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San Francisco Pension Backs Off Hedge Funds After Conflicts of Interest Surface

San Francisco Employees’ Retirement System (SFERS) was set to vote yesterday on whether the fund should allocate up to 15 percent of assets, or $3 billion, to hedge funds.

But the vote never happened, in part because of the objections of union members and retirees who showed up to the meeting. Recent reports of conflicts of interest surrounding the hedge fund investments probably didn’t help, either.

From the International Business Times:

San Francisco officials on Wednesday tabled a proposal to move up to 15 percent of the city’s $20 billion pension portfolio into hedge funds. The move came a day after International Business Times reported that the consultants advising the city on whether to invest in hedge funds currently operate a hedge fund based in the Cayman Islands.

The hedge fund proposal, spearheaded by the chief investment officer of the San Francisco Employees’ Retirement System, or SFERS, had been scheduled for action this week. If ultimately enacted, it could move up to $3 billion of retiree money from traditional stocks and bonds into hedge funds, potentially costing taxpayers $100 million a year in additional fees.

Pension beneficiaries who oppose the proposal spoke at Wednesday’s meeting of the SFERS board. They cited financial risks and the appearance of possible conflicts of interest in objecting to the hedge fund investments.

Prior to the meeting, the Service Employees International Union, which represents roughly 12,000 members who are eligible for SFERS benefits, asked city officials to have the hedge fund proposal evaluated by a consultant who has worked with boards that have opted against hedge funds.

David Sirota reported on the possible conflicts of interest earlier this week:

[SFERS is] drawing on the counsel of a company called Angeles Investment Advisors, one of a crop of consulting firms that has emerged across the country in recent years to aid municipalities in navigating the murky waters of managing money.

For two decades, Angeles has been employed by the San Francisco pension system to champion the best interests of city taxpayers and employees — the cops, firefighters and other municipal workers who depend on pension payments after their retirement. But the firm is concurrently playing another role that complicates its image as a disinterested guide: An International Business Times review of U.S. Securities and Exchange Commission documents has found that since 2010, Angeles has run a hedge fund based in the Cayman Islands that invests in other hedge funds.

In other words, the consultants that are supposed to be providing unbiased advice about whether San Francisco would be wise to entrust its money to the hedge fund industry are themselves hedge fund players.

SFERS says that, although the vote is tabled for now, it could be brought back at a later time.

This isn’t the first time the pension fund has delayed voting on hedge fund investments. In fact, it’s the third time: the board first delayed the vote in June. Then it delayed the vote again in August.

Chart: How Kentucky’s Alternatives Allocation Compares To Other Funds

The Kentucky Retirement Systems, more than almost any pension fund in the country, allocates a significant chunk of its assets toward alternatives.

But how does KRS compare to other pensions funds in that area? Check out the chart above.

The data is from the Public Fund Survey, which polls 98 pension funds every year on a variety of topics, including asset allocation.

Only 4 funds in that 98 fund sample allocated a higher percentage of its assets toward alternatives than Kentucky.

Chart is courtesy of the Kentucky Center for Investigative Reporting.

Documents Shed New Light on Alleged Conflicts of Interest In New Jersey Pension System

Gov. Chris Christie has shielded his state’s pension system in recent weeks from allegations of conflicts of interest by asserting one thing: the State Investment Board doesn’t have input in pension investment decisions, it only loosely oversees them.

But new documents obtained by the International Business Times suggest that the Council does have an active hand in guiding pension money.

David Sirota writes:

The minutes of the State Investment Council (which Christie appoints, and whose official mission is to “formulate policies governing the investment of [state] funds”), show his appointees not only oversee the state’s due diligence reviews of specific managers but also offer guidance to New Jersey Treasury Department officials about managers. Christie appointees at times cast votes on specific investments and have spearheaded the recruitment and subsequent appointment of the official who runs the state’s Division of Investment.

