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CalPERS, CalSTRS See Results From Initiative To Add Women To All-Male Boards

Earlier this summer, CalPERS and CalSTRS teamed up to try to improve the diversity of all-male corporate boards in California. The funds’ research had shown that 131 California-based companies had no women on their boards, so the pension giants sent letters to those companies to gauge their interest in improving the male to female ratio of their boards.

Early returns are in, and the initiative is already producing results. From IR Magazine:

At least 15 companies based in California have added a female director to their all-male boards and 35 have indicated a willingness to do so after a board gender diversity campaign launched by state pension giants CalSTRS and CalPERS targeting 131 companies in the state.

CalSTRS, the largest educator-only pension fund in the world with $187 bn in assets under management, along with CalPERS, which manages some $301 bn, began the campaign four months ago to target companies in its home state with all-male boards.

As part of the campaign, the two pension funds sent a letter to the companies offering their expertise to help them appoint women to their boards. Along with the letter, the campaigners included a copy of the National Association of Corporate Directors report ‘The Diverse Board: Moving from Interest to Action’ to illustrate the potential advantages of appointing women to a board.

CalPERS and CalSTRS started the campaign after learning that nearly 25 percent of the 400 largest publicly traded companies in California had no women on their boards. Only two of those 400 companies had boards where a majority of members were female.

Pension Funds Stay Silent on Corporate Tax Avoidance

Pension funds are no strangers to using their clout to push for changes within the companies they invest in—in the last few years, dozens of funds have called for more sustainable business practices from fossil fuel-oriented companies and advocated new safety guidelines for gun manufacturers.

But on one issue, public pension funds are remaining silent. The issue: corporate tax avoidance. As reported by the New York Times:

In the outcry about the recent merger mania to take advantage of the tax avoidance transactions known as inversions, certain key players have been notably silent: public pension funds.

Many of the nation’s largest public pension funds — managing trillions of dollars on behalf of police and fire departments, teachers and others — have major stakes in American companies that are seeking to renounce their corporate citizenship in order to lower their tax bill.

While politicians have criticized these types of deals — President Obama has called them “wrong” and he is examining ways to end the practice — public pension funds don’t appear to be using their influence as major shareholders to encourage corporations to stay put.

Tax avoidance made headlines again last week when Burger King announced it was buying Tim Horton’s, a move which would make Burger King a “citizen” of Canada for tax purposes.

Pension funds didn’t speak up. But why? The NY Times speculates that investment performance has a lot to do with it:

Public pension funds may be so meek on the issue of inversions because they are conflicted. On one side, the funds say they care about the long term and the implications for their state. Calpers’s “Investment Beliefs” policy states that the pension system should “consider the impact of its actions on future generations of members and taxpayers,” yet most pension funds are underfunded and, frankly, desperate to show investment returns. Mergers for tax inversion can prop up share prices of the acquirers and clearly help pension funds, at least in the short term, show improved performance.

CalPERS is usually one of the first funds to use “activist investing” tactics to push for changes in the companies they invest in. But the fund has remained unusually quiet. The fund talked to the NY Times and gave an explanation:

The California Public Employees’ Retirement System, the nation’s largest public pension fund and typically one of the most vocal, has remained silent.

“We don’t have a view on this from an investor standpoint — we’re globally invested, as you know, and appreciate that tax reform is a government role,” Anne Simpson, Calpers’s senior portfolio manager and director of global governance, told me. “We do expect companies to act with integrity, whatever the issue at hand — that goes without saying. We also want to see a focus on the long term.”

When I pressed for more, her spokesman wrote to me, “We’re going to have to take a pass on this one.”

Mark Cuban recently stated that he would sell the stock of any company that moved out of the United States to avoid taxes.

Photo by TaxRebate.org.uk

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.

Fitch Upholds ‘A’ Rating for California General Obligation Bonds

When CalPERS moved last week to implement 99 new types of pensionable compensation, Fitch publicly mused whether the action was a “step backward” from the state’s recent pension reforms.

But the rest of California’s economy, combined with provisions in the most recent budget which increase state funding to CalPERS and CalSTRS, was enough for Fitch to uphold its ‘A’ rating on the state’s GO bonds.

