michigan | Pension360

Dozens of Pension Funds Are Reviewing PIMCO Investments After Bill Gross Departure

The United States’ public pension funds have tens of billions of dollars invested with PIMCO. But dozens of funds have put PIMCO on their “watch” lists – if they haven’t exited PIMCO already. From Bloomberg:

Illinois’s teacher retirement system, with $3 billion invested with Newport Beach, California-based Pimco, has had the money manager on its watch list since February, when former Chief Executive Officer Mohamed El-Erian left, according to an article published today. Texas Municipal Retirement System put Pimco on watch after Gross’s departure.

Managers of New York City’s retirement systems are reviewing $7.08 billion in Pimco investments, while those overseeing plans in Michigan, Indiana and North Dakota are monitoring the situation, according to the article.

A San Francisco city and county plan’s committee this week will hear from a consultant about $82 million invested in Pimco’s Total Return Fund. (PTTRX) A termination would mark the first time it has eliminated an offering, according to the interview with Jay Huish, the system’s executive director.

Gross, 70, who co-founded Pimco more than four decades ago, left last month for Janus Capital Group Inc. (JNS) after deputies threatened to quit and management debated his ouster. His departure prompted investors to review their Pimco holdings and triggered $23.5 billion in redemptions in September from the $201.6 billion Total Return Fund, which he previously ran.

Gross’s new Janus Global Unconstrained Bond Fund received $66.4 million in subscriptions last month, according to Morningstar Inc.

The Florida Retirement Systems, one of the largest public funds in the country, announced last week it would cut its investments with PIMCO.

Moody’s: Undoing Retiree Cuts Would Spell Bankruptcy For Flint

Detroit isn’t the only Michigan city having a hard time financially. Flint, a smaller but similarly distressed city, has toyed with the idea of bankruptcy for months.

The city cut retiree benefits in an attempt to improve its fiscal condition, but a lawsuit over those cuts is waiting in the wings.

Moody’s has now said that the city is unlikely to face bankruptcy – but if retirees win their lawsuit against the city, that outlook could change. From Michigan Live:

Flint and Detroit have many similarities, but bankruptcy isn’t likely to be among them, according to an analyst with Moody’s Investors Service.

David Levett, writing in the Sept. 11 issue of U.S. Public Finance Weekly Credit Outlook, says Flint is unlikely to follow Detroit’s path into bankruptcy in the near term, especially if the courts allow the city to keep benefit cuts to retirees in place.

[…]

Earlier this year, Earley himself raised the possibility of bankruptcy for Flint if it loses a lawsuit filed by city retirees, which seeks to maintain the health benefits that workers retired with.

Levett’s analysis credits Flint’s emergency managers with having “substantially improved financial operations with dramatic changes, including restructuring pension benefits, outsourcing services, eliminating 20 percent of the city’s workforce and reducing total employee compensation equivalent to 20 percent of wages.”

He says Flint’s financial progress “would be derailed” if cuts to retiree benefits are overturned.

“The city would face substantial financial pressure should the benefit cuts not stand, increasing the likelihood of a bankruptcy filing … If the city ultimately loses the challenge, annual expenditures would increase by $5 million, equivalent to 8 percent of 2013 revenues,” the report says.

Flint Councilman Joshua Freeman was not so optimistic. In an email to Michigan Live, he said he sees “no clear path forward that does not include bankruptcy”.

Michigan To Sell Record Number of Bonds to Finance Pension Shortfalls

640px-Kalamazoo — Kalamazoo is just one Michigan city considering a historic bond offering to cover pension obligations.

It’s a strategy that’s becoming increasingly common—municipalities, straddled with outstanding pension obligations, issue bonds to cover near-term funding shortfalls.

In a particularly risky iteration of the practice, cities and states will take the proceeds from selling the bonds and re-invest them into the market.

That’s exactly what Michigan is gearing up to do, according to Bloomberg:

The Detroit suburb of Macomb County plans a $270 million sale of municipal debt, its biggest ever, to finance retiree health-care costs, while Kalamazoo is considering a historic $100 million bond offer for similar expenses. Bloomfield Hills plans to borrow a record $17 million for pensions. The law allowing the practice expires Dec. 31.

