Arizona State Retirement System

Indiana Pension Commits $100 Million to Real Estate Fund

The Indiana Public Retirement System has committed $100 million to a Blackstone fund that invests in real estate.

The US pension fund, which has had limited exposure to core-plus funds, said it was unconcerned by Blackstone’s move into core-plus property and its branching out into opportunistic strategies.

Most of Indiana’s fund investments in real estate – totalling approximately $2bn – have been in core and opportunity funds.

The pension fund has made three previous investments with Blackstone, totalling $216m, including a co-investment and two investments in the fund manager’s opportunity funds VI and VII.

With the new investment, Indiana joins several other public pension funds in the Property Partners fund.

The Virginia Retirement System and the Texas Permanent School Fund each made $100m commitments to the fund last year, while the Arizona State Retirement System committed $50m.

Blackstone is looking to raise $1bn for the fund, which is open-ended and leveraged at around 50%.

The fund manager is co-investing $35m.

Limited partners are projected to achieve 9-11% returns from the fund, focused solely on US multifamily, office, retail and industrial real estate.

The fund will buy single properties, as well as make entity-level investments in real estate operating companies.

The Indiana PRS manages $30 billion in assets.

Photo credit: “Flag map of Indiana” by Map_of_USA_IN.svg: This version: uploaderBase versions this one is derived from: originally created by en:User:WapcapletFlag_of_Indiana.svg:derivative work: Fry1989 (talk) 22:26, 19 June 2011 (UTC) – Map_of_USA_IN.svgFlag_of_Indiana.svg. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag_map_of_Indiana.svg#mediaviewer/File:Flag_map_of_Indiana.svg

Arizona Pension CIO Counters Claims of Being States Worst-Performing System

Ryan Parham, chief investment officer of the Arizona Public Safety Personnel Retirement System (PSPRS), penned a piece in the Arizona Capitol Times on Thursday defending his fund against claims of being Arizona’s “worst-performing pension plan.”

But Parham says the raw return numbers don’t tell the whole story. Here’s what Parham has to say:

All too often, fiction and gossip move faster than truth and reason. As such, it is often stated by our detractors that our $8 billion portfolio is the state’s “worst-performing pension plan,” which gives the impression that our investment staff is incompetent and responsible for the trust’s sagging pension funding levels.

The truth is: the Arizona Public Safety Personnel Retirement System has an enviable investment record. Prominent industry consultants rank PSPRS among the top 4 percent of all U.S. pension funds in risk-adjusted returns for the past three years. We also join the top 11 percent of all U.S. pension funds for the past five years. While these facts might not make for a provocative headline, they matter to our beneficiaries, our contributors, our staff and our elected officials.

[…]

Last fiscal year, PSPRS outperformed national risk-adjusted averages by one half of 1 percent. It sounds miniscule, but it meant an additional $380 million in value to the trust. Our actively managed strategy is simple: Diversify assets and reduce exposure to publicly traded equities, the greatest driver of market volatility. High-risk strategies and lack of diversification have proven disastrous for PSPRS, as evidenced by $1 billion losses suffered in the 2000-2001 “dot-com” market crash.

While it is true that in recent years PSPRS’ returns have been less than its sister plan, the Arizona State Retirement System (ASRS), it is important to remember our innovative, low-risk, moderate return strategy is by conscious design, due to a pension benefit that PSPRS alone must pay to pensioners. This benefit, called the Permanent Benefit Increase, or “PBI,” siphons and distributes half of all returns in excess of 9 percent to eligible retirees. Not only are these increased payment levels made permanent, the investment gains only serve to increase – not decrease – unfunded future liabilities.

Read the entire column here.

Photo: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under CC BY-SA 2.5 via Wikimedia Commons

Arizona Pension Lowers Employee Contribution Rate For First Time in 5 Years; Strong Investment Returns Cited

Starting in July, members of the Arizona State Retirement System will pay a smaller percentage of their paychecks toward the pension system. It’s the first contribution rate decrease in five years, but it comes with a catch: retirees will not receive a cost-of-living raise in 2015.

