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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.

Some NY State Police Officers Use Private Jobs to Boost Public Pensions

Publicly employed police officers are often contracted to work private events—from keeping the peace at retail stores around Christmas-time, to keeping an eye on the crowds at music festivals.

But an investigation by a New York newspaper found that several police departments in the state are letting the overtime racked up at private events count towards an officer’s public pension—a practice which the state Comptroller’s Office says is not allowed.

From the Times-Union:

The state Comptroller’s Office says overtime reimbursed by a private company does not count toward an officer’s pension benefit.

But the Times Union found that several Capital Region police departments — including those in Colonie, Schenectady and Troy — report private duty overtime to the retirement system.

“I think a lot of people might be surprised to the extent with which this happens around the state,” said E.J. McMahon, president of Empire Center for Public Policy, an Albany think tank. “You can actually bolster your pension with time spent working in uniform on private time.”

Taxpayers should care about the practice, McMahon said, because pensions are lifelong payments backed by taxpayer dollars.

The legality of using private duty details as part of the pension calculation is murky. Several retirees are appealing the comptroller’s position in state Supreme Court.

The retirement of a Guilderland police officer who worked overtime at Crossgates Mall brought the issue to the attention of many Capital Region police chiefs. As a result, Guilderland stopped reporting private work to the retirement system and, last month, Bethlehem prohibited officers from working the jobs.

Albany and Saratoga Springs also comply with the comptroller’s view that private overtime is not pension eligible.

But several high-ranking police officials have publicly raised concerns about whether its fair to disallow private jobs when calculating pension benefits. From the Times-Union:

“Anytime a man or woman is in police uniform, they are on police duty, period,” Colonie Police Chief Steven Heider said.

Heider considers the officers on-duty, accountable to the police department and exposed to the dangers of police work.

Last year, Colonie police collected about $120,000 in reimbursements from private entities for police details, which Heider said are assigned by rotation. About 40 percent came from patrols at Colonie Center mall.

The town reported the wages to the retirement system as pension eligible.

Colonie requested guidance from the comptroller about whether to report the wages as pension eligible, but never heard back, Heider said. If the comptroller advises Colonie to stop, the town will, he said.

Of the seven police departments in upstate New York’s Capital Region, three departments allow private duty overtime to count toward public pensions. Officers in those departments have racked up nearly $200,000 in private duty overtime last year, according to the Times-Union investigation.

Photo by Giacomo Barbaro via Flickr CC License

Pension Obligation Bonds Help Some Governments But Hurt Many More, Says New Report

New Jersey, Illinois, and California.

Those are the states that, more than any others, have frequently scrambled to pay down their pension obligations by issuing a financial tool called Pension Obligation Bonds (POBs). Over the last three decades, those three states have issued a total of $25 billion worth of POBs in an attempt to ease the heavy burden of their pension systems’ on state finances.

But what are POBs, and do they work as advertised? A new report from the Center for Retirement Research sheds light on that question and suggests that POBs may not be beneficial, after all. But first, what exactly is a POB? From Governing:

The tool, called Pension Obligation Bonds (commonly referred to as POBs), allows governments to issue taxable bonds for the purposes of putting money toward or fully paying off the unfunded portion of a pension liability. The proceeds from the bond issue go in the pension fund. The theory is that the rate of return on the investment will be greater than the interest rate the government pays to bond investors so that the transaction is favorable to the government; it makes money off the deal.

The concept is simple enough. And, in theory, it’s pretty clever. But in practice? Well, let’s just say timing is key. And many state and local governments have failed to get the timing right. It has cost them dearly, as Liz Farmer summarizes:

The report noted that the governments more likely to issue POBs are ones that have pension plans that represent “substantial obligations.” The governments have large outstanding debt and are short of cash. However, rather than necessarily relieving such governments of financial pressures, the bonds actually create a more rigid financial environment. Issuing bond debt to pay off a long-term obligation like a pension liability turns a somewhat flexible pension obligation into a hard and fast annual debt payment. Thus, “governments that have issued a POB have reduced their financial flexibility,” the study says.

POBs’ net returns (what the investment has earns after making bond payments) has varied, depending on when the bonds were issued. According to the center’s research, the net rate of return has averaged in the low, single digits for most years (the 30-year average is 1.5 percent). Governments that issued Pension Obligation Bonds in 1998, 1999, 2000 and 2007 actually lost money on their investment. Detroit, for example, issued debt at the peak of the market in the mid-2000s to fund its pension plan and did so using a complicated interest rate swap deal. The result was that the deal went the wrong way for the city. Detroit was still on the hook to pay bondholders and though its pension was well funded, it had even less day-to-day cash to meet its financial obligations. That debt played a key role in Detroit’s decision to file for bankruptcy last July.

Illinois, New Jersey, Detroit—that’s not the kind of company you want to keep if you are a local government trying to curb the burden of pension obligations. Though, the reputation of POBs may not be completely deserved. After all, just because struggling governments use them unwisely doesn’t mean POBs aren’t an effective tool when used the right way.

