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A judge on Friday overturned a series of pension reforms aimed at two Chicago pension funds, declaring the changes unconstitutional.

The city had argued the reforms amounted to a “net benefit” for retirees, because the changes improved the solvency of the funds.

But Judge Rita Novak disagreed, and said the reforms diminished benefits.

More from the Chicago Tribune:

The state constitution, [Judge Novak] wrote in her 35-page opinion, “removed diminishing benefits as a means of attaining pension stability.” The city, under the state constitution, already is obligated to ensure pension funding because pension promises are “a contractual relationship between the employer and employee,” the judge said.

Novak also rejected the city’s contention that because at least 27 of 31 affected unions agreed to the changes, it was a “bargained-for” change.

“There is no evidence that, in reaching an agreement with the city, the union officials followed union rules and bylaws in such a way as to bind their members,” she wrote. “Nor is there evidence that the membership voted on the agreement . . . Additionally, there is no showing that the unions could have acted as agents of retired members while at the same time acting as representatives of active employees.”

[…]

At issue is a 2014 state law Emanuel pushed through the legislature that aimed at shoring up the financially imperiled pension funds by reducing cost-of-living increases and requiring workers to kick in more money. The city also would pay more into the retirement funds, and Emanuel came up with some of that money by raising 911 phone fees by $1.40 a month.

There are implications for Chicago’s budget; interestingly, the ruling gives the city some relief in the short-term. The Tribune explains:

The court loss Friday on the laborers and municipal workers pension case actually gives Emanuel a small bit of budget breathing room heading into 2016. The city would no longer have to increase its payments into those two pension funds. That means the $50 million freed up by the 911 phone fee hike could be spent elsewhere.

In addition, Emanuel no longer would have to find an extra $50 million a year in each of the next four years for the two pension funds. But that would be kicking the can down the road, as the pension shortfalls would continue to grow and it would become far more costly in the long run to restore their financial health.

The two affected pension funds — the Municipal Employees’ Annuity and Benefit Fund of Chicago and the Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago — are collectively $9.5 billion in the hole.

 

Photo by bitsorf via Flickr CC License

Two weeks ago, CalPERS came under fire for not collecting data on the carried interest fees it pays to its general partners. In the wake of scrutiny from national media and state Treasurer John Chiang, the pension fund sent out a directive to staff to begin collecting the fee data.

Now, the scrutiny has expanded to include CalSTRS; the teachers’ pension fund admitted earlier this month that it did not collect data on its carried interest fees, either.

From the Financial Times:

The second-largest US public pension fund has admitted it has failed to record total payments made to its private equity managers over a period of 27 years.

The admission by Calstrs, the $191bn California-based pension fund, prompted John Chiang, the state treasurer of California, to declare he will investigate the failure, which poses serious questions as to how pension fund money is being spent.

[…]

A spokesman for Calstrs, which helps finance the retirement plans of teachers, said the fund does not record carried interest. “What matters is the overall performance of the portfolio.”

Following questions from FTfm, Mr Chiang said he would demand Calstrs look into payments of carried interest to its private equity managers.

“Disclosure [of carried interest fees] is very important,” said Mr Chiang, who sits on the administration board of both Calstrs and Calpers.

[…]

Calstrs, which manages a $19.3bn private equity portfolio and has 880,000 members, said it has no plans to upgrade its systems for tracking and reporting payments to private equity managers.

Margot Wirth, director of private equity at Calstrs, said it used “rigorous checks” to ensure private equity managers took the right amount of carried interest.

All of Calstrs’ partnerships with private equity managers were independently audited, Ms Wirth added. She said the pension fund carried out its own internal audits and employed a specialist “deep dive” team to look at private equity contracts.

Carried interest is a profit-sharing fee paid by pension funds to the general partners with which they’ve invested.

 

Photo by Stephen Curtin via Flickr CC License

Earlier this summer, Pension360 covered the increasing role of ESG factors in CalPERS’ manager selection and evaluation.

All of the pension fund’s outside managers will have to articulate how ESG factors figure into their investment strategies; further, ESG will play a bigger role in hiring of new managers as well as evaluation of current managers.

Last week, Investments and Pensions Europe sat down with senior portfolio manager for global equity, CalPERS’ senior portfolio manager for global equity. Simpson talked about the rise of ESG at the pension fund:

“We’re reframing the ESG debate as an investment issue,” Simpson said. “For us, it’s the natural next step from adopting investment beliefs a couple of years ago. We’re shifting from thinking about this as ‘ESG issues,’ and thinking about what is required for our funds to be sustainable over the 70-year liability horizon we’ve got.”

Two of the investment beliefs “set the stage” for what CalPERS is doing.