More details on the contribution rate decrease from the Arizona Republic:

The decrease in the contribution rate, which was approved by the ASRS board of trustees, is the first in five years.

Chairman Kevin McCarthy said the reduction is small — a fraction of 1 percent — but a step in the right direction. He said it will save money for public employees and employers “who have seen nothing but increases.”

The reduction is possible because of large investment returns this past fiscal year. In addition, roughly 500 more public employees joined ASRS and began paying into the trust. Since 2009, the system annually lost thousands of active members — and their payments — because of government layoffs.

And details on the COLA:

Barbara Masztakowski, who retired in 2003 from Chandler, said it’s not fair that retirees are not getting an increase when ASRS investment staffers are.

“Truly, they should treat themselves the way they treat us,” Masztakowski said in a phone interview.

She said the formula that ASRS uses to trigger benefit increases for retirees is nearly impossible to achieve.

For a permanent benefit increase to kick in, the trust must produce a rate of return in excess of 8 percent — the assumed rate of investment growth — for 10 years and generate a pool of excess earnings.

That formula uses a “geometric and actuarially smoothed average” that takes into account compounding. The current 10-year average is about 7.6 percent, below the trigger.

Although ASRS retirees have not received a cost-of-living adjustment for nearly a decade, retirees in the more financially fragile state Public Safety Personnel Retirement System saw their COLA benefits restored earlier this year after winning a lawsuit. The ASRS retirees were not part of that case.

Paul Matson, ASRS executive director, said he understands retirees may not be happy but said he expects a benefit increase within the next few years.

The lack of a COLA is controversial among retirees because 10 of the System’s investment staffers are receiving bonuses in 2015 totaling $225,000. Fund investments returned 18.6 percent overall last fiscal year.

Photo credit: “Entering Arizona on I-10 Westbound” by Wing-Chi Poon – Own work. Licensed under Creative Commons Attribution-Share Alike 2.5 via Wikimedia Commons

Arizona Pension Scolded After Racking Up $1.76 million Legal Bill In 2013-14

The Public Safety Personnel Retirement System (PSPRS) racked up $1.76 million in legal bills in fiscal year 2013-14.

To put that legal tab in context, consider the legal bills accrued by the state’s largest pension fund, the Arizona State Retirement System: ASRS is four times as big as PSPRS, but only paid $1.24 million in legal bills.

The state’s Attorney General’s Office is now saying that enough is enough. From now on, the Office says it must approve any legal work outside investment advice.

From the Arizona Republic:

The Arizona Attorney General’s Office has cracked down on the use of outside legal counsel by the financially troubled Arizona public-safety pension fund after the fund paid out $1.76 million to the Kutak Rock law firm last fiscal year.

The Public Safety Personnel Retirement System also is represented by the Attorney General’s Office and recently hired a full-time investment attorney who makes $215,000 annually. The pension fund has relied on Kutak Rock for administrative, litigation and investment advice, records show.

Under the Attorney General’s directive, Kutak Rock now may only provide investment advice. Any additional work must be approved by the Attorney General’s Office.

Eric Bistrow, chief deputy attorney general, recently wrote PSPRS that engaging outside counsel “when there is no need to do so constitutes a breach of fiduciary responsibilities.” Bistrow noted that he has instructed staff members to “be vigilant in requiring” PSPRS to adhere to proper standards.

Of the $1.76 million billed by Kutak Rock last year, just more than one-third related to investment advice, records show. The balance related to administrative and litigation matters.

[…]

“We took this action because they (Kutak Rock) were doing too much and were well beyond the scope,” said Stephanie Grisham, spokeswoman for Attorney General Tom Horne. “Basically, they (PSPRS) were using them instead of us, and that was not okay.”

Bistrow bluntly told PSPRS that large outside legal tabs would no longer be tolerated. He said in his directive that the same services “can be obtained with as much, if not more, expertise and at a much lower cost, at this office.”

Jared Smout, PSPRS interim administrator, said the pension fund is “working to make everything right. We are trying to figure out the balance. The AG’s Office will now provide review of public records requests, open meetings laws and personnel matters.”