Although examples are hard to come by, POBs can be used effectively. In 2002 and 2003, Winnebago County and Sheboygan County in Wisconsin issued POBs to the tune of $7 million. They paid a 3 percent interest on that debt, but earned 20 percent returns on investments made with the borrowed money. Unfortunately, it doesn’t always work that way.

You can read the CRR’s full report on POBs here.

Photo by Miran Rijavec Stan Dalone via Flickr CC License

Here’s How A Handful of Pension Funds Will Benefit From Citigroup’s $7 Billion Settlement

Last week, Citigroup agreed to settle the claim that it had misled investors about the quality of mortgage-backed bonds it sold prior to the 2008 Financial Crisis. The settlement required that Citi admit they misrepresented the quality of those bonds, and that admission carried a $7 billion price tag for the firm. Most of that money will be allocated toward fines it must pay to the Justice Department and to consumer relief.

But there were other victims as well, which means there are other winners in this settlement: the pension funds who bought those precarious bonds.

Illinois is one state that will benefit. From the Chicago Tribune:

Illinois will receive $84 million as part of a national $7 billion settlement resolving allegations by federal and state authorities that Citigroup Inc. sold risky mortgage-backed securities that harmed investors, which included pension systems and communities.

More than half the money headed to Illinois will fully compensate the state’s pension funds for losses suffered from 2006 to 2007, when they were misled by Citi, according to the Illinois attorney general’s office.

Citigroup will pay $33.04 million to the Illinois Teachers’ Retirement System, $3.12 million to the State Universities Retirement System and $7.83 million to the Illinois State Board of Investment, which oversees the State Employees’ Retirement System, General Assembly Retirement System and Judges’ Retirement System.

An additional $40 million will be dedicated to consumer relief, and an independent monitor will be appointed to help distribute the money.

“This relief will fully restore the losses Illinois’ pension systems incurred as a result of Citigroup’s fraudulent schemes in the mortgage-backed securities market, and it will provide much-needed aid to Illinois homeowners who are still paying for Wall Street’s reckless actions,” Illinois Attorney General Lisa Madigan said in a statement.

Illinois can’t yet break out the party hats: the state’s pension shortfall still stands at around $100 billion.

California is the other major beneficiary. As reported by the Sacramento Business Journal:

California will get nearly $200 million as part of Citigroup Inc.’s $7 billion nationwide settlement with the U.S. Department of Justice in resolving civil claims related to the financial company’s conduct in selling residential mortgage packages during the run-up to the financial crisis.

California’s two large public pension funds, California Public Employees’ Retirement System and California State Teachers’ Retirement System, will recover $102.7 million in damages for losses on mortgage-backed securities. California consumers also are guaranteed at least $90 million in relief.

“Citigroup misled consumers and profited by providing California’s pension funds with incomplete information about mortgage investments,” California Attorney General Kamala Harris said in a news release. “This settlement holds Citi accountable and compensates the state’s pension funds that protect the retirement savings of hardworking Californians.”

New York is receiving $92 million as well, but it’s not known whether the state’s pension funds will see any of that money.

Detroit Gives Raises to City Officials As Vote Nears to Cut Worker Pensions

Detroit’s high-profile bankruptcy has filled the front pages of newspapers across the country, and it seems the new twists just keep coming in this drama. In one corner, public employees and retirees are getting ready to vote on a measure that would cut their paychecks and pensions in unprecedented ways.

In the other corner, Detroit’s Emergency Manager Kevyn Orr is drawing flak for awarding raises to many city officials, including the mayor, city council members, and some non-union city workers:

Effective July 1, they all get 5 percent raises. Before the raise, Mayor Mike Duggan earned $158,000 a year, and Detroit’s nine at-large council members made $73,181 each, along with a pension, cell phone, city car and city-paid gasoline.

By comparison, the median household income in Detroit was $25,193 in 2011, according to the U.S. Census Bureau. Orr’s own salary of $275,000 a year to guide Detroit through the largest municipal bankruptcy case in history will not change.

“We’re still in the middle of bankruptcy, we still don’t know what the cost is going to be, and it seems like the attorney fees, right now, have gone up to $75 million,” [Wayne County Executive Robert] Ficano said live on WWJ 950 Wednesday morning.

Orr’s office says the costs for the increases are covered in the city’s restructuring plan, which is pending in federal bankruptcy court. Later this month, some of those same workers will see larger paycheck deductions earmarked for increased pension contributions. Deductions of 4 percent to 8 percent will begin July 14 to help fund pensions.

Back to the vote: the stakes are high for both the city and its workers. If workers and retirees vote “yes” on the measure, they’ll be giving up big chunks of their paychecks and benefits. If they vote “no”, they’ll likely have to settle for a far worse deal:

Hundreds of millions of dollars in pledged foundation and state money to spare deeper cuts from pensions and to save the city’s art collection depends on approval of the city’s plan by workers and retirees. If they vote against it, the pledged donations vanish. This may be the proponents’ most convincing argument: Vote for the city’s deal, or cuts — as much as 4.5 percent from some retirees’ pensions as well as smaller than expected cost-of-living increases — will get far worse.

