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Judge Orders Arizona Fund to Release Federal Subpoena to Public

There are so many scandals surrounding Arizona’s Public Safety Personnel Retirement System—illegal raises, large severance packages for fired personnel, allegations of sexual harassment—that it’s easy to forget that one has outlasted them all.

The longest running scandal dates back to last year, when the three high-level investment personnel mysteriously quit the fund—presumably in protest of something.

It didn’t take long to find out why. Allegations soon surfaced that other investment staff at the fund had inflated the value of real estate assets in order to trigger large bonuses for themselves. A federal criminal investigation is still ongoing.

But back in March, watchdog group Judicial Watch asked the fund to release the federal grand-jury subpoena related to those allegations to the public. The fund refused, and so the matter went to court.

A judge ruled Wednesday that the subpoena is a matter of public record, and PSPRS has to release it. From the Arizona Republic:

Judicial Watch filed a public records request for the documents after The Arizona Republic in early March reported that PSPRS had received a federal grand jury subpoena as part of a criminal investigation into whether pension-trust managers inflated certain real-estate investment values. PSPRS has denied the allegations.

The trust refused to release the records, prompting Judicial Watch to sue. The trust claimed it was not in its best interest to release the records and that disclosure might interfere with a federal grand jury investigation.

However, the judge said “PSPRS does not show any specific, material harm that would result from disclosure of this federal grand jury subpoena.” He also ruled that “although the public records law does not mandate disclosure of every document held by a state agency, a document with a ‘substantial nexus to government activities’ is a public record. … Clearly there is such a substantial nexus here.’ “

The judge gave no timeline for the release. But PSPRS Chairman Brian Tobin said he will release it to the public sometime Monday, after a meeting with the system’s board of directors.

Illinois Governor, Challenger Spar over Pension Links to Cayman Islands

It’s become a tradition for politicians of either party: on the campaign trail, at some point, you need to accuse your challenger of dodging taxes. The race for Illinois governor is no exception, but there’s an interesting spin on this one.

Current Illinois Gov. Pat Quinn earlier this week accused wealthy challenger Bruce Rauner of dodging U.S. taxes by placing his money in offshore accounts in the Cayman Islands.

A Chicago Tribune investigation had previously revealed that Rauner paid a tax rate of around 15 percent on much of his fortune, even though his wealth made him eligible for tax brackets above 30 percent.

But Rauner fought back, first claiming that his offshore investments did not impact the tax rate he paid. Then, he claimed Quinn himself had money in the Caymans. His pension, to be exact.

Rauner claims that Illinois pension funds have hundreds of millions of dollars in Cayman-based investments.

From the Chicago Sun-Times:

Rauner’s campaign said the Teachers Retirement System has invested $433.5 million in Cayman Islands-based funds while the State Board of Investment has $2.3 billion in offshore holdings, which includes some Caymans-related funds though the agency could not specify how much.

Both are tax-exempt entities and, unlike individual investors, derive no direct tax benefit from investing in funds based there, spokesmen for both agencies said. TRS invests on behalf of current and retired suburban and downstate teachers. The State Board of Investment oversees pension investments for current and retired state workers, university employees, judges, lawmakers and state officials, including the governor.

“If Pat Quinn refuses to apologize and tell the truth, he should immediately move to divest all state investments from companies and funds domiciled overseas, including in the Cayman Islands,” Rauner’s campaign said.

As was bolded, pensions systems are tax-exempt and so there’s no tax benefit from putting money offshore.

Quinn’s camp, when pushed for a statement, declined to say whether Quinn would like the pension systems to stop investment in Cayman-related funds. But the Governors spokeswoman told the Sun-Times:

“The governor has no authority to direct pension fund investments, and he’s not about to start getting involved. That’s really not the issue.”

Argentina Default Devastates Pensions of Brazilian Mailmen

Argentina’s failure to pay interest on its debt—resulting in the country’s second default in 13 years—was always going to have an economic ripple effect.

But Brazilian mailmen probably didn’t realize they’d be near the top the list of negatively affected parties. In light of Argentina’s default, they’ve seen their pensions zapped.

That’s because Postalis, the pension manager to which about 130,000 active and retired Brazilian postal workers belong, is feeling the pain of the default.

Postalis was invested in the fund Brasil Sovereign II Fundo de Investimento de Divida Externa, a Brazil-based investment fund of Bank of New York Mellon, that this week wrote down its assets by 51 percent, according to Bloomberg:

Bank of New York Mellon Corp. said one of its Brazil-based investment funds wrote down more than half the value of its assets after recording losses on investments linked to Argentine government debt.

The Brasil Sovereign II Fundo de Investimento de Divida Externa FIDEX took a loss of 197.9 million reais ($87.2 million) on Aug. 1 after booking a provision on credit-linked notes tied to Argentine bonds, according to a regulatory filing yesterday by BNY Mellon DTVM, the bank’s Brazilian fund manager. The fund has just one investor and the identity is not public information, according to securities regulators.

Argentina last week failed to make a $539 million interest payment on its bonds, prompting Standard & Poor’s and Fitch Ratings to declare the country in default for the second time since 2001. The country has about $29 billion of overseas foreign-currency notes outstanding, and the International Swaps & Derivatives Association ruled last week that the failure to pay interest will trigger $1 billion of credit-default swaps.

“Due to the suspension of payment on foreign debt notes issued by Argentina backing the referred notes, and to the necessity to change its evaluation methodology of some credit-linked notes, provisions for losses have been made in its portfolio,” BNY Mellon DTVM said.

The fund that held the notes had 384.4 million reais worth of assets as of July 31, according to data available at the website of the Brazilian securities regulator. The value dropped about 52 percent to 185.5 million reais as of Aug. 1.

You’ll notice in the excerpt above that the fund has only one investor, the identity of which isn’t public information. But it’s widely believed that investor is Postalis. From Businessweek:

While the statement didn’t identify the entity that is the fund’s sole investor, all signs point to Postalis, the pension manager serving about 130,000 current and former postal workers in Brazil.

Postalis, which had 8 billion reais ($3.5 billion) in assets according to the latest data available, said in statements as early as 2011 and as recently as May that it had invested in the fund. Postalis’s press office declined to comment.

Postalis is Brazil’s 14th-biggest pension group by investments under management, according to June 2013 data available from the Brazilian pension association Abrapp.

Brazil’s pension regulator was asked by multiple media outlets to comment on the situation, but has so far declined all requests.

Photo: “Argentina Logo” by Guillermo Brea. Licensed under Creative Commons

Memphis’ Pension Fund Is Considering Going All-In On High-Risk Strategies

For the last two years, the City of Memphis Pension Fund has been considering an overhaul in investment strategy. The strategy: re-allocating hundreds of millions of dollars from U.S. stocks and bonds into higher-risk investments. That entails increased allocations toward private equity, hedge funds, foreign stocks and bonds and real estate investments.

On August 28, the board that makes investment decisions for the fund will vote on the change in policy.

The board had already voted at its last meeting to allow the fund to double its real estate investments, from 5 percent of its portfolio to 10 percent.

CalPERS Rescinds $700 Million Investment With Private Equity Fund Headed By Doctor With No Private Equity Experience

You probably trust your doctor with your life. But with your money? Many people might balk at the notion of their doctor making their investment decisions for them.

But back in 2007, CalPERS made a big bet: a $705 million investment in a private equity fund, Health Evolution Partners Inc., specializing in health care companies.

The CEO of the fund, David Brailer, is a nationally renowned physician who had previously been the “health czar” under George W. Bush. But this was his first foray into the investment space, and he had no experience running an investment fund or making private equity investments.

Still, he reportedly promised the CalPERS board healthy returns in excess of 20 percent.

But through seven years, the fund has never managed to exceed single-digit returns. And portions of CalPERS’ investment have actually experienced negative returns.

That has led CalPERS to cut ties with the fund, according to Pensions & Investments:

CalPERS is ending its unique experiment as the sole limited partner of Health Evolution Partners Inc., a private equity firm that focuses on health-care companies.

…

CalPERS data show the HEP Growth Fund had an internal rate of return of 6.5% from its inception in mid-2009 through Dec. 31, 2013. By contrast, the $5.3 billion growth fund portion of CalPERS’ private equity portfolio returned 12.72% for the five years ended Dec. 31, the closest comparison that could be made with the data the pension fund made available.

The HEP fund of funds has had more serious performance problems. Its IRR from inception in 2007 through Dec. 31, 2013 was -5.2%, show CalPERS statistics. CalPERS also wants out of that investment, but sources say a complicated fund-of-fund structure may make that difficult.

Mr. Desrochers would not comment on HEP, telling a Pensions & Investments reporter the matter was too sensitive to discuss.

CalPERS spokesman Joe DeAnda, in an e-mail, said, “We continue to evaluate all options relating to Health Evolution Partners.”

Mr. Brailer did not return several phone calls.

CalPERS paid the fund over $18 million in fees in the fiscal year 2011-12, according to the System’s financial report.

Meanwhile, CalPERS is gearing up for another large investment partnership, to the tune of $500 million, that will focus on infrastructure investments. FTSE Global Markets reports:

The California Public Employees’ Retirement System (CalPERS) today announced a new $500m global infrastructure partnership with UBS Global Asset Management.

CalPERS, the largest public pension fund in the US, will contribute $485m to the newly formed company, while UBS will contribute $15m and act as managing member.

The partnership will operate as Golden State Matterhorn, LLC and is set to pursue infrastructure investment opportunities in the US and global developed markets.

“UBS brings extensive experience and a proven track record in global infrastructure investing that makes them a great fit for this partnership,” says Ted Eliopoulos, CalPERS Interim Chief Investment Officer. “We’re excited to work with them as we identify and acquire core assets that will provide the best risk-adjusted returns for our portfolio.”

The CalPERS Infrastructure Program seeks to provide stable, risk-adjusted returns to the total fund by investing in public and private infrastructure, primarily within the transportation, power, energy, and water sectors.

Infrastructure investments returned 22.8% during the 2013-14 fiscal year and 23.3% over the past five years, outperforming the benchmark by 17.23 and 16.6 percentage points, respectively.

CalPERS holds about $1.8 billion in infrastructure assets.

Photo by hobvias sudoneighm via Flickr CC License

Arizona Fund’s Strong Performance May Lead To Bigger Retiree Benefits—But Not This Year

Tens of thousands of Arizona retirees were hoping to begin receiving larger benefit checks in the coming months. That may happen eventually for the 120,000 retired members of the Arizona State Retirement System (ASRS), but it won’t happen this year.

That’s because benefit increases, such as COLA increases, are tied to the fund’s long-term performance. And despite posting the second-best annual investment return in the last decade—18.6 percent net of fees—the ASRS still has work to do to meet the benchmarks that permit it to increase benefits.

From the Arizona Republic:

For a permanent benefit increase to kick in at ASRS, the trust must produce a rate of return in excess of 8 percent — the assumed rate of investment growth — for 10 years and generate a pool of excess earnings.

Simple averaging shows that benchmark has been met, but there is another caveat: The formula to pay cost-of-living adjustments uses a “geometric and actuarially smoothed average,” which takes into account compounding.

That formula, dragged down by heavy investment losses during the 2007-09 recession, puts the 10-year rate of return at 7.6 percent, [ASRS Chief Executive Paul] Matson said, which is below the trigger.

“We are certainly getting closer to it,” Matson said.

The funded status — a measure of the amount needed to pay current and future pension liabilities at ASRS — is projected to be 76.6 percent. Less money is needed from employees and employers the closer the figure is to 100 percent. A funded ratio of 80 percent is considered “healthy” in public retirement systems.

Arizona’s other major pension fund, the Arizona Public Safety Personnel Retirement System, posted an annual return of about 15 percent gross of fees.

The performance of the ASRS may not warrant benefit increases, but the fund’s investment staff may still be in line for bonuses. From the Arizona Republic:

Matson said it is unclear if his investment staff will receive bonuses, even with the exceptional financial returns. He said there are other benchmarks that must be met, and a determination won’t be made for eight to 10 weeks.

Matson said bonuses are needed to retain quality staff to oversee the portfolio and garner solid rates of return.

“Without good staff, there are detriments to performing well,” he said.

Pension360 has previously covered the controversial bonuses given to the investment staff of the other major fund in Arizona, the APSPR.

Photo by: “Arizona-StateSeal” by U.S. Government. Licensed under Public domain via Wikimedia Commons

Divesting From Gun Manufacturers Is Still On The Minds of Some Large Pension Funds

The politics of guns isn’t a topic too often broached at shareholder meetings.

But that’s exactly the topic that was the center of attention at Alliant Techsystems’ annual shareholder meeting on July 30, which included a shareholder resolution asking the Virginia-based defense and sporting goods company to comply with some of the Sandy Hook Principles—an initiative requesting that firearms manufacturers comply by certain guidelines, for example, developing better safety technology.

The message of the Sandy Hook Principles: comply or be sold.

And who filed that shareholder resolution? The Connecticut Retirement Plans and Trust Funds as well as the New York State Common Retirement Fund.

According to a press release, the resolution asked for the following from Alliant Techsystems:

* Promoting restrictions on firearms and ammunition sales, transfers and possession to keep guns out of the hands of children, persons with mental illness or mental health challenges, criminals, domestic or international terrorists and anyone else prohibited from possessing them under federal law;

* Supporting the establishment of a federal universal background check system for every sale or transfer of guns or ammunition conducted by the company;

* Reevaluating policies regarding the sale, production, design or conversion of military style assault weapons for use by civilians, including the distribution of any materials/information that may be used to assist in such conversions;

* Taking steps to promote the conducting of background checks for every sale or transfer of guns or ammunition by business clients, including gun show operators or gun dealers.

* Supporting a federal gun trafficking statute to ensure stronger punishment for individuals engaging in the trade of selling firearms to anyone prohibited from possessing them under federal law; and

* Promoting gun safety education at the point of sale and in the communities in which the company conducts business operations.

It’s only the latest in a string of “social Investment” decisions that imply institutional investors are considering divesting from gun manufacturers.

In February, a professor convinced his institution, Occidental College, to pass a resolution banning firearm investments by the school. It was the first college in the United States to do so.

A Pennsylvania volunteer group called Delco United is attempting to convince various municipalities to divest from guns, and in at least one case it worked: after a visit from Delco, the Pennsylvania State Association of Boroughs subsequently sold its holdings in Sturm, Ruger & Co.

Last year, CalPERS voted to sell about $5 million worth of securities related to gun manufacturers. CalSTRS, and others, followed suit. From Governing:

The $154-billion California State Teachers’ Retirement System, the country’s second largest government retirement plan, took a similar action.

CalSTRS and CalPERS took up the divestment issue at the request of state Treasurer Bill Lockyer, a member of both boards. Lockyer called the vote “largely symbolic” but stressed that it’s an important way to spur incremental change.

“We’re limited by the constraints of our responsibility and the rules that CalPERS has,” said Lockyer. “There’s only one way that we speak and that’s with money.

Funds in Chicago, New York state, New York City, Connecticut, Rhode Island and Massachusetts have publicly said they are exploring such divestments.

The Philadelphia Board of Pensions threatened to divest its $15.3 million share in various gun manufacturers if they didn’t sign on to the Sandy Hook Principles.

Chicago mayor Rahm Emanuel ordered the city’s funds to divest from firearms manufacturers, but only one fund complied.

But when it comes to social investing, is the probability of making a change worth the chance of “fiscal peril” posed by potentially higher administrative costs and lower returns associated with divesting? One prominent retirement researcher thinks not. From Governing:

Alicia Munnell, director of the Center for Retirement Research at Boston College, is an outspoken critic of social investing. After years of social investment decisions in regard to South Africa, the Sudan and other countries and causes, Munnell sees fiscal peril in forcing portfolio managers to add non-monetary considerations to investment decisions. “Introducing another dimension creates a risk that portfolio managers will take their eyes off the prize of maximum returns and undermine investment performance.”

As she sees it, the people making the social investment decisions are not the people who will bear the burden if anything goes wrong. “If divestiture produces losses either through higher administrative costs or lower returns,” she says, “tomorrow’s taxpayers will have to ante up or future retirees will receive lower benefits.”

Private pension plans, which are governed by the Employee Retirement Income Security Act, are prohibited from social investing. Munnell believes public plans should follow suit. Not that there isn’t room for other groups to do social investing. “If rich people want to adjust their own portfolios, that is perfectly reasonable,” she says. “But for public plans to do it is not.”

