governors of both parties since 1997, who did not make required contributions whenever they ran into budgeting difficulties. Christie’s special commission will also look at reforms implemented in other states and then recommend changes to the governor.

Although Christie has been on the town-hall circuit this summer speaking of the need to reduce current contributions for public workers, those benefits in some cases are protected by the state constitution – and could be hard to claw back.

Christie, however, may be able to reduce health benefits, which are not as strongly protected as pensions under New Jersey law. He could also try to increase pension contributions for future workers, and their retirement age, as he did in 2011. Still, a Democratic-controlled Legislature is unlikely to go along with those moves.

Today, he announced the people that will populate the panel. Here’s a breakdown of who they are:

Thomas J. Healey – Partner, Healey Development LLC

Mr. Healey joined Goldman, Sachs & Co. in 1985 to create the Real Estate Capital Markets Group, and founded the Pension Services Group in 1990. He became a Partner in 1988, a Managing Director in 1996, and remains a Senior Director of Goldman Sachs. Prior to joining Goldman Sachs, Mr. Healey served as Assistant Secretary of the U.S. Treasury for Domestic Finance under President Ronald Reagan.

He is Chairman of the Rockefeller Foundation Investment Committee and is actively involved with other charitable institutions. Mr. Healey graduated from Georgetown University in 1964 and Harvard Business School in 1966.

Tom Byrne – Founder, Byrne Asset Management:

Tom founded Byrne Asset Management in 1998. He serves as the Managing Director and Head of Equity Portfolio Management and brings over 35 years experience in the securities industry to his clients.
Governor Chris Christie appointed Tom to the New Jersey State Investment Council. The Council oversees New Jersey’s public pension fund assets, currently about $73 billion. Tom also serves as a trustee and treasurer of The Fund for New Jersey and is a trustee of several other civic organizations. He also served two terms as Chairman of the Democratic State Committee in New Jersey.

Tom is a graduate of Princeton University (1976) and Fordham Law School (1981).

Ray Chambers –Special Envoy, United Nations:

Ray Chambers is a United Nations Special Envoy for Financing the Health Millennium Development Goals and For Malaria (United States). [He] is a philanthropist and humanitarian who has directed most of his efforts towards at-risk youth.

He is the founding Chairman of the Points of Light Foundation and co-founder, with Colin Powell, of America’s Promise — The Alliance for Youth. He also co-founded the National Mentoring Partnership and served as Chairman of The Millennium Promise Alliance.
Chambers is the founder and Co-Chairman of Malaria No More, with Peter Chernin, President of News Corporation. He is taking a leave of absence from that role to focus on his appointment as the United Nations Secretary-General’s Special Envoy for Malaria.

Leonard W. Davis – Chief Investment Officer, SCS Commodities Corp:

Mr. Davis has organized and managed private equity, technology, and natural resource companies. He has been the principal financial manager in a private equity company and has been the Chief Financial Officer to the lead investor of a natural resource company active in metals and energy.

Mr. Davis received his B.S. in Accounting from Spring Garden College and is a Certified Public Accountant.

Carl Hess – Managing Director of Americas, Towers Watson:

Carl A. Hess (age 52) has served as Managing Director, The Americas, of Towers Watson since February 1, 2014, and has also served as the Managing Director of Towers Watson’s Investment business since January 1, 2010. Prior to that, he worked in a variety of roles over 20 years at Watson Wyatt, lastly as Global Practice Director of Watson Wyatt’s Investment business. Mr. Hess is a Fellow of the Society of Actuaries and the Conference of Consulting Actuaries, and a Chartered Enterprise Risk Analyst. He has a B.A. cum laude in logic and language from Yale University.