What caused the high legal bills? The pension fund offers an explanation:

PSPRS has been particularly busy in [several] legal areas over the past 18 months. The system has been locked in litigation with former employees who allege it engaged in questionable financial practices, and its director retired this summer after The Arizona Republic disclosed that illegal raises had been paid to some staffers.

Those problems have invited close scrutiny by journalists and the FBI, which is investigating some of the whistle-blowers’ allegations.

Smout said PSPRS has until now relied on outside counsel because the trust’s investments expanded during the past decade and the agency needed legal expertise.

“We’ve only had competent in-house counsel since August,” Smout said.

Read more coverage of Arizona’s PSPRS, and the controversies surrounding the fund, here.

Arizona’s Largest Pension May Boost Retiree Benefits, Lower Employee Contributions

The Arizona State Retirement System (ASRS) says there could be a permanent benefit increase on the horizon—the first since 2005. System officials also indicated that public workers could see their contributions decrease.

ASRS is 77 percent funded – but officials say higher investment returns, better cash flow and reduced liabilities have opened the door for the potential benefit increases.

From the Arizona Republic:

Paul Matson, chief executive of the $32 billion Arizona State Retirement System, said he expects retirees could see a permanent benefit increase, of undetermined size, sometime in the next three or four years. The last increase for the pension fund and its more than half-a-million members came in 2005. Benefit hikes are made possible by excess investment earnings, largely from the stock market, he said.

Similarly, an improving financial backdrop for the pension system also could mean that more than 200,000 public-sector workers in Arizona — along with the cities, counties, state agencies, school districts and other entities that employ them — could start paying slightly lower contributions to support the system, Matson added.

[…]

At a time when public pension programs including the Arizona State Retirement System remain significantly underfunded, Matson’s assessment was surprisingly upbeat. But recent fixes and long-term trends have put the system in much better shape, he said.

“We have a strong, healthy system that’s fully sustainable on the retirement and health sides,” he said in an interview with The Arizona Republic. The program provides retirement, health and long-term disability benefits.

In an interview with the Arizona Republic, ASRS chief executive Paul Matson expounded on the reasons behind the proposed benefit increase:

Matson cited three main reasons for the improvement:

– Changes in certain benefit formulas have reduced the system’s liabilities. Working with the Legislature over the past decade, the Arizona State Retirement System has closed loopholes and made other adjustments. One involved new workers joining the system. In prior years, many new hires were allowed to purchase retirement-service credits at a cost of about 40 cents on the dollar. That unsustainable practice and about a dozen others have been restricted or eliminated, Matson said.

– Contribution increases have boosted the system’s cash flow and assets. Employees and their employers each currently make contributions into the system equivalent to 11.6 percent of worker salary. That’s up from an unsustainably low 2.5 percent a dozen years ago. As noted, the recent trend of contribution hikes eventually will be followed by modest decreases, before contributions level out around 6.75 percent many years down the road.

– Higher investment returns have bolstered the system’s assets. The stock market has been on a tear, rising about 200 percent between the bottom in early 2009 and the recent peak in September of this year. Although prices have retreated over the past few weeks, the trend for most of the last five years has been favorable. The Arizona State Retirement System generated an average yearly compounded return of 14.2 percent over the five years through June 2014, including a gain of 18.6 percent in the most recent year. Those returns are after expenses.

Matson did say he doesn’t expect investment performance to be quite as good, year in and year out, as it has been the previous 5 years.

ASRS has 551,000 members and manages $32 billion of assets.

Arizona Pension Commits $150 Million To Real Estate Funds

The Arizona State Retirement System (ASRS) has committed a total of $150 million to two real estate funds: Blackstone Property Partners and Related Companies’ Energy Housing Fund.

The first fund will invest in industrial, retail and office buildings. The second fund will focus on residential apartments.

From IPE Real Estate:

The pension fund approved the $100m commitment to Blackstone Property Partners, as well as a $50m commitment to the Related Companies’ Energy Housing Fund.

