Tag: featured

Canada’s pension funds invest a significantly higher portion of their assets in infrastructure than their U.S. counterparts, according to a Preqin study that examined the investing habits of pension funds on both sides of the border.

The average Canadian fund boasts an infrastructure allocation of 5.3 percent; meanwhile, U.S. funds invest about 2 percent of their assets in the class. Further, Canadian funds were far more likely to invest directly.

More from Chief Investment Officer:

Nearly 70 private and public plans in the Great White North—with an average of $14.6 billion in assets under management—reported a current average allocation of 5.3%, or $1.08 billion, of total assets to infrastructure. Some 61% said they invested at least 5% of their total assets.

This figure was slightly lower than the average target allocation of 8.4%, or $1.17 billion.

US funds, on the other hand, only had an average exposure of 2% to infrastructure, leaving room to meet the target allocation of 4%. The current average allocation was just $172 million from an average of $17.6 billion of total assets. The vast majority—80%—of US funds allocated less than 5% of their portfolio to infrastructure.

While an overwhelming majority—97% of Canadian and 93% of US funds—chose unlisted funds, there was a significant portion (35%) of Canadian plans directly investing in infrastructure. Only 1% of US funds directly invested, Preqin found.

The way infrastructure allocations were reported was also markedly different north of the border: Three-quarters of Canadian plans had separate infrastructure allocations, while US funds largely preferred to invest through broader private equity and real assets allocations.

Read a portion of Preqin’s report here.

Investment managers working with CalPERS will soon have to follow a series of ESG-focused guidelines and expectations, according to a new report from Top1000Funds.

All managers will have to articulate how ESG factors figure into their investment strategies, and ESG will play a bigger role in hiring of new managers as well as evaluation of current managers.

Reported by Amanda White at Top1000Funds:

CalPERS staff led by Anne Simpson, senior portfolio manager and director of global governance, presented the ESG manager expectations, and draft sustainable investment guidelines, to the investment committee this week.

The $307 billion fund will factor into its decisions about hiring and monitoring external investment managers the degree to which managers assess ESG factors and integrate them into their process.

“If for example a manager hasn’t addressed how to carry out an environmental impact, if that can be easily integrated, that will affect our decision,” Simpson says.

“This is going beyond asking are you a signatory to the PRI? It lifts the lid, as they have to report to us on this.”

In an exclusive interview with www.top1000funds.com, Simpson said that CalPERS considers managers that do not identify and manage these risks as having a “sub-par investment process”.

The purpose of the project, which has been two-years in the making, is to integrate ESG risk and opportunity considerations into the investment processes and decision making across the total fund at the same time CalPERS wishes to recognise the complexity and differences across asset class strategies.

CalPERS manages $307 billion in assets. Read the full report here.

 

Photo by penagate via Flickr CC

Cezary Podkul is a former investment banker and reporter who has covered finance for Reuters and now ProPublica. This story was originally published at ProPublica.

What happens when you’ve been kicking the fiscal can down the road for years, but the road suddenly hits a dead end? That’s what Chicago – and the state of Illinois – are about to find out.

Chicago’s immediate problem is last week’s credit downgrade by Moody’s Investors Services, which turned its debt to junk and could force the city to immediately come up with $2.2 billion to satisfy debts and other obligations.

It’s not clear how – or if – the city could come up with that money.

When big cities have had debt crises – such as Detroit’s recent problems or New York City’s epic problems in the 1970s – states typically rode to the rescue in one way or another. But Illinois, which has the lowest credit rating of any state in the nation, says it can’t help the stricken city.

The downgrade follows a recent decision by the Illinois Supreme Court, which invalidated state limits on cost-of-living adjustments to state pensioners. The limits were part of a slate of reforms signed into law in 2013 by then-Gov. Pat Quinn, a Democrat, to deal with underfunded pensions.

Moody’s said the court decision was key to its downgrade because the city has been hoping to dig out of its own financial hole by reducing cost-of-living adjustments, which typically raise the cost of pensions by close to 50 percent.

Chicago’s predicament actually has its roots in a 2003 decision by Illinois to kick the pension can down the road – by borrowing money to fund pensions rather than trying to get the benefits reduced or to stepping up payments to make them financially sound.

In the ultimate can kick, the state borrowed a whopping $10 billion – the biggest bond issue in its history – on the premise that investing the proceeds would earn more than the interest on the bonds.

Unfortunately for Illinois taxpayers, the pension funds’ investments, hurt badly by the financial market meltdown of 2008–2009, have earned less than expected.