From a Fitch release:

Pension funded ratios have declined and there is a history of inadequate contributions to the teacher system; however, the state has instituted some benefit reforms and the fiscal 2015 enacted budget provides the first installment of a long-term plan to increase funding of the teacher pension system.

Full actuarial contributions to the public employees’ system are legally required, but not for the teachers’ system, leading to persistent underfunding of the latter. The state addressed teachers system funding with legislation enacted in June 2014 that will increase statutorily required contributions to the system from the state, school districts, and teachers beginning in the current fiscal year. The legislation gradually increases funding requirements, with the first installment funded in the fiscal 2015 budget, and expects that it will be fully funded by 2046.

Fitch notes that it doesn’t believe California’s two main pension funds, CalPERS and CalSTRS, are necessarily as healthy as their current funding ratios indicate. Still, a diverse economy and the hope of “improved fiscal management” were among the factors that led Fitch to avoid downgrading the state’s debt.

Fitch explains:

System-wide funded ratios on a reported basis for the state’s two main pension systems, covering public employees and teachers, have eroded due to investment losses. Based on their June 30, 2013 financial reports, the public employees’ plan reported an 83.1% system-wide funded ratio, and the teachers’ plan reported a 67% system-wide funded ratio.

Using Fitch’s more conservative 7% discount rate assumption, funded ratios for the two systems fall to 78.8% for public employees and 63.5% for teachers. On a combined basis, net tax-supported debt and pension liabilities attributable to the state at 8.3% are above the state median of 6.1%, ranking the state 31st.

The state adopted a broad package of pension reforms in 2012 that affect most state and local systems, including through benefit reductions for new workers and higher contributions for employees. While changes are expected to generate only modest near-term annual savings for the state and for local governments whose pension plans are subject to the reforms, annual savings are expected to grow considerably over time.

Fitch considers California’s GO bond outlook to be “stable”.

Photo credit: “GoldenGateBridge-001″ by Rich Niewiroski Jr. Licensed under Creative Commons Attribution 2.5 via Wikimedia Commons

Will Villa Park Cut Ties With CalPERS?

The California city Villa Park could vote today to remove itself from the California Public Employees Retirement System (CalPERS).

The decision comes in the face of mounting pension costs and calls for increased transparency in local budgets, which would shine more light on California cities’ unfunded pension liabilities.

First reported by the Voice of OC:

The Villa Park City Council could vote Tuesday to end its contract with the California Public Employees’ Retirement System or CalPERS, the world’s sixth largest pension provider, in an effort to reduce increasing pension costs.

The CalPERS move follows an Orange County Grand Jury report that called for greater budget transparency in Orange County cities.

The report indicates Orange County cities’ unfunded pension liabilities have been increasing on an annual basis since 2007.

There have been increased calls for budget transparency in recent years as cities and towns in the CalPERS system have shouldered more liabilities. A recent report called for all cities to put their budgets online and include CalPERS cost projections in all budgets going forward.

Villa Park has millions in unfunded pension liabilities. From Voice of OC:

For its pension costs, Villa Park, a north OC bedroom community of about 5,000, has a shortfall of about $3.5 million, leaving 17.5 percent of its employee pension costs unfunded, according to the grand jury report.

Gov. Jerry Brown enacted sweeping pension reforms in 2012 aimed at reducing pension payments for most public employees hired after 2013.

But because many public workers were hired before 2013, they are grandfathered into the old system, and reforms likely won’t make a dent for another decade, the grand jury report states.

Villa Park could vote on leaving CalPERS as early as 6:30 pm (Pacific Time) Tuesday. The city wouldn’t be the first to leave CalPERS; Canyon Lake, a city of 11,000, left the system in 2013 due to increasing employee contributions.

CalPERS Weighs Withdrawal From Commodities

California is often on the cutting edge of trends that eventually reverberate throughout the rest of the country. The same is true of CalPERS, the pension fund that was among the first to invest in real estate, hedge funds and private equity.

So when CalPERS announces a dramatic change in investment strategy, other funds drop what they’re doing and listen. Funds are certainly listening lately, as CalPERS is considering a handful of moves that would shift its asset allocation significantly.

Among them: the fund is considering taking all of its money out of commodities. From the Wall Street Journal:

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio and it currently has $2.4 billion in such derivatives, or less than 1% of total holdings.