Arizona is the second major US institutional investor to place capital with Blackstone Property Partners, following a $100m commitment last month by the Texas Permanent School Fund.

Blackstone, which is looking at a $1bn initial capital raise for the fund, will co-invest $75m of its own capital.

The open-ended fund, will invest in larger properties and portfolios. US office, industrial, retail apartments are being targeted by the fund, which is projected to achieve between 9% and 11% returns and be leveraged at 50%.

Arizona said Related’s Energy Housing Fund will invest in residential properties – primarily apartments – in areas of energy development and tight housing conditions. The pension fund will classify the investment as a niche and tactical investment within its real estate portfolio.

The fund will invest in US apartments as well as new developments, focusing on deals in Texas and North Dakota for their links to the energy sector.

[…]

The pension fund said it is also conducting due diligence on two more potential investments: a joint venture with Red Mill Capital to invest in US retail, and a co-investment with the CIM Group on a New York residential and retail project.

ASRS allocated $500 million for real estate investments in 2014.

The pension fund manages $30 billion in assets.

American Century Lands $530 Million Investment From Arizona State Retirement System

The Arizona State Retirement System has invested $530 million with American Century Investments. As reported by the Kansas City Business Journal:

The investment will be placed in the American Century Non-U.S. Growth strategy, which looks for companies with a market capitalization of $3 billion or more, with accelerating growth and improving fundamentals. The overall portfolio typically invests in about 90 to 135 companies.

The investment management team is led by Senior Portfolio Manager Rajesh Gandhi, a 17-year financial services veteran who joined American Century in 2002.

The Arizona State Retirement Systems manage $34 billion in assets for 500,000 members.

Portfolio Manager Rajesh Gandhi explains his investment strategy in this video, courtesy of American Century.

Arizona Fund’s Strong Performance May Lead To Bigger Retiree Benefits—But Not This Year

Tens of thousands of Arizona retirees were hoping to begin receiving larger benefit checks in the coming months. That may happen eventually for the 120,000 retired members of the Arizona State Retirement System (ASRS), but it won’t happen this year.

That’s because benefit increases, such as COLA increases, are tied to the fund’s long-term performance. And despite posting the second-best annual investment return in the last decade—18.6 percent net of fees—the ASRS still has work to do to meet the benchmarks that permit it to increase benefits.

From the Arizona Republic:

For a permanent benefit increase to kick in at ASRS, the trust must produce a rate of return in excess of 8 percent — the assumed rate of investment growth — for 10 years and generate a pool of excess earnings.

Simple averaging shows that benchmark has been met, but there is another caveat: The formula to pay cost-of-living adjustments uses a “geometric and actuarially smoothed average,” which takes into account compounding.

That formula, dragged down by heavy investment losses during the 2007-09 recession, puts the 10-year rate of return at 7.6 percent, [ASRS Chief Executive Paul] Matson said, which is below the trigger.

“We are certainly getting closer to it,” Matson said.

The funded status — a measure of the amount needed to pay current and future pension liabilities at ASRS — is projected to be 76.6 percent. Less money is needed from employees and employers the closer the figure is to 100 percent. A funded ratio of 80 percent is considered “healthy” in public retirement systems.

Arizona’s other major pension fund, the Arizona Public Safety Personnel Retirement System, posted an annual return of about 15 percent gross of fees.

The performance of the ASRS may not warrant benefit increases, but the fund’s investment staff may still be in line for bonuses. From the Arizona Republic:

Matson said it is unclear if his investment staff will receive bonuses, even with the exceptional financial returns. He said there are other benchmarks that must be met, and a determination won’t be made for eight to 10 weeks.

Matson said bonuses are needed to retain quality staff to oversee the portfolio and garner solid rates of return.

“Without good staff, there are detriments to performing well,” he said.

Pension360 has previously covered the controversial bonuses given to the investment staff of the other major fund in Arizona, the APSPR.

Photo by: “Arizona-StateSeal” by U.S. Government. Licensed under Public domain via Wikimedia Commons