U.S. states and cities are struggling with how to pay for promises to workers after the recession ravaged their finances. Yet few communities see debt as the answer — sales of revenue-backed pension bonds have tallied $356 million this year, data compiled by Bloomberg show. Interest rates close to five-decade lows are making it more attractive to pursue the risky strategy of investing borrowed funds in financial markets.

“We can’t afford to wait,” said Peter Provenzano, Macomb County finance director. “Timing the market is difficult. You could sit on the sidelines and miss out on an opportunity.”

It’s a risky strategy that’s been covered many times before, perhaps best by the Center for Retirement Research’s recent brief.

The gist: If a city is going to re-invest proceeds from issued debt, they better hope the market produces returns that exceed the cost of servicing the debt.

The problem is, most cities that turn to this practice are already in dire straits fiscally. If the bet doesn’t pay off, it leaves cities even worse off.

At least one Michigan city is shying away from the practice: Grand Rapids.

“The best way to have odds in your favor is to do this when stock prices are depressed,” Scott Buhrer, the city’s chief financial officer, told Bloomberg. “We’re in the latter stage of a bull market.”

Photo: “Kalamazoo” by User Mxobe on en.wikipedia – own-work. Licensed under Public domain via Wikimedia Commons

After Massive Investment Losses, Michigan Pension Funds Benefit From Settlements with AIG, Private Equity Firms

AIG revealed in an SEC filing this week that it plans to pay out a massive sum of money to settle an ongoing lawsuit claiming the firm misled investors on the quality of certain investments prior to the 2008 financial crisis.

The total settlement: $970.5 million. And certain pension funds in Michigan will likely see a chunk of that change. That’s because they lost a significant chunk of change when they bought investment vehicles from AIG prior to 2008.

The State of Michigan Retirement Systems says it lost between $110 million and $140 million due to AIG.

Detroit’s General Retirement System as well as the Saginaw Police and Fire Pension Board say they lost millions more, as well.

All told, those funds could receive a combined payout totaling eight figures. From Crain’s:

This week, AIG disclosed to the U.S. Securities and Exchange Commission it would pay $960 million under a mediation proposal to settle the consolidated litigation, on behalf of investors from that period.

[…]

The lawsuit alleges AIG executives gave false and misleading information about its financial performance and exposure to residential mortgage backed securities in the run-up to the financial market collapse.

The $54.8 billion Michigan systems — a group of plans administered by the state Office of Retirement Services for former police officers, judges and other state and public school employees — became lead plaintiff for the class in March 2009, after informing the court of its nine-figure losses.

The federal Private Securities Litigation Reform Act of 1995 says a court should presume a plaintiff is fit to lead class actions like this one if it “has the largest financial interest in the relief sought by the class.” In fact, it had about double the losses of any other plaintiff seeking the same lead role — so its piece of the nearly billion-dollar pie may be larger than most.

The bolded is important, because it means that the State of Michigan Retirement Systems will almost certainly be receiving the highest payout of any of the plaintiffs.

Meanwhile, another Michigan fund—the Police and Fire Retirement System of the City of Detroit—was the beneficiary of another settlement today.

Three private equity firms settled a seven-year-long lawsuit today that alleged the firms colluded and fixed prices in leveraged buyout deals. The firms—Kohlberg Kravis Roberts (KKR), Blackstone, and TPG—settled for $325 million.

Among the suit’s plaintiffs were public pension funds that held shares in the companies that were bought out by the firms at “artificially suppressed prices, depriving shareholders of a true and fair market value.” From DealBook:

The lawsuit, originally filed in late 2007, took aim at some of the biggest leveraged buyouts in history, portraying the private equity firms as unofficial partners in an illegal conspiracy to reduce competition.