“One is that long-term value creation comes from the management of three forms of capital – financial capital, human capital and also physical capital,” Simpson said.

“We’ve never been terribly fond of the ESG acronym. By reframing this as sustainable investment around these three forms of capital, we’ve given an economic framing of the issue to use in explaining what it is we want our managers to be paying attention to when they’re deploying capital.”

The second CalPERS investment belief is the statement that “risk is multifaceted for an investor like CalPERS, because of our size, the longevity of our liabilities and so forth”.

“Risk for us isn’t captured just through tracking error and volatility – natural resource scarcity and demographic and climate changes are also risks.”

Read the full interview here.

 

Photo by penagate via Flickr CC License

Pension funds are the top customers of alternative asset managers, according to a new survey by Towers Watson of the top 100 alternative managers.

In 2014, pension funds held 33 percent of the assets of the top 100 alternative managers.

More from Benefits Canada:

The research, which includes data on a diverse range of institutional investor types, shows that pension fund assets represent one-third (33%) of the top 100 alternative managers’ assets, followed by wealth managers (19%), insurance companies (8%), sovereign wealth funds (5%), banks (4%), funds of funds (3%), and endowments and foundations (2%).

“The alternative asset management industry houses some of the most highly skilled investment teams around, which if combined with aligned interests and fair fees, provide a compelling proposition,” says [Brad Morrow, Tower Watson’s head of investment manager research]. “However, investors across the board should first check that they have sufficient governance levels, particularly for complex alternatives. This ensures they make the most of the increasing market volatility and associated alpha opportunities, particularly given the current lack of clear beta opportunities.”

[…]

In the ranking of top 100 asset managers by pension fund assets, these increased again from the year before to reach over US$1.4 trillion. Real estate managers continue to have the largest share of pension fund assets with 36%, followed by PEFoFs (20%), private equity (15%), hedge funds (12%), infrastructure (8%), FoHFs (6%), illiquid credit (4%, versus 2% in 2013) and commodities (1%).

The survey found that the assets of the top 100 alternative managers collectively reached $3.5 trillion in 2014, up $2 billion from a year earlier.

 

Photo by  Dirk Knight via Flickr CC License

Support for Illinois Gov. Rauner’s pension overhaul proposal, unveiled last week, is split down party lines, and the divide only deepened as the plan’s full details were released.

The law would limit union workers’ ability to collectively bargain on many issues; additionally, Rauner offers incentives to workers who opt-in to a less generous pension plan.

More from the Associated Press:

The legislation would prohibit state employee unions from collective bargaining on issues such as wages, vacation and overtime, and would freeze salaries for five years beginning this month. It would then offer workers the option of getting raises, more vacation or more overtime — but only if they agree to switch to a less-generous pension plan.

[…]

The legislation would provide state employees with incentives to switch to the pension plan the Legislature adopted for workers hired in 2011 or later.

The so-called “Tier II” pension plan requires employees to work longer before they may retire. It also provides smaller cost-of-living increases in retirement than the plan most workers are on, which provides 3 percent increases each year, compounded annually.

Workers who switch to the less-generous pension plan may choose from three incentive packages. They offer various increases in salary, vacation or overtime earnings, plus a $2000 “transition bonus.”

[…]

New police officers and firefighters would be put into a so-called “Tier 3″ plan, which would be a hybrid of a pension plan and a 401(k)-style defined contribution plan.

Additionally, the overhaul gives Chicago a longer timeline for bringing its police and fire pension funding up to 90 percent. Right now, the city has until 2040 to bring its public safety pensions to a 90 percent funded ratio; under Rauner’s plan, the deadline would be extended to 2055.

 

Photo by Tricia Scully via Flickr CC License

Illinois Gov. Bruce Rauner on Wednesday unveiled his own pension reform proposal, which contains significant changes for public workers of all stripes, as well as municipalities.

[Read a full summary of the overhaul at the bottom of this post.]

Among other things, the bill contains benefit reductions – leading some to question whether this proposal would hold up in court.

From the Sun-Times:

The lengthy bill — all 500 pages of it — would cut retirement benefits for police officers, firefighters and public teachers. It would also give local governments a way to file for bankruptcy “as a last resort” after a review or the declaration of a fiscal emergency.

[…]

Rauner’s bill gives Cook County the option of choosing the pension plan introduced by Preckwinkle, or a consideration-based plan that prompts employees to choose between a bargaining change, a reduced cost-of-living adjustment benefit or agreeing that all future salary increases are not included in pension benefit calculations.

[…]

A closer look at the governor’s proposal raises questions over its constitutionality, since it appears to offer workers the choice between one diminished benefit or another.