Ethan Kra – Founder, Ethan Kra Actuarial Services LLC:

Ethan Kra is an independent actuary, specializing in litigation support/expert witness, advice on multi-employer plan exposures and strategies and the financial aspects of executive benefits. Previously, he was a Senior Partner and Chief Actuary-Retirement of Mercer, where he consulted in the areas of the design and funding of pension and group insurance benefits, structuring and funding of non-qualified pension benefits and the proper accounting for expense of employee benefits.

He specializes in analyzing the economic and accounting implications of financing strategies and vehicles for employee and executive benefits. For over 17 years, he chaired Mercer’s Actuarial Resource Network, a committee of the senior technical actuaries throughout the United States.

Ken Kunzman – Partner, Connell Foley LLP

Kenneth F. Kunzman was Chairman of the Connell Foley Executive Committee from 1995 to 2002. He has been a partner in the firm since 1968 and has been responsible for a variety of areas of law.

Additionally, Mr. Kunzman serves as Chairman and Trustee of the Corella A. and Bertram F. Bonner Foundation of Princeton, NJ which provides scholarships for needy students of 26 colleges based upon community service. He is Trustee Emeritus of Caldwell College, former Trustee of St. Peter’s Prep, and Co-Chairman Emeritus of Seton Hall University Pirate Blue Fund. Mr. Kunzman served as Captain, US Air Force from 1962-1965.

Mr. Kunzman serves as a member of the Board of Trustees and the Executive Committee of the Scholarship Fund for Inner City Children and is the former Chairman of the Essex Legal Services Foundation, where he continues to serve as a Trustee.

Larry Sher – Partner, October Three Consulting LLC

Larry Sher is a member of the actuarial consulting team and part of the senior leadership for October Three. Larry also is head of our dispute resolution practice, which provides support to clients in disputes related to their retirement plans, both in litigation and otherwise. Larry’s experience in this area is extensive, having served as an arbitrator outside of litigation and as an expert in many lawsuits, including prominent cases involving cash balance pension plans. Larry is a highly sought after expert and advisor.

Margaret Berger – Principal, Mercer Consulting

One thing is certain: the panel has no shortage of impressive resumes. But it’s ideas, not resumes, that will effectively reform New Jersey’s Pension System. Pension360 will keep you updated on subsequent developments surrounding the The Pension and Health Benefit Study Commission.

After Massive Investment Losses, Michigan Pension Funds Benefit From Settlements with AIG, Private Equity Firms

AIG revealed in an SEC filing this week that it plans to pay out a massive sum of money to settle an ongoing lawsuit claiming the firm misled investors on the quality of certain investments prior to the 2008 financial crisis.

The total settlement: $970.5 million. And certain pension funds in Michigan will likely see a chunk of that change. That’s because they lost a significant chunk of change when they bought investment vehicles from AIG prior to 2008.

The State of Michigan Retirement Systems says it lost between $110 million and $140 million due to AIG.

Detroit’s General Retirement System as well as the Saginaw Police and Fire Pension Board say they lost millions more, as well.

All told, those funds could receive a combined payout totaling eight figures. From Crain’s:

This week, AIG disclosed to the U.S. Securities and Exchange Commission it would pay $960 million under a mediation proposal to settle the consolidated litigation, on behalf of investors from that period.

[…]

The lawsuit alleges AIG executives gave false and misleading information about its financial performance and exposure to residential mortgage backed securities in the run-up to the financial market collapse.

The $54.8 billion Michigan systems — a group of plans administered by the state Office of Retirement Services for former police officers, judges and other state and public school employees — became lead plaintiff for the class in March 2009, after informing the court of its nine-figure losses.

The federal Private Securities Litigation Reform Act of 1995 says a court should presume a plaintiff is fit to lead class actions like this one if it “has the largest financial interest in the relief sought by the class.” In fact, it had about double the losses of any other plaintiff seeking the same lead role — so its piece of the nearly billion-dollar pie may be larger than most.

The bolded is important, because it means that the State of Michigan Retirement Systems will almost certainly be receiving the highest payout of any of the plaintiffs.