If they go along with the deal, retirees and workers would also agree to give up lawsuits challenging cuts to their pensions. Though a federal judge here has made it clear that he believes pensions may be cut in bankruptcy, the Michigan Constitution includes protections, and opponents of the city’s plan say they cannot believe their colleagues would even consider ceding legal challenges.

Meanwhile, another struggling Michigan city, Flint, is considering following in Detroit’s footsteps by declaring bankruptcy. Flint is attempting to cut its retirees’ benefits to improve its financial position. But the legality of that move is dubious and will be decided by a judge soon.

Flint once had 200,000 residents has seen a dramatic drop in population over the past several decades. The birthplace of General Motors (NYSE: GM) has lost many factory jobs and abandonment of properties.

Last year, Detroit became the largest municipality in the U.S to enter Chapter 9 bankruptcy. Flint is about an hour away and if the judge rules against the city’s effort to cut its retiree health care benefits, the city is expected to file for bankruptcy. Flint will join dozens of cities and counties that have sought help from courts to modify their retiree benefit system.

“If we don’t get any relief in the courts … we are headed over the same cliff as Detroit,” said Darnell Earley, the emergency manager of Flint’s finances. “We can’t even sustain the budget we have if we have to put more money into health care for city workers.”

Photo Credit: University of Michigan via Flickr Creative Commons License

After Detroit: How Will Illinois and Its Communities Respond?

Detroit’s fiscal struggles, particularly its bone-dry pension system, have been well documented over recent years. But the city’s problems aren’t unique–and Chicago is one city that is currently dealing with many of the same pension-related fiscal pressures as Detroit. To discuss these problems, the Civic Federation and the Federal Reserve Bank of Chicago held a forum on April 23, 2014, that brought together over 140 participants. Now, the Federal Reserve Bank of Chicago is giving us an inside look at that conference, and has released a detailed article about what was discussed.

To read the article, click here.

Photo by Bitsorf via Flickr CC License

Retirements in Illinois surge as workers try to shield pensions from reform law

In a normal month in Illinois, the state expects about 200 public workers to retire.

Apparently, last April wasn’t a normal month. That’s because an estimated 1,100 state workers retired in April 2014 in an attempt to lock in their pensions, which could otherwise be affected by the state’s pension overhaul, signed into law in December.

It’s unknown whether early retirements will actually protect pensions from the reform measures. And while the staggering number of retirements caught state legislatures off guard, representatives from labor groups are less surprised.

From the Saint Louis Post-Dispatch:

Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees Council 31, said the increase in retirements is not a surprise.

“It’s indicative of the harm done to employees and retirees and the complications posed by the implementation of Senate Bill 1,” Lindall said.

It’s not just state workers who are leaving the work force because of the changes.

Thousands of university employees also are retiring sooner than they expected because of mistake in Senate Bill 1 that calculates a university employee’s benefits as of last year instead of this year.

Lawmakers have pledged to fix the mistake, but that hasn’t stopped the departures.

Illinois’ pension overhaul, which raises retirement ages and decreases COLAs, among other things, was set to go into effect on June 1, 2014. But various legal challenges may push that date back.

Until then, the state’s public workers are left to roll the dice on whether they should retire early for a chance at an un-modified pension.

Photo Credit: TaxCredits.net via Creative Commons License

Alaska mulls using savings to cover pension-funding shortfall

Alaska is a state far removed geographically from the rest of the country it belongs to. But financially, it may as well be a part of the lower 48—because, unfortunately for Alaska, the United States’ public pension problems know no borders.

The state’s lawmakers have been trying to address the state’s pension funding shortfall—the fund was only 59.2% funded as of 2011, 9^th worst in the country—with concrete proposals for months.

Alaska governor Sean Parnell proposed in December that the state move $3 billion from its rainy day fund into its retirement system in an effort to start paying down its $12 billion pension obligation.

The plan went to the state House of Representatives, where it passed with near unanimity, and now the bill has passed the Senate as well—albeit with some changes. In essence, the plan is to use the state’s savings account to infuse its retirement system with $3 billion in additional contributions over the next 25 years.

The Republic has more details:

The Senate Finance Committee’s rewrite of HB385 calls for a contribution rate determined by what’s known as a level percent of pay method for 25 years. While the bill itself does not include dollar amounts, information provided by the Legislative Finance Division and Buck Consultants indicates combined annual payments for the two systems starting at about $345 million in 2016 and slowly building to about $514 million in 2038. It calls for a final payment of about $490 million the following year.

The information shows the Senate Finance approach extending payments by three years beyond Parnell’s plan, which called for annual payments of $500 million between the systems after the infusion, and costing slightly more — about $13 billion total for Parnell’s plan compared with about $13.3 billion under the committee approach.

These are projections, not predictions, Buck and Legislative Finance Division Director David Teal have pointed out.

Though the bill now differs slightly from Gov. Parnell’s original plan, he was happy with the result.

“With this legislation, we are strengthening the state’s AAA bond rating and ensuring future generations are not saddled with this debt,” he said in a press release.

Photo Credit: SalFalko via Flickr Creative Commons License

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