Even worse, the state gets to deduct interest and principal on the bonds – currently some $500 million to $600 million a year – from the contributions it makes to the pension funds.

The net effect: The funds are worse rather than better off as a result of the pension bonds. Unfunded liabilities swelled from $43 billion when the bonds were sold to $86 billion by 2010, state data show.

Despite that grim history, Illinois borrowed another $7.2 billion for pensions in 2010 and 2011. By the time Quinn signed reforms in 2013, the state was in major trouble, with unfunded liabilities of nearly $100 billion – about $7,500 per resident.

Illinois isn’t alone in turning to pension bonds.

In 1997, New Jersey tried to borrow its way out of pension fund problems with debts that are still being repaid. The California city of San Bernardino sought bankruptcy protection in 2012 under the weight of its pension costs, pension obligation bonds and other debts.

“The borrowing is taking the pressure off politicians from actually facing the actual reforms that need to happen on these pension systems,” said Ted Dabrowski, vice president of policy at the Illinois Policy Institute in Chicago. “You’ve got a situation where the system is no longer sustainable, whether it’s New Jersey or Illinois.”

But Chicago and Illinois are the biggest examples of what happens when you can no longer kick the pension-cost can down the road. They are unlikely to be the last examples.

 

Photo by bitsorf via Flickr CC LIcense

A high-ranking SEC official on Wednesday said that private equity firms are getting better at disclosing fees and other investment expenses to their limited partners, according to a Wall Street Journal report.

But Marc Wyatt, director of the SEC’s Office of Compliance, also said there was “room for improvement”.

From the Wall Street Journal:

Marc Wyatt, the acting director of the SEC’s Office of Compliance, Inspections and Examinations, said private-equity firms and their investors are “more focused” on fees and expenses, and that has prompted the industry to review and often change practices regulators have highlighted as questionable.

“This is a positive change,” Mr. Wyatt said. He added that there is “room for improvement” in how firms allocate expenses and manage co-investments, in which fund investors such as pension funds and sovereign-wealth funds directly participate in certain deals. He also called out real-estate funds, which sometimes offer property management and other services for an additional fee.

[…]

Mr. Wyatt said firms are providing more complete information to investors and, in some cases, eliminating fees that the agency has questioned. Specifically, he said the private-equity practice of pocketing extra fees when selling or taking public the companies they own seems to be falling out of favor.

Mr. Wyatt also said firms are better disclosing how they collect commissions for helping the companies they control get goods and services at a discount. The SEC had expressed concern that firms weren’t providing investors enough information about the fees they receive for steering companies into these group-purchasing programs.

The comments were made during the Private Fund Compliance Forum 2015, held in New York on Wednesday.

 

Photo by Securities and Exchange Commission via Flickr CC License

The Illinois Supreme Court on Friday unanimously ruled that the state’s pension reform law, enacted in 2013, violates the state constitution.

[Read the court’s full decision at the bottom of this post.]

It’s important to note that the ruling affects the state’s future finances, but doesn’t retroactively alter the state’s past finances (FY 2013-14 and FY 2014-15 budgets).

That’s because Illinois anticipated a legal challenge to the law, and didn’t budget the savings stemming from the reforms — a move that looks prudent now.

From the Chicago Tribune:

Republican Justice Robert Karmeier, writing for the entire court, said the law violated provisions of the 1970 Illinois Constitution known as the pension protection clause. The clause says public employee pensions are a contractual relationship with government and benefits cannot be diminished or impaired.

The December 2013 law called for curbing automatic and compounded annual cost-of-living increases for retirees, extending retirement ages for current state workers and limiting the amount of salary used to figure pension benefits.

Karmeier rejected arguments by the state that economic necessity forced curbing retirement benefits despite the constitution’s pension protections.

“Our economy is and has always been subject to fluctuations, sometimes very extreme fluctuations,” Karmeier said.

But, he noted, “The law was clear that the promised benefits would therefore have to be paid and that the responsibility for providing the state’s share of the necessary funding fell squarely on the legislature’s shoulders.

“The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and… it is a crisis for which the General Assembly itself is largely responsible,” Karmeier wrote.

The full decision can be read below.

 

Pension Decision

 

Photo credit: “Gfp-illinois-springfield-capitol-and-sky” by Yinan Chen – www.goodfreephotos.com (gallery, image). Via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Gfp-illinois-springfield-capitol-and-sky.jpg#mediaviewer/File:Gfp-illinois-springfield-capitol-and-sky.jpg

A bill that calls for the issuance of $12 billion in pension bonds passed the Colorado House easily on Friday.

Now the proposal moves to the Senate, where it faces more skepticism and an uphill battle.