Meanwhile, another Michigan fund—the Police and Fire Retirement System of the City of Detroit—was the beneficiary of another settlement today.

Three private equity firms settled a seven-year-long lawsuit today that alleged the firms colluded and fixed prices in leveraged buyout deals. The firms—Kohlberg Kravis Roberts (KKR), Blackstone, and TPG—settled for $325 million.

Among the suit’s plaintiffs were public pension funds that held shares in the companies that were bought out by the firms at “artificially suppressed prices, depriving shareholders of a true and fair market value.” From DealBook:

The lawsuit, originally filed in late 2007, took aim at some of the biggest leveraged buyouts in history, portraying the private equity firms as unofficial partners in an illegal conspiracy to reduce competition.

As they collaborated on headline-grabbing deals — including the buyouts of the technology giant Freescale Semiconductor, the hospital operator HCA and the Texas utility TXU — the private equity titans developed a cozy relationship with one another, the lawsuit contended. Citing emails, the lawsuit argued that these firms would agree not to bid on certain deals as part of an informal “quid pro quo” understanding.

In September 2006, for example, when Blackstone and other firms agreed to buy Freescale for $17.6 billion, K.K.R. was circling the company as well. But Hamilton E. James, the president of Blackstone, sent a note to his colleagues about Henry R. Kravis, a co-founder of K.K.R., according to the lawsuit. “Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.

Days later, according to the lawsuit, Mr. James wrote to George R. Roberts, another K.K.R. co-founder, using an acronym for a “public to private” transaction. “We would much rather work with you guys than against you,” Mr. James said. “Together we can be unstoppable but in opposition we can cost each other a lot of money. I hope to be in a position to call you with a large exclusive P.T.P. in the next week or 10 days.” Mr. Roberts responded, “Agreed.”

The settlement now awaits approval from the Federal District Court in Massachusetts.

Could Climate Change Deplete Your Pension?

If oil, gas and coal companies were to face serious financial difficulty, the average person might anticipate the annoyance of a higher heating bill, or having to cough up more cash to fill up at the gas station.

They probably don’t think about their pension—but maybe they should.

Earlier this year, members of the British Parliament sent out a clear warning to the Bank of England and the country’s pension funds: watch out for the carbon bubble.

The “carbon bubble”? Here’s a quick explanation from the Guardian:

The idea of a carbon bubble – meaning that the true costs of carbon dioxide in intensifying climate change are not taken into account in a company’s stock market valuation – has been gaining currency in recent years, but this is the first time that MPs have addressed the question head-on.

Much of the world’s fossil fuel resource will have to be left unburned if the world is to avoid dangerous levels of global warming, the environmental audit committee warned.

To many, it probably sounds like a silly term. But its potential implications are serious enough that many in the UK are starting to worry about its effect on the global economy, and that includes pension funds—UK pension funds are particularly exposed to fossil fuel-based assets, as some estimates say 20 to 30 percent of the funds’ assets are allocated toward investments that would be seriously harmed by the burst of the “carbon bubble”.

But some experts say pension funds in the US should be worrying about this, too, because it’s a global issue. From The Ecologist:

If the impetus to prevent further climate change reaches the point where measures such as a global carbon tax are agreed, for example, then those fossil fuel reserves that have contributed to the heady share price performance of oil, gas and coal companies will become ‘unburnable’ or ‘stranded’ in the ground.

But even if we continue business as usual, value could begin to unravel.

Because to continue with business as usual would require an ever increasing amount of capital expenditure by the industry to explore territories previously off limits – the Arctic, for example and the Canadian Tar Sands – tapping these new resources, quite apart from being a bad idea environmentally, is hugely expensive.

Dividends – the payments earned by shareholders as a reward for keeping their shares, have come under increasing pressure as companies have had to spend their money on more exploratory drilling rather than rewarding shareholders.