Social investment advocates argue they have a moral responsibility to society. As Chicago Alderman Will Burns put it earlier this year, “The damage caused by these weapons is far greater than any return on investment.”

It’s a strong argument, and one that Munnell says makes her position “not a pleasant one.” When the genocides in Darfur were occurring and pension plans were talking of disinvesting, Munnell disagreed vocally with that policy. “I sounded pro-genocide. Now I sound anti-gun control. I’m neither. I just don’t think social investing is effective. It can harm the performance of public plans.”

Connecticut Treasurer Denise Nappier has a different view.

“These companies will enhance their long-term shareholder value if they are seen as a reasonable public voice in the debate over the proper response to the Newtown tragedy”, said the Treasurer in a statement to Institutional Investor. “At the same time, they will suffer if the public perceives them as unwilling to consider reasonable voluntary measures, such as the Sandy Hook principles.”

Photo by Mitch Barrie via Flickr CC License

Philadelphia Funds Return 15 Percent As New Investment Strategies Play Out

The Philadelphia Board of Pensions, the entity that handles investments for the city’s pension funds, released its annual return data this week. The fund returned just over 15 percent for the fiscal year. From the Philadelphia Enquirer:

The total fund ended the fiscal year up 15.6 percent, outperforming its benchmarks by 1.96 percent. A more narrow portfolio, managed internally, did well, too, showing an 11.97 percent return, about 3.5 percent higher than similar benchmark funds.

The city’s pension system is severely unfunded, with only about half the money it needs to pay its $5 billion in obligations to current and future retirees.

The fund altered its investment strategy in recent years, in large part to the hiring of Chief Investment Officer Sumit Handa. From the Inquirer:

The board’s investment strategy has been revamped with the arrival three years ago of Handa and executive director Francis X. Bielli.

Investments were tweaked, Handa said, particularly the pension board’s fixed-income portfolio.

While investment firms handle the bulk of funds, the pension board staff manages a portfolio of about $260 million, or 5.3 percent of the pension fund. Known as the Independence Fund, it is designed as a “tactical” fund, Handa said, to be used to rapidly respond to opportunities the staff might see.

It strives for high returns at low risk. Since it was established in early 2012, it has been an overachiever by those standards. Outperforming its benchmark, it has shown only a third of the risk associated with investing in the S&P 500, while achieving 60 percent of the rate of return.

This marks the third consecutive year the fund has outperformed its benchmark. Previous to that, the fund has underperformed its benchmarks over the past five and ten-year periods.

The S&P 500 returned 21 percent over the period (July 1- June 30) that the Board of Pensions reported their annual return.

Maryland’s Top Fund Returns 14 Percent for Year

The Maryland State Retirement and Pension System is the latest fund to release its investment performance data for fiscal year 2013-14, and the fund returned over 14 percent for the year, the System’s second consecutive year of double-digit investment returns. From the Baltimore Post-Examiner:

Maryland’s pension system for state employees and teachers had another strong investment performance for the fiscal year which ended June 30 earning 14.37%, bringing the value of the portfolio to $45.4 billion, a gain of more than $5 billion.

It was the second year in a row of strong performance due to sharp upturns in stocks, according to Chief Investment Officer Melissa Moye. The fund exceeded its target of 7.7% and its market benchmark of 14.16% — what its basket of assets would have been expected to earn.

The System is still in a hole due to its unfunded liabilities, which sit at about $20 billion. But the major credit rating agencies, even while weary of the liabilities, have commented on the improved health of the system of late as the effects of several reform measures have been positively felt. From the BPE:

These liabilities are consistently mentioned as a negative financial factor by all three bond rating agencies as they did earlier this month.

But the three New York agencies also note the improvements made in Maryland’s pension outlook after employee contributions were raised and benefits reduced by the legislature in 2011.

“The funds annual returns continue to reflect the strong market environment that has prevailed since the end of the credit crisis,” State Treasurer Nancy Kopp, chair of the pension board, said in a statement.

Typically, the System released investment performance figures by asset category. This year, the system only released aggregate returns and did not specify returns by asset category, although those figures may be released to the public eventually.

The S&P 500 returned around 21 percent for fiscal year 2014.

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