[…]

The discussions are taking place between the fund’s interim Chief Investment Officer Ted Eliopoulos and Calpers’s other top investment executives. The Calpers board hasn’t yet been informed about any possible changes and no final decisions have been made, the people said.

The move, however jarring, wouldn’t be out of step with other recent investment decisions by CalPERS. The fund has shown a willingness to exit large investments it considers risky. From Wall Street Daily:

CalPERS’ potential retreat from riskier investments is evidence that it’s trying to simplify its portfolio and guard against losses during the next market downturn.

In a sense, CalPERS is turning to a bit of a “risk off” mode in this time of uncertainty.

Ultimately, with the realization that we’re in the midst of the Fed’s continued tapering, talk of interest rates hikes, and geopolitical unrest from the Middle East to the Ukraine, it may be time to dial down risk and play it safe.

In fact, this move is reflective of last fall, when CalPERS hinted at a shift away from complex investments, warning that the fund “will take risk only where we have a strong belief we will be rewarded for it.” This decision came after it had approved a new set of investment goals that reduced future exposure to equities and private equity, while increasing allocations to bonds and real estate.

A similar move by CalPERS also took place at the end of 2012, when the fund chopped commodities investments by more than half – prompting reports that it was shifting from commodities to inflation-linked bonds.

And in both incidences, the commodities markets experienced corrections.

CalPERS is weighing several other ideas, including whether forgo individual stocks in favor of securities that track broader industries.

CalPERS also made headlines last month when it announced it would cut its hedge fund allocation by 40 percent.

Photo by Terence Wright via Flickr CC License

Fitch Weighs In On New CalPERS Compensation Rules

This week, CalPERS approved 99 types of additional income that workers can include in their pension calculations.

The change will increase the pensions of many workers in the CalPERS system, and the fund has already drawn flak from California Governor Jerry Brown.

Now, the credit rating agency Fitch is in on the game, too. Fitch says the changes will increase pension liabilities and present additional costs to the state. From Fitch:

The expanded definition of pensionable compensation exposes public employers to higher pension liabilities and contribution expenses, and appears to be a step backward from recent reforms. The Public Employees’ Pension Reform Act of 2013 (PEPRA) narrowed the definition of pensionable compensation for public employees in an effort to address “pension spiking,” the inflation of base pay for purposes of pension benefit calculations. This decision expands the definition of pensionable compensation, in apparent conflict with PEPRA, and will increase pension costs for public employers if implemented.

The magnitude of impact from this decision is not yet clear, but it raises more questions about the sustainability of California’s pension reform efforts, which continue to face legal and institutional challenges. Particularly worrisome to Fitch is the absence of detailed information on the analysis of its projected costs. The decision has been sharply criticized by Gov. Jerry Brown, who cited its conflicts with recent state legislation intended to reduce pension costs. City-led pension reform efforts in San Diego and San Jose remain mired in litigation while this CalPERS decision appears to open up a new front for challenging reform efforts.

Gov. Brown was actually open to most of the 99 “special pay items”. But he adamantly opposed the measures that contradicted the reform law Brown passed in 2012.

“Today Calpers got it wrong,” Brown said in a statement on Wednesday. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

CalPERS Board Member Facing Stiffer Penalty After Latest Failure To File Campaign Documents

What do the years 2002, 2007, 2008, 2010, 2012 and 2013 all have in common?

Those are the years that Priya Mathur, Vice President of the CalPERS board, failed to submit campaign finance documents or conflict of interest statements in a timely manner.

She was fined three times by the Fair Political Practices Commission over that period for those violations. Now, another fine is coming for her latest transgressions. From the LA Times:

At issue in the recent enforcement action was the failure to file four semiannual campaign financial statements for 2012 and 2013 in a timely manner.

In a recent email, she described the missed reports as an oversight. “I had inadvertently failed to file the proper forms in 2012 to close my campaign committee,” she said.

The proposed fine of $1,000 was announced Aug. 11 after she and FPPC attorneys reached an agreement to settle the charges. In turn, Mathur and her board reelection committee pledged not to contest the punishment.

But the panel reversed course on the $1000 dollar fine and decided they should quadruple it—raising it to $4000. The Sacramento Bee reports:

Mathur, the pension fund’s vice president, had agreed to a $1,000 fine with the staff of the state Fair Political Practices Commission. But the commissioners refused to accept the fine Thursday, arguing that Mathur should get a higher penalty because she had been fined several times before by the FPPC.