So some shareholders are already feeling the impact and rather than see their dividends further eroded, might prefer to sell their shares in favour of a more rewarding dividend stock.

Some don’t have the stomach for all those hypotheticals. But it’s hard to deny the policy shifts in recent years leading us towards a lower-carbon world. That includes regulation in the US, Europe and China that cuts down emissions and encourages clean energy.

That trend doesn’t look to be reversing itself in the near future, and those policies are most likely to hurt the industries most reliant on fossil fuels.

There’ve been calls in the US for public pension funds to decrease their exposure to those industries. From the Financial Times:

US pension funds have ignored calls from city councils and mayors to divest from carbon-intensive companies, despite concern about the long-term viability of their business models.

At least 25 cities in the US have passed resolutions calling on pension fund boards to divest from fossil fuel holdings, according to figures from 350.org, a group that campaigns for investors to ditch their fossil fuel stocks.

Three Californian cities, Richmond, Berkeley and Oakland, urged Calpers, one of the largest US pension schemes, with $288bn of assets, and which manages their funds, to divest from fossil fuels. Calpers has ignored their request.

Calpers said: “The issue has been brought to our attention. [We] believe engagement is the best course of action.”

Pension fund experts point out that it is difficult to pull out of illiquid fossil fuel investments, or carbon intensive stocks that are undervalued, provide stable dividends or are better positioned for legislative change.

CalPERS isn’t the only fund that doesn’t want to divest. Not a single public fund has commited to divesting from carbon-reliant companies.

To some, CalPERS’ policy of “engagement” rather than divestment probably sounds like a cop-out. But some experts think the policy could be effective.

“With divestment you are not solving the problem necessarily, you are just not part of it.” Said George Serafeim, associate professor of business administration at Harvard Business School. “With engagement you are trying to solve the problem by engaging with companies to improve their energy efficiency, but you are still part of the mix.”

Photo: Paul Falardeau via Flickr CC License

With Lawmakers In Recess and Elections On Horizon, Pennsylvania’s Pension Debate is Heating Up

Pennsylvania Gov. Tom Corbett has spent the first week of August touring the state as part of his re-election campaign, and he’s using the opportunity to hammer home Pennsylvania’s need to lower the costs of its retirement system, and tout his policy ideas on the subject.

One idea that Corbett has frequently proposed is shifting some state workers from their defined-benefit plans into 401(k)-style plans. Nearly every state burdened with pension obligations has considered this policy option. Many have even implemented it. From PennLive:

Only Alaska and Michigan have shifted new hires into 401(k)-style programs, but nearly a dozen states have crafted hybrid programs featuring smaller lifetime pension plans along with a 401(k)-style plan, and some states, such as Florida, are giving new employees the option of going entirely into a 401(k)-style plan, our pal Deb Erdley at The Tribune-Review reports.

Corbett’s repeated harping on the pension issue has gotten him, to some extent, what he wanted back in June: a debate. Even if state lawmakers remain on vacation, many experts have been weighing in on the issue.

Richard Johnson, director of the Washington-based Urban Institute’s Program on Retirement Policy, makes this note on the switch from DB to DC:

“These defined-benefit plans work very well if you’re going to stay for 30-35 years, but they require a pretty large employee contribution, and they don’t work very well for the shorter-term worker,” Johnson tells the newspaper.

Stephen Herzenberg of the Keystone Research Center points to the experiences of other states as an argument against switching to a 401(k)-style plan:

In fact, when Florida created this choice, its traditional pension was overfunded. In a decade-plus since, the investment returns of Florida’s traditional pension have been 10 percent higher than the return on individual accounts. Over the 30 years that typical retirement contributions grow, this difference would become a one-third gap in savings available for retirement.

Alaska and Michigan did shift all new hires into 401(k)-style plans but the switch did not, in fact, work. Pension debt in both states grew.

Rhode Island did save some money but only because of deep cuts in traditional pensions, including for current retirees. The state then wasted some savings on a “hybrid plan” for new employees that included 401(k)-type accounts with low returns and high fees.

Guaranteed pensions need sound management and can get in trouble if politicians fail to make required contributions. But long term, there’s no beating the high returns of professional managers and the low costs of pooled pension assets. That’s why Pennsylvania’s current pension design is the best deal, long term, for taxpayers and retirees.

Nathan A. Benefield, Vice President of Policy Analysis at the Commonwealth Foundation, took issue with that critique:

Herzenberg claims that reforms moving state workers to a 401(k)-style retirement plan in other states have “failed” because their traditional, non-401(k) pension funds lost value during the most recent recession. Huh?

Every state¹s pension fund lost value when the stock market fell, including Pennsylvania’s, which went from being fully funded to today having more than $50 billion (and growing) in unfunded liabilities. That’s about $10,000 per household in the state.

Now here’s the rub. States like Michigan and Alaska would have lost more from their pension funds had they not started to convert new employees into a 401(k). In fact, without reform, Michigan’s unfunded liability would be upwards of $4.3 billion more.

Thankfully, because lawmakers in the Wolverine state acted early, they saved taxpayers those additional costs. Pennsylvania would have also had substantial savings had we followed Michigan’s lead.

Corbett has tried desperately to make pension reform a campaign issue. It has worked. He’s gotten the media, thought leaders and everyday citizens talking about Pennsylvania’s retirement system and the policy options to address the issues Corbett foresees.

That’s healthy for the state—but make no mistake, it’s probably just as healthy for Corbett’s election chances.

Screen shot 2014-08-08 at 10.35.12 AM — Credit: Wikipedia

He’s been gaining ground on challenger Tom Wolf in recent weeks.

Judge: Unions Must Use Different Argument If They Want To Overturn Baltimore Reforms

After several years and numerous legal battles, a federal judge today affirmed that a series of pension reforms enacted by Baltimore in 2010 were constitutional.

But the judge, Barbara Milano Keenan of 4th U.S. Circuit Court of Appeals, left the door open for unions to again challenge the reforms. This time, unions will have to bring a different legal argument to the table.

Quick context: In 2010, Baltimore overhauled its police and fire pension systems and implemented reforms—higher employee contributions, higher retirement ages and lower COLAs—which were projected to save the city $64 million annually. Details from the Baltimore Sun:

Under the mayor’s plan, firefighters and police have been required to increase contributions to the pension fund — now 10 percent of their salaries. Many officers were told that they would no longer be able to retire after 20 years, but would have to stay on the force for 25 years to receive their pensions. Retired workers also lost what was called the “variable benefit,” an annual increase tied to the stock market. Instead, the youngest retirees receive no annual increase through the variable benefit, and older retirees receive a 1 percent or 2 percent annual increase.

The bolded section is key. The first legal challenge against the reforms centered around the decrease in COLAs. Unions argued that the change was illegal because Maryland, like many states, treats pension benefits as contracts that cannot be impaired.

Most states sidestep the contract issue by applying reforms to new hires only. But Baltimore had decreased COLAs for retirees as well.

So, in 2012, a District Court ruled the change illegal, saying “elimination of the variable benefit constituted a substantial impairment of certain members’ contract rights, and that the impairment was not reasonable and necessary to serve an important public purpose.”

The ruling today overturned the District Court’s decision and re-instated the COLA decreases. The logic behind the ruling, from Reuters:

The appeals court said the reform was a “mere breach of contract, not rising to the level of a constitutional impairment or obligation.”

It also dismissed the notion that allowing the reform to go through would give a city “unfettered discretion to breach its contracts with public employees,” because of protections in Maryland law.

“This contention lacks merit because, under Maryland law, the city is only permitted to make reasonable modifications to its pension plans,” wrote Keenan. “Any reduction in benefits ‘must be balanced by other benefits or justified by countervailing equities for the public’s welfare.’”