According to minutes of the State Investment Council, most of New Jersey’s investments in private equity, hedge funds, venture capital and other so-called alternative investments are reviewed by Christie appointees on the Investment Policy Committee (a subcommittee of the State Investment Council). Typically, the minutes show State Investment Council Chairman Robert Grady reports the committee “discussed the investment and was satisfied that the due diligence that was performed was adequate and appropriate.”

Grady was appointed to the council by Christie. He also serves as the Chairman of the Governor’s Council of Economic Advisers, and state documents show he was in regular contact with Christie administration and campaign officials. The governor has described him as a longtime friend.

The State Investment Council debates the merits of specific investments in open session, offering advice to Department of Treasury staffers about the specific money manager being given a New Jersey pension contract. Because the council has influence over the selection of specific managers, Grady and another Christie appointee, real estate investor Jeffrey Oram, have recused themselves from deliberations that involve managers to whom they might have a financial connection.

The documents also reveal a few examples of members explicitly voting to approve (or disapprove) big investments with money managers. From the report:

– On Dec. 8, 2011, Grady spearheaded a proposal to invest as much as $1.8 billion of New Jersey money in the Blackstone Group. State records show “a motion was made by Chair Grady to approve the Blackstone investments,” the motion “was seconded by Council Member Oram,” and the investment in Blackstone was subsequently approved on a 7-2 vote. As IBTimes previously reported, Grady’s private firm was investing in one of the same Blackstone funds though Grady did not disclose that at the time of the vote.

– On July 21, 2011, the council voted on a quarter-billion-dollar investment in Blackstone Resources Select Fund. After a debate, the council voted against a motion to halt the investment.

– On June 11, 2011, the council voted to approve a financial maneuver to facilitate a specific transaction with a firm called RLJ Lodging Trust.

In addition to overseeing and voting on specific investments, Christie appointees oversee the appointment of the state official who runs the state’s Division of Investment.

Christie yesterday offered his first extensive defense against conflict of interest allegations.

Photo by Truthout.org via Flickr CC License

U.S. Supreme Court Won’t Hear New Orleans Pension Case

New Orleans has failed to pay $17.5 million in required pension contributions to the city’s firefighters’ pension fund since 2010. A state court last year ruled that the city had to repay the fund in full, and an appeals court affirmed the ruling.

But New Orleans tried to appeal the case to the U.S. Supreme Court – the city argued that it shouldn’t have had to shoulder the cost of the pension fund’s failed investments, which led to a decreased funding ratio and required higher payments from the city.

But today, the U.S. Supreme Court said it wouldn’t hear the case. From NOLA.com:

The U.S. Supreme Court has decided to stay out of the ongoing legal feud between the Mayor Mitch Landrieu and the New Orleans firefighters’ pension board, leaving the city to cover disputed payments to the firefighters’ collective retirement account over the past four years.

The high court refused on Monday to hear an appeal from Landrieu arguing that state Judge Robin Giarrusso overstepped her authority when in March 2013 she ordered City Hall to immediately pay $17.5 million to the firefighters’ pension fund for shortfalls in 2012. Her ruling was upheld by the state’s 4th Circuit Court of Appeal in December.

The Supreme Court’s decision likely will have little bearing on the case, considering that Landrieu and the pension board have begun work on a compromise. On Friday, the two sides agreed to refinance the city’s debts to the fund, a shift that would considerably lower the city’s monthly payments should Giarrusso agree to it. That $17.5 million bill, for instance, would be lowered to $9.2 million under the proposed arrangement.

The two sides go back to District court on October 21.

Photo by Mark Fischer via Flickr CC License

Stockton Can Cut Pensions And Stop Paying CalPERS. But Will It?

In a groundbreaking decision, a judge ruled yesterday that the bankrupt city of Stockton, California could indeed cut worker pensions and halt payments to CalPERS. From the LA Times:

A federal bankruptcy judge dealt a serious blow to California’s public employee pension systems by ruling Wednesday that payments for future worker retirements can be reduced when a city declares bankruptcy — just like its other debts.