From the Denver Post:

The bill is the first step toward authorizing the Colorado Housing and Finance Authority to sell up to $12 billion in bonds to more quickly close the gap between PERA’s pension demands and its income.

PERA would invest the proceeds from the bond sale in the stock market.

Proponents say that with the current low interest rates on borrowing, the PERA could meet its payments and come away with extra money to fund pension obligations.

But opponents say it’s too risky, and fear the move could damage the state’s credit rating and put pensions at risk — especially if the investment market tanks.

[…]

On the House floor Friday, Rep. Kevin Priola, R-Henderson, worried what might happen if the economy declines after the state treasurer invests a lot of money.

“It’s possible that $10 billion could take a 20 to 30 percent haircut within months,” he said.

[…]

Sen. Chris Holbert, R-Parker, withdrew his name as primary sponsor on Friday.

Holbert says the bill is too complex to be fully vetted at the eleventh hour and said in a statement that he will vote “no” if it’s brought to vote.

“If this is a good idea today, then it ought to be a good idea next January,” he said in an interview.

The Colorado Public Employees Retirement Association is about 64 percent funded.

Read the text of the pension bond bill here.

 

Photo credit: “Denver capitol” by Hustvedt – Own work. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

The New York State Common Retirement Fund plans to invest up to three percent of its assets – or $5 billion – in Africa over the next five years, according to a report from the Wall Street Journal.

The pension fund is seeking diversification and stronger returns, and believes African investments can deliver on those goals.

The fund currently has $200 million invested in the continent via private equity funds.

From the Wall Street Journal:

African private-equity firms, venture capital, real estate and new infrastructure projects such as power plants are likely to receive funding, said Chief Investment Officer Vicki Fuller.

[…]

“I want to invest in the people who are local, understand the culture, understand on a very granular basis what’s happening,” Ms. Fuller said at a conference in London organized by the African Private-Equity and Venture Capital Association.

The fund will write checks of about $100 million for funds bigger than $500 million and invest in smaller firms and new funds through a fund of funds manager rather than directly.

The New York pension manager is also prepared to team up with sovereign-wealth funds and other pension funds to invest in African infrastructure projects.

In response to a question about how to encourage more American public pension funds to invest in Africa, Ms. Fuller said it was important to brief trustees and overseers, such as New York State comptroller Thomas P. DiNapoli.

“His only concerns are that we invest in countries that treat their citizens well. Now, on a given day, that’s not even the case in the U.S.,” Ms. Fuller said. “But you know that the law is on the side of the citizenry in the U.S.”

The New York Common Fund manages $180 billion in assets.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. Find more of his stories at CalPensions.com.

A retiree group won a big victory last month. Reversing a superior court ruling, an appeals court overturned part of a voter-approved San Francisco pension reform in 2011 that ended higher payments to retirees when investments have “excess earnings.”

But the feisty retiree group, Protect Our Benefits, is unhappy because the appeals court ruled higher payments can be ended for city workers who retired on or before Nov. 5, 1996, when the supplemental cost-of-living adjustment was first approved by voters.

“The appellate court has denied the POB petition for rehearing,” Larry Barsetti, chair of Protect Our Benefits, said in a message last week on the website of the retiree group.

“Unless they made any changes to their ruling that we haven’t seen yet, as is possible with these things (and we won’t know that until we get the formal written denial from them, possibly Monday April 27th), the next step is to petition the California Supreme Court and attempt to have the ruling regarding the pre-1996 retirees overturned,” Barsetti wrote.

Retirees, scattered and no longer union members, might seem unlikely to be formidable, particularly when battling a cost-cutting pension reform backed by all 11 county supervisors, business and labor groups, and 69 percent of San Francisco voters in 2011.

The reform, Proposition C, was the milder establishment alternative to deeper pension cuts in Proposition D by Jeff Adachi, one of the 16 candidates for mayor on the San Francisco ballot that year, including the incumbent and winner, Mayor Ed Lee.

“The epitome of greed,” Gary Delagnes, president of the San Francisco Police Officers Association, told SF Weekly in 2012 when the retiree group began its legal challenge. Barsetti is executive secretary of Veteran Police Officers Association.

And it was the police association’s own retiree group, VPOA, that Barsetti said last week was “instrumental” in the birth of Protect Our Benefits, a political action committee financed by donations that has spent more than $225,000 on attorney fees.

Barsetti said an estimate that the supplemental COLA targeted by Proposition C would cost $300 million over the next two decades came from an actuary hired by a wealthy supporter of the measure.

“We don’t think it’s anywhere near that,” he said.