But the judge said unions could change their argument, and they might have another shot at overturning the legality of the reforms in court.

Judge Keenan said that unions should argue the city took “private property for public use, without just compensation.”

And unions do plan to keep fighting.

“We have to get with our attorneys and decide which way to go, whether it’s federal or state,” said Rick Hoffman, president of the firefighters union. “I personally think this ruling strengthens our stance.”

Photo: “Ext-Night” by Basilica1 Licensed under Public domain via Wikimedia Commons

Morgan Stanley Likely To Be Sued Over CalPERS Investment Losses

An SEC filing this week revealed that Morgan Stanley is anticipating a lawsuit from the California Attorney General stemming from massive investment losses sustained by CalPERS in 2007.

CalPERS claims it lost over $199 million on those “toxic” real estate investments, which it bought from Morgan Stanley after the bank allegedly “misrepresented” the quality of the investments.

The lawsuit concerns investments CalPERS made with Cheyne Finance LLC in 2006. The firm went bankrupt in 2007, leaving CalPERS with massive losses.

CalPERS has previously filed lawsuits against several ratings agencies for the AAA ratings they assigned to structured investment vehicles produced by Cheyne in 2006. More details from the Sacramento Bee:

California officials are threatening to sue investment bank Morgan Stanley over a series of toxic real estate investments that allegedly cost CalPERS nearly $200 million.

Morgan Stanley, in a Securities and Exchange Commission filing earlier this week, said it was told by California Attorney General Kamala Harris in early May to expect a lawsuit over its marketing of the investments, which were made during the housing boom. Harris said the bank misled investors and she is likely to seek triple damages.

In its filing, the bank said it “does not agree with these conclusions and has presented defenses” to the attorney general. A spokesman for Harris declined comment.

The bank said the potential lawsuit revolves around its marketing of “structured investment vehicles,” a series of deals developed by a firm called Cheyne Finance. The vehicles were grab bags of mortgage loans and other assets.

Between 2007 and 2009, CalPERS lost around $1 billion on its investments with Cheyne and two other SIVs, according to its lawsuit against S&P.

Photo by Jim Yi/Flickr CC License

Judge Orders Arizona Fund to Release Federal Subpoena to Public

There are so many scandals surrounding Arizona’s Public Safety Personnel Retirement System—illegal raises, large severance packages for fired personnel, allegations of sexual harassment—that it’s easy to forget that one has outlasted them all.

The longest running scandal dates back to last year, when the three high-level investment personnel mysteriously quit the fund—presumably in protest of something.

It didn’t take long to find out why. Allegations soon surfaced that other investment staff at the fund had inflated the value of real estate assets in order to trigger large bonuses for themselves. A federal criminal investigation is still ongoing.

But back in March, watchdog group Judicial Watch asked the fund to release the federal grand-jury subpoena related to those allegations to the public. The fund refused, and so the matter went to court.

A judge ruled Wednesday that the subpoena is a matter of public record, and PSPRS has to release it. From the Arizona Republic:

Judicial Watch filed a public records request for the documents after The Arizona Republic in early March reported that PSPRS had received a federal grand jury subpoena as part of a criminal investigation into whether pension-trust managers inflated certain real-estate investment values. PSPRS has denied the allegations.

The trust refused to release the records, prompting Judicial Watch to sue. The trust claimed it was not in its best interest to release the records and that disclosure might interfere with a federal grand jury investigation.

However, the judge said “PSPRS does not show any specific, material harm that would result from disclosure of this federal grand jury subpoena.” He also ruled that “although the public records law does not mandate disclosure of every document held by a state agency, a document with a ‘substantial nexus to government activities’ is a public record. … Clearly there is such a substantial nexus here.’ “

The judge gave no timeline for the release. But PSPRS Chairman Brian Tobin said he will release it to the public sometime Monday, after a meeting with the system’s board of directors.

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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