U.S. Bankruptcy Judge Christopher Klein ruled that bankruptcy law supersedes California pension laws that require cities to fund their workers’ future retirement checks.

“I’ve concluded the pension could be adjusted,” Klein said.

The potentially groundbreaking decision came after a large creditor of Stockton, which filed for bankruptcy protection two years ago, asked the judge to reduce the amount the city owes to the California Public Employees’ Retirement System, the nation’s largest public pension fund.

Until now, CalPERS had argued successfully in the bankruptcy cases of other California cities that amounts it requires for public worker pensions could not legally be reduced.

But just because Stockton can cut pensions doesn’t mean the city will. The city’s current bankruptcy plan doesn’t include pension cuts or the halting of payments to CalPERS. From the Sacramento Bee:

The practical effect of Klein’s ruling is unclear. It depends in large part on whether Klein will accept Stockton’s financial reorganization plan – a plan under which the city promises to keep making its annual $29 million pension payments in order to retain its relationship with CalPERS.

If Stockton gets Klein’s approval and can resolve its bankruptcy without slashing pensions, the impact of Klein’s ruling is blunted somewhat. But Klein won’t rule on the city’s plan until Oct. 30.

Because of Stockton’s pledge, CalPERS attorney Michael Gearin downplayed the decision and said it doesn’t force the city to cut its pension payments. “It doesn’t establish a precedent. Those were his comments about a hypothetical city” that wants to cut ties with the California Public Employees’ Retirement System, he said.

The city seems to have an interest in working to keep pensions intact. Staying with CalPERS, on the other hand, is being viewed as a reluctant necessity. From the Sacramento Bee:

City officials have said they have no choice but to stick with CalPERS. If it doesn’t pay the pension fund in full, default would occur, and the city would either have to make a one-time payment of $1.6 billion to keep pensions whole or let CalPERS slash benefits by 60 percent. The result would be a mass exodus of employees, the city said, creating an enormous setback just as the troubled city, saddled with poverty and a high crime rate, is starting to get back on its feet.

CalPERS released a statement immediately after the ruling expressing their disappointment with the decision and claimed that the ruling was “not legally binding”. From Reuters:

“This ruling is not legally binding on any of the parties in the Stockton case or as precedent in any other bankruptcy proceeding and is unnecessary to the decision on confirmation of the City of Stockton’s plan of adjustment,” Calpers spokeswoman Rosanna Westmoreland said in an emailed statement.

“CalPERS will reserve any further comment until such time as the court renders its final written decision. What’s important to keep in mind is what the City of Stockton stated in court today: that they can’t function as a city if their pensions are impaired.”

Anonymous Money Floods Phoenix Pension Vote

A Phoenix ballot initiative – titled Proposition 487 – would block off the city’s traditional pension system from all new hires, and instead shift those employees into a new, 401(k)-style plan.

Unions have made no secret of their disdain for the initiative and have raised over $100,000, mostly from firefighters, to fund ads opposing the potential law.

But support for Proposition 487 is strong as well – $428,200 has been raised in support of the measure. The only problem: no one knows where that money is coming from. From the Arizona Republic:

Conservative advocacy groups with secretive funding sources are pouring money into a ballot-initiative effort to end the city pension system in Phoenix.

While it’s clear unions are bankrolling the opposition to Proposition 487, the sources of the pro side’s campaign war chest are unknown. Most of its cash has come from anonymous “dark money” groups — and the state is investigating its largest corporate backer over a complaint alleging campaign-finance violations.

So far, Citizens for Phoenix Pension Reform has received 98.5 percent of its money from corporate groups that don’t have to disclose their funding sources.

Campaign-finance reports filed late last week show the group has overwhelmingly outraised government-worker unions, raking in $428,200 through the Sept. 15 reporting period.

[…]

Most of the pro-reform group’s money — $335,750 — has come from the Arizona Free Enterprise Club, a non-profit corporation that’s not required to reveal its funding sources.