Of the nearly 27,000 San Francisco Employees Retirement System members receiving benefits last year, Barsetti said about 8,300 retired before voters approved the supplemental COLA on Nov. 5, 1996.

Retirees in the city-run pension system receive a basic COLA of up to 2 percent, depending on inflation. San Francisco voters approved a supplement on Nov. 5, 1996, that could boost the COLA to 3 percent of the pension amount.

The money for the supplemental COLA comes from pension fund investment earnings “in excess of the expected earnings on the actuarial value of assets” in the previous year.

The city pension system currently assumes investments will earn 7.5 percent a year, the same as California’s three large state retirement systems, which critics say is too optimistic.

Skimming investment earnings looks dubious after a recession and stock market crash left most public pensions underfunded. Growing pension costs are causing concern that too much money is being diverted from government programs and services.

But in the past, for example, “excess earnings” paid for a “13th check” pension bonus in San Jose and two CalPERS programs, the Investment Dividend Disbursement Account and the Extraordinary Performance Dividend Account.

All three of those programs have been discontinued. But 20 county retirement systems operating under a 1937 act can still use “excess earnings” for retiree bonuses, retiree health care or lowering employer contributions.

Barsetti’s response to criticism of skimming “excess earnings” is that the San Francisco pension system is different. Pension increases must be approved by voters, rather than bargained by unions and then approved by elected local or state lawmakers.

After initial voter approval in 1996, the supplemental COLA was strengthened by a vote in 2002 making the supplement permanent, not reducible once granted. Another vote in 2008 increased the supplement from 3 to 3.5 percent of the pension amount.

“I believe that the people who are paying the bill should have a vote,” said Barsetti.

Enjoying a surplus, the San Francisco pension system went without employer contributions from 1996 to 2004. The city became the model for requiring voter approval of pension increases in San Diego in 2006 and Orange County in 2008.

Big investment losses and a civil grand jury report in 2009 on soaring pension costs led to San Francisco voter approval of Proposition C in 2011, part of which required full or 100 percent pension funding the previous year to provide a supplemental COLA.

Because of retroactive salary and annual inflation adjustments, said the civil grand jury, pensions exceeding their highest salary on the job were being received by 60 percent of police and 55 percent of firefighters retired since 1998.

Last year the pension system was 94 percent funded using market value assets. This year employer contributions for police are 37 percent of pay, firefighters 44 percent and miscellaneous 19 percent. The aggregate employee contribution is 11 percent.

(In contrast, the California Public Employees Retirement System plan for state workers was 72 percent funded. Employer contributions are 47 percent of pay for the Highway Patrol, 25 percent for miscellaneous, and employee contributions are 6 to 11 percent.)

The grand jury report in 2009 said San Francisco employer costs, $178 million the previous year, were expected to soar to $520 million in 2011. The latest actuarial report expects employer costs to be $527 million this year, while employees pay $304 million.

In the court battle over Proposition C, the city said switching the supplemental COLA from “excess earnings” to a requirement that pensions be fully funded “clarified” voter intent in 2008 when the supplement was increased to 3.5 percent.

A superior court judge, agreeing with the city, said the “legislative history” of the previous votes showed that the supplemental COLA was tied to whether the pensions were fully funded.

“Indeed, were the Retirement Fund not fully funded in 1996, 2002 or 2008, it seems quite unlikely that the voters would have approved or extended supplemental COLAs, as they did,” the judge said.

In a 3-to-0 ruling March 27, a state appeals court overturned the superior court decision. The 2008 ballot materials “do not mention full funding,” said the panel, and Proposition C is clearly a pension cut violating “vested rights” under long-established contract law.

The appeals court also said retirees before Nov. 6, 1996, have no vested right to the supplement. The “contractual basis of a pension right” is an exchange for services, said the court, and those retirees left service before the supplement was offered.

 

Photo by ilirjan rrumbullaku via Flickr CC License

Cezary Podkul is a former investment banker and reporter who has covered finance for Reuters and now ProPublica. This story was originally published at ProPublica.

As we reported last week, Gov. Chris Christie’s rhetoric about his fiscal record in New Jersey doesn’t always match what’s in his budget. Since then, we’ve found another example of Christie’s malleable math.

On multiple occasions, the GOP governor has claimed that he put more money into public employee pensions than any prior governor – Democrat or Republican. When we noticed that the numbers didn’t support the claim, the governor’s aides had a ready explanation.

It turned out they weren’t counting a $2.75 billion pension contribution that former Gov. Christine Whitman made – because the money was borrowed in a 1997 bond sale. That’s not the same, they said, as putting taxpayer money directly into pensions. Debt, after all, has to be paid back.