As they collaborated on headline-grabbing deals — including the buyouts of the technology giant Freescale Semiconductor, the hospital operator HCA and the Texas utility TXU — the private equity titans developed a cozy relationship with one another, the lawsuit contended. Citing emails, the lawsuit argued that these firms would agree not to bid on certain deals as part of an informal “quid pro quo” understanding.

In September 2006, for example, when Blackstone and other firms agreed to buy Freescale for $17.6 billion, K.K.R. was circling the company as well. But Hamilton E. James, the president of Blackstone, sent a note to his colleagues about Henry R. Kravis, a co-founder of K.K.R., according to the lawsuit. “Henry Kravis just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours,” Mr. James wrote.

Days later, according to the lawsuit, Mr. James wrote to George R. Roberts, another K.K.R. co-founder, using an acronym for a “public to private” transaction. “We would much rather work with you guys than against you,” Mr. James said. “Together we can be unstoppable but in opposition we can cost each other a lot of money. I hope to be in a position to call you with a large exclusive P.T.P. in the next week or 10 days.” Mr. Roberts responded, “Agreed.”

The settlement now awaits approval from the Federal District Court in Massachusetts.

Could Detroit-Style Cuts Come to California?

Pension benefits, once thought safe, now stand on shakier footing than they ever have. Detroit’s citizens live in a state where pensions are protected by the Constitution, but that didn’t matter when a bankruptcy judge ruled that the city could cut worker pensions as part of its bankruptcy restructuring plan.

California workers are now wondering what this all means for them—particularly the workers in the bankrupt cities of Stockton and San Bernardino. The state heavily protects its pension benefits, present and future.

Still, the question on everyone’s mind is: Could Detroit-style pension cuts come to California? Ed Mendel explored that question in a post today on CalPensions:

U.S. Bankruptcy Judge Steven Rhodes, acting earlier than expected, ruled last December that Detroit pensions can be cut, even though the Michigan constitution says pensions are a “contractual obligation” that can’t be “diminished or impaired.”

The ruling that federal bankruptcy law allowing contract impairment overrides state law was appealed by unions. But the early ruling, along with potential loss of “grand bargain” financial aid, may have added to fear of deep pension cuts, influencing the vote.

A cut of 4.5 percent in active and retired general worker pensions and the elimination of cost-of-living adjustments was approved by 73 percent of voters. Leaving police and firefighter pensions intact but trimming their COLAs from 2.25 to 1 percent was approved by 82 percent.

In a brief supporting the appeal of Judge Rhodes’ ruling, CalPERS argued, among other things, that Detroit has a city-run plan and that an “arm of the state” like CalPERS cannot under federal bankruptcy law be impaired in a municipal bankruptcy.

The judge handling the Stockton case, U.S. Bankruptcy Judge Christopher Klein, has said one of his options is ruling on the general issue of whether CalPERS pensions can be cut without necessarily finding that Stockton pensions should be cut.

CalPERS filed the brief in question shortly after the Detroit ruling. The premise of CalPERS argument was that the Detroit ruling didn’t apply to them because Detroit is a city, while CalPERS operates on the state level.

But as Mendel points out, there are a few key similarities between Detroit‘s bankruptcy and those of California. From CalPensions:

Although differing on pensions, the Detroit and Stockton plans to exit bankruptcy are similar on retiree health care. Detroit announced last week that a 90 percent cut in retiree health care was approved by 88 percent of voters.

Judge Klein ruled in 2012 that retiree health care can be cut in bankruptcy, acknowledging the result may be “tragic hardships” for some. A Stockton retiree health care debt of $544 million was reduced to a one-time payment of $5.1 million.

Another similarity is that the Detroit and Stockton “plans of adjustment” to cut debt and exit bankruptcy face challenges from bondholders. Making little or no reduction in massive pension debt, but deep cuts in bond payments, is said to be unfair.

What happens in California will have a ripple effect across the country as cities nationwide are increasingly weighing the prospect of going through municipal bankruptcy proceedings. The judges presiding over these cases will be wading in uncharted waters—and their word will be law. Pension360 will be following subsequent developments closely.