Because of its non-profit status, it does not have to disclose donors and therefore is considered a dark-money group. But it is required to spend more than half of its money on social-welfare causes. However, the Arizona Secretary of State’s Office concluded in August that there was “reasonable cause” to believe the Free Enterprise Club has violated elections laws and investigated its activities. Elections officials believe the club operates more like a political committee, which must disclose donors, than a non-profit.

Union groups are none too happy about the secretive funding sources. From the Arizona Republic:

Labor leaders against the initiative have made the shadow money a centerpiece of their campaign, posting hundreds of “Dark Money” arrows pointing to “YES on 487″ signs across the city. They assert the outside groups are propped up by right-wing billionaires and Wall Street bankers, who would benefit from axing pensions.

“If you have nothing to fear, say where your money is coming from,” said Frank Piccioli, president of the American Federation of State, County and Municipal Employees Local 2960, which includes about 2,145 office workers and 911 operators.

“Most of them do have ulterior interests. They have to be benefiting somebody,” he said. “What do you have to hide?”

Unions have raised $106,600 to fight Prop. 487, with the bulk of the money coming from Valley firefighter unions. The opposition campaign reported contributions from firefighters in Phoenix, Chandler, Tempe, Glendale and Peoria. The anti-Prop. 487 campaign also isn’t required to disclose individual donors, though labor leaders said the money comes from membership dues.

Phoenix residents will vote on the measure on November 4.

Pension Funds React, Weigh Next Move After Bond Guru’s Departure From PIMCO

Bill Gross, bond guru and co-founder of investment management firm PIMCO, has left the company. Gross’ is only the latest in a string of high-level departures from the firm.

Some wealth managers had exited PIMCO earlier this year after sensing that the “team was falling apart.”

But how are pension funds reacting?

Here’s CalPERS’ take, from Bloomberg:

The California Public Employees Retirement System, the largest U.S. pension, said it doesn’t have plans to change its investments with Pimco, according to an e-mailed statement today.

“Calpers has respect for both Bill Gross and Pimco investment professionals,” the pension system said. Calpers, which has about 1.5 percent, or $1 billion, of its fixed-income assets in a Pimco international bond fund.

New Mexico PERS isn’t ready to make any decisions, either. But the Florida SBA, the entity that manages investments for the state’s pension funds, is watching PIMCO closely. Bloomberg reports:

Jon Grabel, chief investment officer of the Public Employees Retirement Association of New Mexico, said it’s too early to make a decision about moving assets. Pimco manages about $725 million for the association in a separate account, Grabel said.

“One person may get the headlines, but one person doesn’t manage trillions of dollars,” he said.

The Florida State Board of Administration, which manages $147 billion in its Florida Retirement System Pension Plan, has been monitoring Pimco since El-Erian left. The fund has $1.9 billion invested in Pimco and nothing in Janus, said Dennis MacKee, a spokesman for the pension.

Pimco is on the system’s watch list, which isn’t a precursor to redemption, MacKee said. It means the board is looking closely at the funds’ performance and operations and will meet with consultants and investment staff to decide what to do, he said.

New York’s Common Fund and Indiana PERS are taking a similar approach: they’ve not yet moved on from PIMCO, but have placed the firm on a ‘watch list’, reports Bloomberg:

New York City’s five pension funds are evaluating the situation at Pimco, the New York City Office of the Comptroller said in an e-mailed statement. Total assets of the funds for firefighters, police officers, teachers, school administrators and civil servants is about $160.5 billion.

The $30.2 billion Indiana Public Retirement System said Pimco remains on its watch list and it’s monitoring developments, Jennifer Dunlap, a spokeswoman for the pension fund, said in an e-mailed statement. The retirement plan had put Pimco on its list in January.

Gross left PIMCO to take a job at Janus Capital Group Inc.

Gross said he wanted to take a job that allowed him to get closer to his original passion: trading bonds.