We duly reported that response. Except that when it comes to his budget, Christie does count the payback on the bonds – it’s tallied under “school aid” as a teacher retirement expense picked up by the state.

The bond payments highlight the enormous weight that public employee pension obligations have put on New Jersey’s chronically troubled finances.

Christie muscled a slate of pension reforms through the Democratic legislature in 2011, but it didn’t fix the problem. Now, as he prepares a possible presidential campaign, his hope for another grand pension bargain with unions is in trouble.

When it comes to New Jersey’s school aid budget, it turns out that pension payments have been the main driver of increases in recent years. Aid for classroom and other educational uses has held flat, but it hasn’t stopped Christie from declaring a victory for education.

“We are making record investments in aid to our schools, and this year again I propose to do that for a fifth straight year,” Christie in his February budget address, citing his proposal to spend $12.7 billion on school aid.

The figure includes $185 million in payments on a portion of the pension bonds. A spokesman for the New Jersey treasury said the bond payments are considered school aid because teacher pensions are an education cost. Past governors also have counted the pension bond payments the same way, so Christie isn’t alone.

Christie has complained about the bond sale under Whitman, a fellow Republican, listing it among “deadly sins of the past” committed by previous governors.

By the time New Jersey taxpayers finish paying off the debt, they will have coughed up more than $10 billion. Data from the treasurer’s office shows the interest rates on the bonds are higher than the returns the proceeds have earned since the sale, making them a money loser overall.

Some $7 billion in principal and interest remains due on the bonds, according to the treasury. Annual payments will top $500 million a year from 2022 to 2029, when the debt will finally be repaid.

Some of these bonds were expensive clunkers known in the trade as “zero-coupon” or “capital appreciation” bonds.

Instead of making regular cash interest payments, as borrowers do on a normal bond, these securities defer interest until all the debt comes due years or decades later, often at multiples of the original amounts borrowed. (The Christie administration has stopped issuing this type of debt.)

To give an example, just one $59 million chunk of those bonds came due this past February, costing the state $219 million. Terms prohibit New Jersey from refinancing even though interest is accruing at more than 7 percent a year – a rare find in today’s low interest-rate environment.

Investors are reaping the rewards. After the bonds sold back in 1997, The Bond Buyer newspaper called Whitman’s pension debt the “deal of the year” and quoted investors who called them a “beautiful piece of paper.”

Asked about the pension borrowing, Whitman said she couldn’t recall why the state opted to sell capital appreciation bonds.

Jim DiEleuterio, Whitman’s treasurer from 1997 to 1999, also said he couldn’t recall. But he still thinks the state made the best decision at the time, based on interest rates and assumed rates of return.

“I think that given the times that we were in, it was the right thing for us to do,” he said.

What about Christie’s claim that he’s contributed more to pensions than prior New Jersey governors?

As we reported earlier, including the $2.75 billion from Whitman’s bond sale that went into state pension funds, her administration contributed $3.7 billion, versus $2.2 billion so far under Christie.

Another $2 billion in promised payments would bring his total to $4.2 billion by June 2016 – without any borrowing.

 

Photo By Walter Burns [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Last week, British Petroleum (BP) shareholders overwhelmingly approved a resolution that requires the oil company to increase the breadth and depth of their reporting of climate change risk.

The resolution was filed by dozens of institutional investors, including eight pension funds.

More from Triple Pundit:

An overwhelming majority (98 percent) of shareholders voted for a resolution on climate change at a BP annual general meeting held on April 16. The resolution requires increased annual reporting on climate change risks. A 75 percent vote was required to make it binding.

[…]

According to a statement by the Aiming for A coalition, it “sends a strong signal to BP about the importance shareholders place on the company’s long-term response to the challenge of transition to a low-carbon economy.” However, not everyone is as excited. A ThinkProgress article points out that while passing the resolution is historic for a major oil and gas company, “the decision is less about addressing the causes and effects of climate change than it is about navigating the new green economy to maximize the company’s profits.”

BP not only recognizes that climate change is occurring, but it already puts an internal price on carbon. The company stated in its 2014 Sustainability Report that it assess how potential carbon policies could affect its businesses and applies “a carbon price to our investment decisions, where relevant.” BP also supports governments putting a price on carbon. Specifically, it supports a price on carbon that “treats all carbon equally, whether it comes out of a smokestack or a car exhaust,” which the company believes “will make energy efficiency more attractive and lower-carbon energy sources more competitive.”

Read the resolution, and the response from BP’s board, here.

 

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