Gary Winuk, the agency’s chief of enforcement, said commissioners sent the case back to the FPPC’s staff and suggested the fine be increased to $4,000.

“Given her history … they felt it warranted a higher penalty,” he said. He said the matter could be brought back to the commission next month.

At this point, Mathur and the ethics panel probably know each other on a first name bases. But repeated disciplinary actions haven’t changed Mathur’s behavior. From the Sac Bee:

The FPPC has already fined Mathur a total of $13,000 for earlier transgressions, including late filing of campaign documents and her conflict-of-interest statements. The most recent fine came in 2010, prompting the CalPERS board to punish her by removing her as chair of the health benefits committee and suspending her from traveling on pension fund business.

In the latest case, Mathur was late filing four campaign finance statements in connection with her re-election bid. Mathur told The Sacramento Bee last week that the late filing was the result of a paperwork mix-up.

The FPPC staff, in its report to the commissioners, said it took “numerous requests” from investigators to get Mathur to finally file the documents. That conduct played a role in the commissioners’ desire for a stronger penalty, Winuk said.

The board’s election takes place next week. The election is conducted by mail.

Photo by Blake O’Brien via Flickr CC License

Illinois, Kentucky Pension Funds Benefit From $17 Billion Bank of America Settlement

A handful of pension funds will be receiving large chunks of change after Bank of America agreed today to pay $17 billion to end a Justice Department probe into the bank’s sale of toxic mortgage securities.

The Justice Department alleged that Bank of America violated federal law when it marketed and sold investment vehicles tied to shoddy home loans and misled investors about the quality of the investments.

Many pension funds were major investors in such investment vehicles and sustained major losses on those investments during the financial crisis.

But some funds will be getting a chunk of that money back, including numerous Illinois funds and the Kentucky Retirement System. From Red Eye Chicago:

For Illinois, the $16.65 billion national settlement means a cash payment of $200 million for the state’s pension system, making it whole for losses sustained as a result of the risky investments.

…

The Illinois pension entities that will receive the payments under Thursday’s deal are the Illinois Teachers Retirement System, the State Universities Retirement System and the Illinois State Board of Investment, which oversees pension plans for state employees, the General Assembly and judges.

Kentucky’s payout is substantially smaller than that of Illinois, but the KRS will still see some relief. From the Lexington Herald-Leader:

Kentucky Retirement Systems will get $23 million from Bank of America’s $16.65 billion national settlement with the federal government over accusations that the bank improperly dumped “toxic” mortgage-backed securities on the market, helping fuel the economic recession of 2008.

This isn’t the first major settlement stemming from toxic investments that have benefited pension funds. Earlier this year, CalPERS and CalSTRS received over $100 million combined when CitiGroup agreed to a $7 billion settlement.

Illinois was a beneficiary of the CitiGroup settlement as well, as three Illinois funds received a combined $45 million as reparations for their investment losses.

Photo by Mike Mozart via Flickr CC License

California Governor Calls Out CalPERS On Pension Tweak

Today CalPERS approved 99 types of “special pay”, or additional income that can be included in calculating a worker’s pension.

California Governor Jerry Brown was receptive to most of the “special pay” items—except for one. But it was enough to compel him to send a letter to CalPERS urging the board not to approve the pending changes.

At issue is a section of the CalPERS proposal that allows pension benefits to be increased based on temporary pay increases and ad hoc payments.

That contradicts a section of Jerry Brown’s 2012 reform law which states that pension benefits can only be based on “normal monthly pay”, and not “short-term” pay increases. From Reuters:

Although Calpers approved 99 types of extra pay that can be factored in to a worker’s income when calculating their pension, Brown only objected to one of those: allowing temporary upgrade pay to be counted as permanent, pensionable income.

Brown, a Democrat, sent a letter to Calpers last week asking them not to allow temporary upgrade pay to count toward pensions.

On Wednesday, the Calpers board rejected Brown’s opposition and voted to pass all 99 pay provisions, including that temporary pay hikes can be factored into a final pension.

“Today Calpers got it wrong,” Brown said in a statement. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

Read the full letter below, courtesy of the Sacramento Bee:

[A quick PSA, in case you don’t live in California: Edmund is the legal first name of Gov. Jerry Brown.]

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