CalPERS To Measure, Disclose Carbon Footprint of Portfolio

CalPERS and several other institutional investors signed the Montreal Carbon Pledge yesterday. The pledge mandates that the investors measure and publicly report the carbon footprint of their entire investment portfolio.

Pennsylvania Not Cutting Hedge Funds Despite State Auditor’s Skepticism

CalPERS’ decision to pull out of hedge funds is having a ripple effect across the country.

On Wednesday, Pennsylvania Auditor General Eugene DePasquale released this skeptical statement on the state pension system’s hedge fund investments:

“Hedge fund investments may be an appropriate strategy for certain investors and I trust that SERS and PSERS weigh investment options carefully,” DePasquale said in a statement. “But, SERS and PSERS are dealing with public pension funds that are already stressed and high fees cost state taxpayers more each year. I support full disclosure of hedge fund fees paid by our public pension funds and we owe it to taxpayers to ensure that those fees do not outweigh the returns.”

Spokespeople for both the State Employees Retirement System (SERS) and the Public School Employee Retirement System (PSERS) have now responded. The consensus: the pension funds will not be cutting their hedge fund allocations.

From Philly.com:

SERS has no plans to cut hedge funds further. “Hedge funds play a role in our current board-approved strategic investment plan, which was designed to structure a well-diversified portfolio,” SERS spokeswoman Pamela Hile told me. With many more workers set to retire, hedge funds (or “diversifying assets,” as SERS prefers to call them) combine relatively steady returns with low volatility “over varying capital market environments.” By SERS’s count “difersifying assets” are now down to $1.7 billion, or 6% of the $28 billion fund and returning 10.7% after fees for the year ending June 30, up from a 10-year average of 7.4%.

Says PSERS spokeswoman Evelyn Williams: “We agree with the Auditor General that hedge funds are appropriate for certain investors. Not all investors can or should invest in hedge funds. Clearly CALPERS reviewed their hedge fund allocation and acted in their own fund’s best interests.

“PSERS also sets our asset allocation based on our own unique goals and issues. We do not have any immediate plans to change our hedge fund asset allocation at this time… PSERS’ hedge fund allocation provides diversification for our asset allocation and is specifically structured so it does not correlate with traditional equity markets…PSERS hedge fund allocation has performed as expected and provided positive investment returns over the past fiscal year, one, three, and five years.”

SERS allocates 7 percent of its assets, or $1.9 billion, towards hedge funds. PSERS, meanwhile, allocates 12.5 percent of its assets, or $5.7 billion, towards hedge funds.

Photo by TaxRebate.org.uk

Europe’s Largest Pension Is “Extremely Happy” With Hedge Funds

Eduard van Gelderen, the newly appointed CIO for ABP, Europe’s largest pension fund, yesterday gave his first interview since taking the job.

ABP is the pension fund for Netherlands’ public workers and controls over $360 billion in assets.

In the interview, van Gelderen addressed the trend of some pension funds scaling back their hedge fund allocations – and said his fund will have no part in it. From Chief Investment Officer:

“No,” says Eduard van Gelderen, the man overseeing investments for ABP, Europe’s largest pension fund. “No. Absolutely not. We are extremely happy with them [hedge funds].”

[…]

“[For us], hedge funds are taken care of by New Holland Capital”—an independent holding that span out of APG almost a decade ago—“and we are extremely pleased with the track record they have shown over the last years.”

At the end of 2013, ABP had assets of around €288 billion, of which it had a 5% strategic allocation to hedge funds, according to its annual report. This allocation outperformed its benchmark by 619 basis points last year and van Gelderen—who took over as CIO from Angelien Kemna on September 1— is resolute that hedge funds will remain a part of the portfolio APG manages for Europe’s largest pension.

ABP’s hedge fund portfolio is more than four and a half times larger than CalPERS’ portfolio was before it pulled out of the asset class.

Read the full interview here.

Photo credit: “EU-Netherlands” by NuclearVacuum. Licensed under Creative Commons Attribution

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