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CalPERS to Cut Investment Fees by 8 Percent Next Year

CalPERS calculates that it will cut investment-related fees by 8 percent in fiscal year 2015-16, according to a report by Bloomberg.

The pension fund has been looking to cut costs recently by reducing the number of private equity managers it invests with and moving more investment management in-house.

According to CalPERS’ proposed budget, obtained by Bloomberg, the 8 percent decrease in fees will come from several areas:

Calpers projects it will pay about $100 million less in fees for hedge-fund investments. The pension has said it would take about a year to unwind all its holdings. It paid $135 million in fees in the fiscal year that ended June 30 for hedge-fund investments, which earned 7.1 percent and added 0.4 percent to its total return, according to Calpers figures.

Brad Pacheco, spokesman for the pension fund, wasn’t immediately available for comment.

Base fees for private-equity investments are projected to decline 7.5 percent to $440.6 million as some investments matured, the number of managers was reduced and Calpers won better terms for new deals.

Base fees for company stock managers are projected to increase 25 percent to $51.3 million. Fees for performance are projected to decrease by $32.6 million because of favorable renegotiated contract terms, Calpers said.

[…]

The largest U.S. state pension fund, known as Calpers, projects that it will pay $930.7 million in base and performance fees to investment firms in the fiscal year that begins July 1, down from more than $1 billion this year and $1.3 billion last year, according to the fund’s proposed budget.

CalPERS managed $295.8 billion in assets as of December 31, 2014.

Photo by rocor via Flickr CC License

Reform Measure Aimed at CalPERS Could Appear on California Ballot by 2016

Back in November, Pension360 covered former San Jose Mayor Chuck Reed’s intention to keep pushing for pension reform even after leaving office.

According to a Reuters report, he’s following through: Reed, along with a coalition of business leaders and politicians, is launching a push to get a pension reform measure on the statewide ballot.

Details are sparse on what exactly the measure would look like.

But it’s likely the measure would aim to make it easier for cities to cut pension payments to CalPERS, or reduce the cost of leaving the fund entirely.

Philadelphia Pension Debt “An Obstacle” to Long-Term Growth, Says City Oversight Board

The Pennsylvania Intergovernmental Cooperation Authority (PICA) has released a report stating that Philadelphia’s pension system will be “an obstacle” to the growth and prosperity of the city.

The report says that pension costs need to be lower and more predictable for the city to grow.

The recommendations provided in the report, as reported by Philly.com:

The report’s recommendations included:

Making all new employees join the city’s hybrid pension plan, called Plan 10, which is similar to a 401(k). Mayor Nutter tried doing this in the last round of negotiations with the municipal unions, but lost.

Abolishing the controversial Deferred Retirement Option Plan (DROP), which allows city employees to pick a retirement date up to four years in the future, then accumulate pension payments in an interest-bearing account while still earning their salary. They collect a lump sum upon retirement. Council would need to pass legislation to abolish DROP.

Increasing employee contributions to the pension fund. Civil employees contribute between 3.95 percent and 4.75 percent of their annual wages. The median employee contribution for the 10 largest American cities is 6 percent, according to the report.

Lowering expectations for the rate of future returns on investments from 7.85 percent to near 7 percent.

The city’s pension system is 47 percent funded.

Read the full report here.

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Video: How Are States Responding to Pension Costs?

This presentation was given by Dana Bilyeu, Executive Director of NASRA, at the 2014 CSG National Conference.

From the video description:

This session explored what’s in store for your state in 2015 and beyond as experts forecast fiscal and economic trends for states and the nation. The discussion focused on the most significant fiscal and economic issues facing states— public pensions, tax reform and ways to foster entrepreneurship—and included insights about how states are tackling similar concerns.

OECD Report: Longer Life Expectancy Threatening Pension Sustainability; More Reforms Needed

The Organization for Economic Cooperation and Development released a report Monday morning highlighting the challenges that longer life expectancy poses to pension systems around the world.

From CNBC:

The world’s retirement bill is coming due—and many countries aren’t ready to pay it.

That’s the conclusion of a report Monday from the Organization for Economic Cooperation and Development, a Paris-based group representing the world’s developed countries.

With populations aging and lifespans rising, government-supported pensions are cutting deeper into national budgets, crowding out spending on other programs and services. The added burden comes as the economies of the developed world are growing slowly, putting added pressure on the tax revenues needed to pay rising pension costs.

[…]

“The ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms,” OECD Secretary-General Angel Gurría said. “We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”

The report acknowledges numerous pension reforms by countries and states in recent years, but says more needs to be done. The report presented a handful of reform proposals. From the OECD:

Increasing the effective retirement age can help but more efforts are needed to assist older workers find and retain jobs. Public policies to reduce age discrimination, improve working conditions and increase training opportunities for older workers are essential.

Countries have also introduced reforms to strengthen funded private pensions. The report highlights the importance of increasing coverage rates in countries where funded pensions are voluntary. Auto-enrolment programs have been successful in raising coverage in the countries that have implemented them.

The report also calls for strengthening the regulatory framework to help pension funds and annuity providers deal with the uncertainty around improving life expectancy. It argues that regulators should make sure that providers use regularly updated mortality tables, which incorporate future improvements in mortality and life expectancy. Failure to account for such improvements can result in a shortfall of provisions of well over 10% of the pension and annuity liabilities.

Capital markets could offer additional capacity for mitigating longevity risk, but the transparency, standardization and liquidity of instruments to hedge this risk need to be facilitated. The regulatory framework will also need to reflect the reduction of risk exposure these instruments offer by ensuring they are appropriately valued by accounting standards and lowering the level of required capital for entities hedging their longevity risk.

Issuing longevity bonds and publishing a longevity index to serve as a benchmark for the pricing and risk assessment of hedges would support the development of longevity instruments.

Rebuilding trust is also an important challenge that policy makers face, says the OECD. Young people in particular need to trust the long-term stability of the pension system and the pension promise that is made to them. Communication campaigns and individual pension statements to explain the need for reform and facilitate choice by individuals are needed, says the OECD.

The full OECD report can be read here.

Photo by Horia Varlan via Flickr CC License

New York Teachers Pension Lowers School Contribution Rate

The New York Teachers Retirement System (TRS) informed schools this month that their contribution rates would be lowered for the first time in five years.

Contribution rates will fall from 17.53 percent of payroll to 13 percent.

The change applies to schools, not to employees of the schools.

From the Democrat and Chronicle:

The drop, which will be as much as 26 percent, will be a major help to school districts that have faced higher bills for retirement costs in recent years, school officials said.

The Teachers Retirement System quietly told school districts late this month that their pension costs for the 2015-16 school year, which starts July 1, will fall from 17.53 percent of payroll to as low as 13 percent of payroll.

It will be the first drop since the 2009-10 school year. In the current fiscal year, the contribution rates are up 7.8 percent after rising 37 percent the year prior.

The retirement system will finalize its rate for the 2015-16 school year in February. The rate will be between 13 percent and 13.5 percent, and the bill is due in the fall 2016.

“Favorable investment returns over the last several years are the primary reason for the decrease in the rate,” the Teachers Retirement System said in a bulletin to school districts.

Pension costs are easing for schools and governments after they skyrocketed amid the recession — the result of major declines on Wall Street.

New York TRS manages $108 billion in assets and returned 18.2 percent last fiscal year.

Chicago Suburb, Strapped With Pension Debt, Considers Privatizing Pension System

The Chicago suburb of North Riverside is straddled with pension debt, and it’s not about to get better – since the town hasn’t made its required pension payments, the state will likely withhold sales tax revenue from the suburb starting in 2016.

That’s why North Riverside is considering privatizing its fire department – a move that would rid the city of future pension costs.

From the Chicago Sun-Times:

North Riverside says its contract with firefighters expired in April and it seeks to privatize its fire protection services, turning current firefighters into employees of a private company, PSI, which has provided paramedic services to the village for decades.

Current North Riverside firefighters would work for PSI at their current salaries and with their current health insurance plan. They also would keep already-accrued pension benefits but would be folded into a 401-(k) program at PSI that would include an employer-matching contribution. Odelson says privatizing fire services will save the village in insurance, overtime, sick time and pension costs for firefighters who make more than $200,000 in yearly salary and benefits.

[…]

The state will begin garnishing sales tax revenue from North Riverside in 2016 if it doesn’t catch up on pension debt. The state can withhold all of that revenue in 2018, says Burt Odelson, North Riverside’s attorney. “When that happens,” he said, “North Riverside will no longer be able to pay their bills.”

North Riverside is a bedroom community without the home-rule power to raise taxes without voter approval. Most of its revenue is generated by sales taxes from the North Riverside Mall, but the village skipped pension payments for three years when the recession hit and tax revenue dropped.

The village now faces an operating budget deficit of $1.9 million, with $1.8 million due to pension obligations. The required payments to the firefighters’ pension fund have skyrocketed sevenfold in the last 10 years.

Unions say the idea would be a breach of contract:

J. Dale Berry, lawyer for North Riverside Professional Firefighters Local 2714 and counsel to the Associated Firefighters of Illinois, says North Riverside is obligated to keep the contract’s current provisions while it proceeds through arbitration, which he says the village is trying to circumvent. The contract, he notes, has a clause forbidding the kind of subcontracting privatization the village seeks.

“They presented this as a fait accompli,” Berry says, noting officials rejected union offers for cheaper health plans, cost cuts and an offer to help organize a consolidation with other departments. “This privatizing thing is another way to open the door to patronage, nepotism, non-merit hiring,” Berry said.

The North Riverside Firefighters Union Local 2714 has said it will sue if the fire department is privatized.

More coverage of the town’s pension funding crisis can be read here.

Phoenix Pension Measure Voted Down, But City Leaders Say Reform Debate Not Over

On Tuesday, Phoenix residents handily voted down Proposition 487, the ballot measure that would have shifted most new hires into a 401(k)-style retirement plan.

The Mayor was an opponent of the measure and called it “too extreme”; but some Phoenix leaders, even the ones that didn’t support Prop 487, are determined to continue the conversation on pension reform.
From the Arizona Republic:

Mayor Greg Stanton called the victory one of the greatest comebacks in Phoenix history. The group advocating for Prop. 487 had a major lead in the beginning, according to polling by both sides, and outspent the city unions, but city workers took to the streets and seized on concerns it could negatively impact public-safety workers.

However, other city leaders said the outcome must not signal the end of the pension-reform conversation. They said the city still has work to do to address rising costs that add to its budget shortfalls, setting the table for a debate over alternative reforms in the coming months.

“If the fiscal problems are not fixed, you will continue to see more cuts in service and higher taxes and fees,” said Councilman Sal DiCiccio, a vocal supporter of the initiative. “It’s making it harder and harder to deliver quality services.”

[…]

Taxpayers’ tab for the city pension system, not including police officers and firefighters, soared to $129 million this year, up from $27.8 million in fiscal 2002. At the same time, the city raised taxes and fees and cut employee compensation to balance its budget deficits.

And the city will likely face another budget deficit heading into the next fiscal year. Its costs for all employee pensions increased by more than $18 million this year alone. City leaders expect that trend will continue, at least in the near term.

“Now it’s time for us to step forward and do some reforms,” said Councilwoman Thelda Williams, who opposed Prop. 487. “I just never believed that (ballot measure) was the mechanism for us to do it.”

But there are obstacles to pushing through a new reform measure, especially since the city passed one as recently as 2013. From the Arizona Republic:

Any efforts for additional reform could face push-back from some City Council and labor leaders who contend the city addressed the problem with a 2013 ballot initiative.

In 2013, voters passed a requirement that municipal workers hired after July 1 of last year split pension-fund contributions 50-50 with the city and work longer before retiring, moves expected to help save $596 million over 25 years, according to the city.

The city also took steps to combat the practice of “pension spiking,” generally seen as the artificial inflation of a city employee’s income toward the end of a career to boost retirement benefits.

Phoenix’s new contracts with its employee unions end the controversial practice of spiking for police officers and firefighters but only cap it for other city workers, saving taxpayers an estimated $233 million over 25 years.

Prop 487 was shot down by voters by a margin of 56-44.

CalPERS: Think Tank “Needs A Lesson In Fact Checking” After Tax Claims

When Californians get their ballots, they will notice 140 different proposed tax increases. One think tank last week said they knew the reason behind the surge—high pension costs.

Mark Bucher, president of the California Policy Center, wrote a column for the Sacramento Bee earlier this week claiming the influx of potential tax increases stemmed from ballooning pension obligations.

Bucher wrote:

Tax-weary Californians looking to explain this paradox need look only to former Vernon (population 114) city administrator Bruce Malkenhorst for an answer.

Malkenhorst received a $552,000 pension in 2013, according to just-released 2013 CalPERS pension data on TransparentCalifornia.com.

[…]

Malkenhorst is part of a growing number of 99 California retirees who received at least half-million-dollar pension payouts in 2013, up from four in 2012. Such lucrative pensions mean that in 2014, California will spend approximately $45 billion on pensions, equaling total state and local welfare spending for the first time. And in the zero-sum game of government spending, an extra dollar spent on pensions means one less spent on welfare, infrastructure or safety – or returned to the taxpayer.

Though Malkenhorst and his ilk personify California’s pension profligacy, they do not drive it. That distinction goes to the 40,000 California retirees who took home pensions greater than $100,000 in 2013.

CalPERS has now responded to the California Policy Center with the following statement, titled “CPC Needs a Lesson in Fact Checking”:

The California Policy Center (CPC) used stale data from 2013 in its Sacramento Bee commentary “Big pensions drive proposed tax increases on CA ballots” and never bothered to check with CalPERS (or even media coverage) to learn that the pension data was no longer accurate. Bruce Malkenhorst, former City Manager of Vernon, no longer receives his half-million dollar pension. Earlier this year CalPERS slashed his benefit to approximately $10,000 a month in April from its peak of more than $45,000 a month, concluding he derived the benefit improperly from the salary set by his employer the City of Vernon. CalPERS is also seeking to recover overpaid assets from Malkenhorst.

While members earning more than $100,000 per year in pensions receive high publicity, the fact is they only represent 2.6 percent of CalPERS retiree payments. It would be helpful if the CPC and others would more carefully check the facts and report on the full picture instead of just painting all public employees with the brush of the likes of Malkenhorst.

Read the statement here and the original article from the California Policy Center here.

Fitch Slaps Jacksonville With Credit Downgrade Over Pension Obligations

Fitch warned Jacksonville earlier this year that a credit downgrade was waiting in the wings if the city didn’t move to control its rising pension costs.

Fitch has now followed through on the threat, downgrading several city bonds from AA+ to AA, and others from AA to AA-.

In doing so, Fitch becomes the second agency to downgrade Jacksonville’s credit in the last four months. Moody’s did so in June.

From the Jacksonville Daily Record:

Fitch Ratings has downgraded several of Jacksonville’s bonds, citing pension risk and lack of reform as key drivers to its negative changes.

In all, about $1 billion in bonds and commercial paper notes were downgraded. Three bonds went from AA+ to AA, while one bond and the city’s commercial paper went from AA to AA-.

Regarding the city’s unlimited tax general obligation, its pension and liability profile is more consistent with an AA rating as opposed to an AA+ rating, the agency explains in its notes. Ratings affect the city’s interest rates on borrowing.

“The rating action focuses on credit risk associated with the city’s pension plans, which have a large collective unfunded actuarial accrued liability and rapidly escalating funding costs,” it states.

The city’s police and fire pension plan’s unfunded liability is more than $1.6 billion. The annual cost of paying into the plan is a projected $154 million for fiscal year 2014-15, up $6 million from the year before.

Chief among Fitch’s concerns is the city’s stalled pension reform efforts. One Fitch analyst said reform has been “very slow to evolve”. From the Florida Times-Union:

Fitch Ratings voiced concerns Monday about whether Jacksonville can actually achieve pension reform that will strengthen the city’s financial outlook.

[…]

After noting that some City Council members have filed amendments seeking to change a pension bill introduced by Mayor Alvin Brown, Fitch’s report questions “when or if” the City Council will vote on that bill.

Fitch also points out that Brown’s bill doesn’t identify a “definitive long-term funding source” to pay for a $400 million piece of Brown’s proposal — a criticism also lodged by several City Council members and the Jacksonville Civic Council, a high-profile business group.

[…]

Fitch put Jacksonville on notice earlier this year it would downgrade the city’s ratings if pension reform isn’t achieved. Brown filed his pension bill in June but it went on the back-burner during the summer budget hearings. The City Council conducted its first session last Wednesday to discuss the bill.

The Mayor’s Office has said the question-filled meeting was productive. But Fitch’s analysts were “concerned that it was not the progress they were after,” said city Chief Financial Officer Ronnie Belton, who talked to the analysts last week.

“I think the message from them is, ‘We’re looking for you to deal with the No. 1 issue you’ve got,’ ” Belton said.

Read the Fitch report here.

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