Madigan spokesman Steve Brown characterized the pension proposal as “a hodge podge.”

“I don’t know how it stacks up to the court opinion,” Brown said, referencing an Illinois Supreme Court decision that earlier this year struck down a landmark pension reform compromise plan. “We’ll have to take a look.”

Read a summary of the overhaul below.

 

 

Photo by Tricia Scully via Flickr CC License

Over the last few months, Pension360 has collected and analyzed the pension records of over 1,000,000 annuitants in New Jersey’s state-level pension systems.

We used the data to create a visual “snapshot” of each system — a way to see benefit payouts in a different, simple light.

The resulting heat maps, which can be seen below, visualize how benefits are distributed amongst the state’s pensioners, system by system.

[Click here to see our visualizations of Illinois pension systems.]

First, read the following instructions on how to read the maps (click to enlarge):

___________________________

With the explanations out of the way, here are the heat maps of New Jersey’s seven state-level pension systems (click any of the maps for enlargement).

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 Photo by Lu Lacerda via Flickr CC License

Just hours before the deadline, cash-strapped Chicago Public Schools (CPS) on Tuesday made its full $634 million pension payment to the city’s teacher pension fund.

The payment was possible, in part, because Mayor Emanuel authorized $1 billion in borrowing last week.

But CPS is now warning that steep budget cuts and layoffs will come as a result of the payment.

From the Chicago Sun-Times:

The cash-strapped CPS used a combination of borrowed money and a promise of cuts to cover the payment after a deal to delay the contribution failed to materialize in Springfield. Last week, Emanuel’s hand-picked school board authorized $1 billion in borrowing just in case state lawmakers didn’t come through on the delay bill.

“Springfield has failed to address Chicago Public Schools’ financial crisis, so today CPS made its 2015 pension payment by borrowing money,” interim CEO Jesse Ruiz said.

“As an immediate consequence of driving the district further into debt and our need to address the existing structural deficit — which is also driven by decades of pension neglect — CPS will make $200 million in cuts,” he said. “As we have said, CPS could not make the payment and keep cuts away from the classroom, so while school will start on time, our classrooms will be impacted.”

As many as 1,400 employees will be laid off beginning Wednesday, according to CPS.

It’s not clear how much of the payment was paid for by borrowing, and how much was paid straight out of the budget — that should become clearer later this week.

 

Photo by bitsorf via Flickr CC License

CalPERS began the process this week of reducing its external managers by 50 percent; the pension fund is selling up to $3 billion of its real estate holdings, and intends to re-invest that money back into real estate with different managers.

Many of the pension fund’s largest real estate managers – Starwood Capital, CBRE Global Investors and BlackRock – could be on the chopping block as CalPERS looks to allocate more funds to smaller, emerging managers.

More from IPE Real Estate:

The California Public Employees’ Retirement System (CalPERS) is selling what could amount to $3bn (€2.7bn) of real estate fund holdings as it embarks on a portfolio-wide manager reduction programme.

[…]

“The sale of these assets represents the continued effort to reduce costs, risk and complexity across the CalPERS fund,” said Paul Mouchakkaa, CalPERS senior investment officer for real assets.

A CalPERS spokesman told IP Real Estate that the objective is to sell “everything in the legacy portfolio,” excluding housing. The proceeds will be reinvested in real estate.

The total amount for sale could vary based on market conditions and what the real estate market can absorb. The spokesman said CalPERS is “open to selling [the legacy portfolio] whole or in pieces”.

The CalPERS legacy property portfolio includes 80 funds with a value of $6.16bn, as of September last year, according to the CIO Performance Report for December 31, 2014.

Park Hill Group is helping CalPERS with the sell-off.

 

Photo by  rocor via Flickr CC License

New Jersey lawmakers have sent Gov. Christie a bill that would break the state’s annual pension contribution into four separate payments.

The hope, among other things, is that four smaller payments will be more palatable – and easier to pay – than one lump sum, annual payment.

From NJ.com:

The change would make it harder for the Christie to make last-minute cuts to balance the budget and increase investment earnings on the money.

[…]

The bill (S3100) passed the state Senate 25-15 and it cleared the state Assembly 52-6, with 16 abstentions.

Under the legislation, the state would make payments on the first of the month in August, November, February and May of each year, generating $100 million in additional investment income next year, Gordon said.

The potential investment returns would continue to rise as the state’s annual pension payment grows, he added.

The state would have to borrow money for the first two quarterly payments up front, but the investment rate of return would easily outpace borrowing costs, the Senate Democrats office said in a statement. It could expect to spend about $13 million in interest — at the current 0.52 percent rate on the state’s line of credit, it said.

Christie vetoed a similar bill in late 2014.

 

Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons