Actuarial Outpost
 
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Pension - Social Security
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Search Actuarial Jobs by State @ DWSimpson.com:
AL AK AR AZ CA CO CT DE FL GA HI ID IL IN IA KS KY LA
ME MD MA MI MN MS MO MT NE NH NJ NM NY NV NC ND
OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY

Reply
 
Thread Tools Search this Thread Display Modes
  #251  
Old 02-07-2019, 07:12 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

CANADA
VALUATION ASSUMPTIONS

https://business.financialpost.com/n...tions-c-d-howe

Quote:
High discount rates could leave pension funds with 'insufficient assets to meet obligations': C.D. Howe
Low interest rates and an aging population are forcing pensions to invest in riskier assets to generate higher returns


Spoiler:
Canadian public pension plans need more regulation, particularly when it comes to setting a key calculation used to determine the assets they need to have on hand to meet future liabilities, because the high rates being used by many plans increases the probability that the plans will have “insufficient assets” to meet their obligations, according to a new paper from the C.D. Howe Institute.

Many defined-benefit pension plan sponsors in Canada are using high discount rates — the interest rate used to calculate the present value of projected future benefits — because it keeps the contributions employers and workers must make to the pension lower, says the paper authored by Stuart Landon and Constance Smith, both professors emeritus in the University of Alberta’s economics department.

The report, published last week, recognizes that there is an incentive for this, but says their analysis shows that the choice to use a higher discount rate adds “considerable risk“ and “increases the probability that the plan will have insufficient assets to meet obligations.”

At the moment, the paper says, public-sector pension plans “receive little guidance on the choice of discount rate and, in practice, many such plans use a rate higher than our best performing rules.”

Pension funds join Ottawa in bid to further G7’s diversity, climate risk efforts
Canada’s public pension funds are piling on leverage — and risk, warns Moody’s
Canadian pension funds have amassed $188B in real estate assets. And they are hungry for more
This, the authors conclude, “suggests the need for prudent regulation of pension plan discount rates.”

Landon said current trends, which include low interest rates and an aging population, are forcing pensions to invest in riskier assets to generate higher returns. A lower discount rate would reduce “the risk these investments will turn out badly,” he told the Financial Post. “You want to build in some insurance.”

The paper he co-authored notes that the prolonged period of low interest rates that followed the 2008 financial crisis — which put pressure on pensions and other long-term investors such as insurers with respect to meeting their future obligations — has already prompted reviews of discount rates by accounting standards boards and regulators in jurisdictions including Canada, the United States, and Europe.


Pension funds using high discount rates may be relying too heavily on boosting investment returns to satisfy their future obligations


Besides the concern that pension funds using high discount rates may be relying too heavily on boosting investment returns to satisfy their future obligations, the selection of the discount rate in a public sector defined-benefit pension plan is also an important factor in how the cost of the plan is allocated between current and future contributors. The higher the chosen rate, the higher the proportion of the cost burden falls on future contributors.

The C.D. Howe Institute paper did not analyze the discount rate used by specific pension plans. Instead, it analyzed a generic defined benefit pension plan in simulations using six different discount rate rules. But the analysis “is relevant for (all) defined benefit plans, such as the CPP (Canada Pension Plan) and the OTPP (Ontario Teachers Pension Plan),” said Smith, Landon’s co-author.

Landon noted that the Ontario Teachers’ Pension Plan uses a discount rate of around five per cent, which is very close to the level the paper found desirable. The rate used by the Canada Pension Plan is higher, he said, as is the closer to six per cent rate used by the Ontario Municipal Employees Retirement System (OMERS).

Thomas Klassen, a professor at York University’s School of Public Policy and Administration, agreed that there is risk associated with choosing a relatively high pension plan discount rate, as many defined benefit plans do.

However, he disagreed with the idea that these rates should be regulated.

“No one can foresee the future. Governments are no better, or worse, than pension plan sponsors in predicting future economic conditions,” he said.

Klassen noted that all pension plans carry risk, and said plan sponsors have made adjustments to contributions or benefits in the past when the discount rate has turned out to be too high or low in the past.

“That is how matters should work, and indeed how they having been working for many decades,” he said.

“A second worry is that should the government force discount rates lower, the attractiveness of defined-benefit (DB) pension plans decreases,” Klassen added.

There has been a steady migration away from defined-benefit pension plans, which guarantee a set payout to employees in retirement.

“No government would wish to intensify this trend,” Klassen said.

A second worry is that should the government force discount rates lower, the attractiveness of defined-benefit (DB) pension plans decreases

Thomas Klassen, a professor at York University’s School of Public Policy and Administration

Keith Ambachtsheer, director emeritus of the Rotman International Centre for Pension Management, is not opposed to some regulation, but said he is of the view that the focus should rest not on the discount rate but on the details and transparency of underlying pension contracts.

“Regulation should require that the economic nature of the contract should be clearly spelled out, including its risks and how and by whom they are borne,” he said, referring to an article he published in December that looked at how employers and their workers would bear the costs in various scenarios if returns failed to materialize as anticipated from higher-risk investments.

Pension plans could also be required to obtain an arms-length “fairness certification” that would demonstrate when a plan was designed to ensure “no party to the contract is systemically advantaged at the expense of any other party,” Ambachtsheer suggested to the Financial Post.

“If all that is done, the choice of liability discount rate becomes self-evident,” he said.

Officials at large Canadian pension plan managers including the Ontario Teachers’ Pension Plan Board, The Public Sector Pension Investment Board (PSP), and the Caisse de dépôt et Placement du Québec, declined to comment on the C.D. Howe Institute paper. A spokesperson for the Canada Pension Plan Investment Board, which invests funds on behalf of the Canada Pension Plan, declined to comment because the discount rate for the national pension scheme is determined by the Chief Actuary of Canada.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #252  
Old 02-07-2019, 10:46 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

NEW YORK CITY

https://www.ai-cio.com/news/new-york...ied-china-fed/

Quote:
New York City is Worried About China, and the Fed
Deputy CIO fleshes out key concerns at meeting of five city pension plans.
Spoiler:
The US-China trade war and monetary policy are two of the primary things keeping the five pension funds of New York City up at night.

Fourth-quarter market swings, the unpredictability of the Fed, and President Trump’s ongoing gripes with China were highlighted as current concerns by Michael Haddad, the deputy chief investment officer of the New York City Bureau of Asset Management at Wednesday’s common meeting. This monthly meeting is where the heads of each of the city pension plans (teachers, employees, and board of education systems, and the police and firefighter pension funds) meet—not to be confused with the New York Common Retirement Fund, the state’s massive pension organization.

Traditionally known for being a rally month, December was rougher than expected for investors. Haddad said one of the catalysts was Apple’s November pre-earnings report, where the company disclosed it would expect fewer iPhone sales in 2019. “It triggered a market view that the combination of China’s slowing and the trade tariffs were going to be damaging to US businesses going forward, and it kind spilled into all things China in that whole fourth-quarter environment,” he said.

The Russell 3000, MSCI World (excluding US), and MSCI Emerging Market indexes were down 14.3%, 13.3%, and 7.5%, respectively, in 2018’s fourth quarter. Although Haddad discussed the slowing of global growth, mentioning issues in Europe such as the yellow jacket protests in France and Italy’s technical recession, he remained fixated on China.

“On one hand you have China as a whole trying to de-lever. On the other hand, you have them trying to keep growth from going too far below their target with some monetary stimulus,” he said. “But China is slowing.”

This, of course, led to the Fed, and eventually Washington D.C., which he said remained “a circus of sorts.”

Federal Reserve Chairman Jerome Powell’s decision to raise interest rates 25 basis points on December 19 was expected, and the change of heart to downgrade the number of hike expectations from three to two was nice, but the move still caused alarm for investors as the market dropped yet again. With its actions, Haddad opined that the Fed had “ignored what was going on in financial markets,” contributing to the extreme volatility felt that month.

As for Washington, D.C., the chief said the midterm elections “actually really bothered markets in the fourth quarter,” where the House flipped from Republican to Democrat.

“From a market perspective, that just means the end of the Republican agenda, if you will, in a market-friendly way, specifically, additional deregulation,” he said. “I think the markets realized there’s going to be less deregulation going forward with the Democrats in check.”

He said that the US’s policies with China are going “more in a positive way” in the fourth quarter because of the G20 summit in Argentina, “where it seemed that Trump and[China President] Xi [Jinping] reached some sort of a d’état.” However, Haddad said the uncertainty remained when layered “on top of the Apple announcement.

“A lot of these things happened in late December, where everything in the market was extraordinarily illiquid,” Haddad said. “A lot of it reversed itself in January…but some of it had to do with illiquidity.”

For now, the deputy CIO sees no clarity as to whether or not Trump and President Xi are going to meet, which is expected. He said Chinese currency has rallied almost 3% from its fall lows. He added that there’s been stability in China’s A-shares since the fall. China’s A-shares are shares that are denominated in local currency.

He also said equity volatility will be higher than in the past. “When you think about downside risk to consensus earnings…it speaks to me that there’s limited upside from here, and it’s not an asset class that I think is going to return anywhere near what we’ve seen in the past several years.”

Returning to the Fed, Haddad said that due to the changes in monetary policy the treasury duration could suffer as the Fed could “flip again” on its decisions, as it said in last week’s meeting that it would look to inflation as the impetus to raise rates.

“I would argue not that the word ‘patient’ in the FOMC statement is meaningful and it’s somewhere in a three- to six-month time period,” he said, adding that he’s also worried about wider credit spreads. “Leverage in investment grade [bonds] has gone up and it doesn’t take much of a catalyst to spill over into investment grade, which then spills over into an entire capital structure.”


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #253  
Old 02-07-2019, 10:46 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

NEW JERSEY


https://www.ai-cio.com/news/nj-gov-v...state-pension/

Quote:
NJ Gov Vetoes Bill, Says It Could Jeopardize State Pension
Phil Murphy rejects proposed legislation as too broad and challenging to implement.


Spoiler:
New Jersey Gov. Phil Murphy has vetoed a bill that would have imposed certain conditions on the investments of its retirement system and required due diligence in the selection of external managers.

The bill had been overwhelmingly approved by the state legislature as the New Jersey Senate passed it 26-12 with two senators not voting, while the state assembly passed it 67-6 with seven representatives not voting.

In his veto letter to the New Jersey state senate, Murphy said he rejected the bill because it was too broad and, as a result, “could jeopardize the overall health” of the state’s retirement systems.

“This bill creates broad proscriptions on the state’s investment practices that would be challenging for the Division [of Investment] to implement,” said Murphy. “The bill’s sweeping prohibition against any investments that could pose a ‘reputational risk’ to the state’s retirement systems, for example, could be interpreted to apply to a wide range of direct and indirect investments, and may be used to call into question investments that are objectively appropriate.”

Murphy also said that he had been advised by the state’s treasury that the bill could undermine certain investment strategies that have been used to reduce fees and increase returns. As an example, he said the state’s Division of Investment has managed many of the state pension funds’ real estate investments through separate accounts rather than a commingled investment vehicle. He said the use of a separate account is expected to save the division approximately $39 million in fees over the life of the $300 million commitment.

“This bill could significantly reduce the division’s ability to take advantage of the savings opportunities available through this and similar investment structures,” wrote Murphy.

According to the text of the bill, the proposed legislation would have imposed conditions on domestic equity investments in the private real estate, private equity, and private infrastructure asset classes in which the Division of Investment has more than a 50% interest. The bill also imposed requirements related to the protection of public sector jobs and the selection of external managers.

The bill required external managers to be evaluated for their record of compliance with the policies, including any responsible contractor policies of public pension plans for which they served or have served as external managers. They would also have been required to disclose any instances of non-compliance with such policies, and to certify that they and their portfolio companies are not out of compliance with any such policies at the time of any proposed investment by the division.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #254  
Old 02-08-2019, 10:51 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

ILLINOIS

https://www.chicagobusiness.com/joe-...icle2-readmore

Quote:
Report recommends biting the bullet on pensions—finally
Something along the lines of the Civic Committee's “Restore Illinois” recommendation appears to be the state's best shot at staving off disaster.

Spoiler:
Give the folks at the Civic Committee of the Commercial Club of Chicago credit for a comprehensive approach to solving Illinois’ financial and economic crisis.

The “Restore Illinois” plan released earlier this week touches every base, from pension shortfalls to tax hikes, local government consolidation and workers' compensation reform. But the plan revolves around roughly $6.4 billion in new taxes to close Illinois’ annual budget deficit, pay overdue bills, establish a rainy-day fund, and eliminate the gargantuan pension funding gap that’s strangling the state.

It’s telling that such a proposal comes from leading downtown business executives, who wouldn’t stump for tax hikes in ordinary circumstances. But Illinois’ circumstances are far from ordinary. The gap between pension obligations to state employees and funds available to cover those payments is $130 billion and growing. The structural operating deficit is projected to rise from $2.8 billion next year to $3.3 billion in 2024. The state’s credit rating is teetering on the edge of junk status, and fiscal uncertainty is undermining business confidence in the state.

What’s more, options for defusing the crisis are limited. Democrats with little interest in true fiscal reform control the governor’s mansion and state Legislature. A state constitutional provision blocks reductions in promised pension benefits.

In light of all that, something along the lines of “Restore Illinois” appears to be our best shot at staving off disaster. The plan would raise revenue for debt reduction by adding a percentage point to personal and corporate income tax rates, taxing retirement income, and levying sales tax on more services. It also proposes $2 billion in spending cuts.

Some $2 billion of the additional money would be allocated to supplemental annual pension contributions to stop growth in the funding gap and save billions by fully funding the plans sooner. Another $1 billion would go toward building a reserve fund, $1.5 billion to paying overdue bills, and the rest to covering the operating deficit.

ADVERTISING

As my colleague Greg Hinz wrote on Feb. 5, the plan bows to reality. Yes, a better approach would be to amend the constitution to allow reductions in pension benefits. But such an amendment is a nonstarter under newly elected Gov. J.B. Pritzker and Illinois House Speaker Michael Madigan, who answer to public employee unions unwilling to countenance any benefit cuts.

Still, the proposal could be improved. It doesn’t go far enough in taxing services, for example, suggesting only that the sales tax be extended to enough services to raise $500 million. But Illinois could bring in $1.2 billion by taxing all the services taxed by Iowa, researchers at the Illinois Commission on Government Forecasting & Accountability estimate. The plan also proposes eliminating estate taxes and portions of the franchise taxes, which raise a combined $495 million. The group argues these taxes make Illinois an outlier among the states, but they smack of special pleading. Keeping those taxes while expanding the sales tax further would generate more than $1 billion, creating wiggle room to trim the income tax hike.

The plan takes only a vague swipe at spending cuts. Half its proposed savings would come from unspecified “operational improvements.”

Most important, the proposed tax hikes come without strings or an ending. Although the plan says Illinois should “consider rolling back the recommended tax increases” when a reserve fund is established and overdue bills paid off, it leaves the matter to politicians’ discretion. That means lawmakers could spend the additional money as they see fit, in perpetuity. We know how well that works.

Rather than increasing Illinois’ basic income tax rate, I’d rather see a separate surtax of limited duration. And the money raised should go into a restricted account, untouchable for any purposes other than paying down debt and funding pensions. When those objectives are achieved, the surtax should expire, and free taxpayers from the legacy of Illinois’ fiscal mismanagement.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #255  
Old 02-08-2019, 01:56 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

CALIFORNIA
CALPERS

https://www.nakedcapitalism.com/2019...year-gift.html
Quote:
More on “Is CalPERS Private Equity Architect John Cole So Clueless He Doesn’t Know He’s Lying?”
Spoiler:
Earlier this week, we described how CalPERS’ John Cole, who has been leading the development of the giant fund’s new private equity scheme, tried selling the board on the idea that they were getting a great deal when the terms he presented show that Cole and CalPERS are about to be taken for a costly ride.

As regular readers may recall, the centerpiece of the new private equity scheme is that CalPERS will set up and (at least initially) provide all of the investment capital for two new funds, even though CalPERS will have no control over them, nor will it have any profit participation in the ventures it is creating. At December’s board meeting, Cole claimed CalPERS would have very favorable financial arrangements with these new entities.

While it is true that CalPERS ought to be getting the very best terms for its two new funds, the reverse is happening. CalPERS is paying well above market rate on basic elements of the deal like the management fee. Moreover, as we plan to discuss in a future post, terms that Cole tried to present as special concessions to CalPERS are in fact completely standard provisions found in almost all private equity fund agreements.

On Tuesday, we addressed one of Cole’s flagrant misrepresentations

On Tuesday, we addressed one of Cole’s flagrant misrepresentations to the board and general public: that CalPERS was getting a very attractive “management fee” by virtue of the fee being based on budgets rather than standard rates. Recall that the management fee is the biggest fee paid to private equity firms receive and they receive it regardless of whether they perform well or not.

We discussed that not only is the fee that CalPERS is planning to pay considerably above what CalPERS ought to pay based on industry convention, given that it’s making two ginormous commitments ($5 billion each, with more expected down the road) but that it’s also vastly in excess of what any sensible budget ought to allow. As we showed, each firm’s owner(s) would pocket over $80 million a year, risk free. Nice work if you can get it.

And mind you, that’s only one of the fees paid to private equity managers. Private equity firms have so many layers that compensation in their partnership aggreements that consultants refer to them as a “wedding cake”. Today, we’ll turn to another layer of the wedding cake, a second gift of CalPERS’ monies that Cole also perversely described as a great feature for CalPERS, even though it actually represents a backsliding in terms of the progress that limited partner investors like CalPERS had made in constraining an abusive fee practice.

Cole piously told the board that CalPERS isn’t going to be paying the sort of private equity tricky fees that have been the subject of SEC enforcement actions and critical press coverage…and then, just a moment later, admitted that the pension fund will, in fact, enthusiastically pay them! From the December meeting transcript:

Board Member Margaret Brown: Great. I’d like to make a recommendation that as part of us drafting that agreement, that we — CalPERS also gets to see the portfolio company financials as well, because that’s where a lot of the shenanigans is played in fees. And what we — you can’t really — we can’t tell, unless we can see the financials of the portfolio companies. And I understand that’s all going to be non-transparent to the public. But CalPERS should absolutely make that a requirement that we get to see those as well.

Investment Director Cole: We agree and we will.

And the point of — to finish my thought. I left a dangling edge there. Finish my thought that the idea of portfolio fees we’ve discussed up front, and said it’s a non-starter. We do not want to pay — have portfolio fees of all the different sorts that have been noted and quoted around. They would not occur.
Now, I’ll make a distinction. Let’s take an example of a company that in the Horizon fund [the Warren Buffett with no Warren Buffett fund] that we own. And what we’re trying to do is to provide — or what our investor is trying to do is provide those — the expertise that would allow them to anticipate and manage through disruption. Maybe it’s technology disruption in their business model.

And as a result, they may engage an executive or a consulting arrangement that will come in and work with the company in order to help them deal with their strategy and make operating decisions.

What we’ve been very clear about is that that’s a good thing. We want there to be an operating overlay that we think helps the growth of the company.

What is not acceptable is that there’s a profit margin put on top of that, and it accrues to the benefit of the GP or the LLC.

Help me. This is just pathetic. CalPERS is asked to be ripped off and will be.

The key issue here is that Cole is discussing that the private equity firm may “engage an executive or consulting arrangement…. We want there to be an operating overlay that we think helps the growth of the company.”

This is “operating overlay’ is what the management fee is supposed to cover! The two funds are going to get $100 million a year each for overseeing the investments. So Cole is blithely proposing to pay twice for this sort of assistance and is trying to pass that off to the board as a great benefit to CalPERS.

The management fee isn’t just to buy the company, have the private equity firm sit on its hands for years, and then sell it when the market looks right. The private equity firm’s professionals also meet with management often (the staff at these companies might say relentlessly), review performance and plans, and apply lots of pressure to Do Better, often accompanied with specific recommendations. Moreover, private equity firms have long marketed that they have seasoned industry executives or individuals with other relevant expertise to help improve the portfolio companies’ operations.

Cole’s “operating overlay” comment means he has bought into a thoroughly discredited practice where the PE managers charge investors a management fee for this relentless oversight of portfolio companies, and then charge the portfolio companies “consulting fees” for providing these same services. Until an SEC crackdown in the last few years, U.S. private equity firms almost universally double dipped this way, and with older funds, the public can see that it is still happening due to better disclosure to satisfy the SEC.

This practice was detrimental on many levels. It harmed private equity fund investors by lowering returns; it harmed the portfolio companies by draining their treasuries in return for nothing; and it harmed the public by forcing on it the social cost of weakened portfolio companies and also the fiscal cost of an essentially universal tax scam associated with the practice.

Within the private equity world, pretty much everyone, even the generally clueless investors, knew that these “consulting fees” were indefensible on their face because the PE managers were charging the portfolio companies for services that, by accepting a management fee, the PE managers had already committed to their investors to provide. In the last few years, two academics have uncovered other critical dimensions to the indefensibility.

Presumably, Cole would not be discussing these agreements with the board if CalPERS’ prospective private equity fund managers intended only to have the portfolio company hire truly independent consultants, like IT experts or even a big name management consulting firm. This would be no more controversial than having a portfolio company hire a janitorial or payroll service, and hence not worthy of mention to the board.

Oxford professor Ludovic Phalippou, based on an extensive review of these contracts, called them “money for nothing” agreements. Even though private equity industry participants already knew that these consulting arrangements were a form of double-dippoing, he had determined that they typically didn’t even require the private equity managers to provide any consulting services in order for the portfolio companies to be obligated to pay. The entire video from one of his lectures at Oxford is worth watching, and the critical section starts at 8:00.



Here is his translation of the services agreement:

I may do some work from time to time
I do some work, only if I feel like it. Subjective translation: I won’t do anything.
I’ll get [in this case] at least $30 million a year irrespective of how much I decide to work. Subjective translation: I won’t do anything and get $30 million a year for it.
If I do decide to do something, I’ll charge you extra
I can stop charging when I get out (or not), but if I do I get all the money I was supposed to receive from that point up until 2018.

Note that the final provision in Phalippou’s list, getting all the money through the term of the agreement even if the company is sold earlier, (the so-called “termination of monitoring fee” abuse) received enough bad press and SEC attention that is is hopefully a thing of the past. But the other practices on Phalippou’s list continue.

Law professor Gregg Polsky wrote an academic article on the same topic of the agreements’ “money for nothing” nature, where he made an exhaustive argument that whenever companies make payments to their owners without any corresponding obligation on the owners’ part to provide commensurate services, such payments must be treated under tax law as dividends. Dividends are not tax deductible as expenses of a business, while fees for services are.

Polsky asserted with strong evidence that private equity firms are causing their portfolio companies to take this non-qualifying tax deduction and, as a result, have cost the U.S. Treasury billions of dollars in a form of tax fraud. His article also identified what he described as the “top ten” most egregious situations where these consulting agreements were nakedly indefensible as contracts for services. Among other things, they contained EXPLICIT DISCLAIMERS stating that no work was required in order for the fee to be payable. Here is his list, with the links to the consulting agreements:

HCA Inc., available at http://tinyurl.com/hca-inc;
Berry Plastics Group Inc., available at http://tinyurl.com/berry-inc;
Univision Communications, available at http://tinyurl.com/univision-inc;
West Corp., available at http://tinyurl.com/west2-inc;
Biomet Inc., available at http://tinyurl.com/biomet-inc;
Dunkin Brands, Inc., available at http://tinyurl.com/dunkin-inc;
Sensata Technology Holdings, available at http://tinyurl.com/sensata-inc;
SunGard Capital Corp., available at http:// tinyurl.com/sungard-inc;
J Crew Group Inc., available at http://tinyurl.com/j-crew-inc;
Immucor Inc., available at http://tinyurl.com/immucor2-inc.

Note that CalPERS invested in the majority of these deals. John Cole would do well to study these agreements to understand past mistakes he should be trying to avoid.

Investors in private equity funds certainly never understood the contractual reality and associated tax scam of PE managers disclaiming any obligation to do work for these “consulting fees.” However, they certainly did grasp the reality that the private equity managers were charging amounts (which were undisclosed to the investors) to the portfolio companies for supposed services that the managers were already being paid for via management fees.

As a result, for the last 25 years or more, private equity investors have been able to force the fund managers to credit back to them at least a portion of the consulting fees they received from portfolio companies. We’ve extensively covered on the blog how the SEC has caught private equity managers crediting less than their contracts require, which is the single most common scam in the private equity world. We’ve also covered how investors wildly misunderstand these crediting provisions and think they are far more generous to them than they actually are. But the point is that even if limited partner investors are not getting all the credits they should or they think they are, the almost universal practice in the marketplace is for them to get SOMETHING. Cole, however, is willing to surrender the status quo completely in this respect and accept nothing.

There is a reason that we say that the practice of crediting consulting fees is “almost” universal, which is that a few PE firms have succeeded in pulling off the scam that Cole is now falling prey to. One private equity insider described the new pitch to investors as follows:

Those old money-for-nothing consulting fees, those were naughty, we admit. We’re not trying to defend those and we are giving up the practice. Instead, we’re going to create our own internal consulting division, and we promise that they will do real work with the portfolio companies that justifies them being paid McKinsey scale engagement fees, or maybe a tad less because we are great guys and are looking out for you. And we promise not to make a profit from this activity. But here is what we need from you. We were crediting back to you the old, money-for-nothing fees because we all knew that they were indefensible. But these new consulting fees are for real work! So you have to let us keep them. Otherwise, how can we afford to pay the people who will work in our “consulting” arm? Got it? Good!

Amazingly, there are a meaningful number of limited partner investors in private equity who have fallen for this old-wine-in-new-bottles relabeling scam and haven’t bothered to confront the reality that they are already paying for these services via the management fee. Many limited investors who have signed up to this type of deal seem to take particular comfort in the claim that these consulting arms will be operated on a non-profit basis, which you can see that Cole somehow thinks is important as well. Given that nobody will be able to verify whether there is a profit margin, it seems reasonable to be skeptical about promises of monk-like asceticism, especially since the fees are typically benchmarked against comparables like McKinsey that have enormous gross profit margins on engagements.1

But key point, which Cole seems to miss, is that by being financially self-supporting, the consulting arms,reduce the number of people and activities that need to be supported by the management fee, thus making the management fee an even bigger source of profit. That is true even if they truly are not making a profit on the consulting operation, which would be hard to verify. 2

One firm that has gone down this in-house consulting arm path is KKR, which has a captive consulting firm, KKR Capstone, that performs many of the portfolio oversight functions for KKR funds that would be performed by traditional private equity firm members in other shops.that would be performed by traditional PE firm members in other shops.

KKR Capstone employees work in the same building in New York as KKR employees but KKR takes the position that they are “independent consultants” and therefore allowed to keep all the revenue they earn by charging the portfolio companies for their services. The point though is that a significant portion of the KKR headcount at this point flies under the “Capstone” banner, which, like the proposed CalPERS structure, is held out as not profit-making and, more importantly, allows KKR to dramatically reduce its own headcount relative to what it would otherwise be. Fewer mouths to feed with the management fee—what about this concept does John Cole not understand?

We asked around regarding a reasonable estimate of what history suggests the CalPERS scheme could allow the managers to extract from portfolio companies One academic who is an expert in private equity consulting practices said that the general partner could easily pull out another $50 million a year on top of the $100 million he’s already planning to have CalPERS pay him.3

CalPERS should heed the recommendation of Dr. Ashby Monk, who has spoken to the board twice about private equity in the last six months. Dr. Monk, who is much better schooled than Cole is on the many ways private equity firms profit at the expense of their investors, concluded the only way to win is not to play their game at all by bringing private equity in house. It’s a mystery why CalPERS is so stubbornly refusing to do what is best for the institution and its beneficiaries.

____

1 In fact, as anyone in consulting will tell you, marketing is a major cost for consulting firms, to the degree that most firms regard 80% utilization of staff as the maximum they can achieve because if they go higher than that, they will be underinvesting in marketing and selling and will pay for it in the not too distant future by not having enough work. So a firm that was assured a steady stream of business from its friendly private equity firms two floors higher in the same building could run at a higher percentage of utilization all the time and charge lower fees while having the same sort of profit margin as a firm that had to price itself to recover its higher marketing and selling costs.

We will put aside the question of whether these less-than-arms’length services would be necessary.

2 Cole’s great pitch for the wondrous benefits of paying the private equity firms for consulting they should have been doing anyhow strongly suggests that there is no offset whatsoever. Otherwise, he’d be implicitly acknowledging that maybe there was something not on the up and up about having the general partners charge any fees to the portfolio companies.

It also isn’t clear that Cole has ruled out a consulting firm charging typical fees and therefore having a profit margin built in if the consulting firm is not part of the fund management firm.

if you read what Cole said carefully, he is arguing that the private equity fund managers won’t be allowed to take a “profit margin.” Cole may actually have been told about how private equity firms often double dip by hiring third parties to perform a task, which in this case would be hiring a consulting firm to work with a portfolio company, and then charge a hefty fee for at most babysitting the consulting firm that the private equity firm brought in. Cole is ruling our that layer of the wedding cake.

3 Remember from our post earlier this week that John Cole said that CalPERS planned to pay roughly 2% in management fees when its two new funds were each at the $5 billion level, and that they expected to pay 1% at $10 billion per fund. That equates to $100 million per year for each. We showed that this translated into profits of over $80 million per year per fund for its owner(s).

One bit of good news is that the consulting fee scam can be executed only at the “Warren Buffett with no Warren Buffett” fund. For the “late stage venture capital fund,” CalPERS would be investing in companies where eaelier-stage venture capital investors would be driving the bus.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #256  
Old 02-08-2019, 02:11 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

https://thehill.com/opinion/finance/...s-entitlements

Quote:
Public pensions are the Trojan horses of US entitlements
BY SEAN HOLLAND AND JAMES LAURIE, OPINION CONTRIBUTORS — 02/06/19 10:30 AM EST
Spoiler:
As hollow as the giant wooden horse of legend, America’s public pension plans have lulled participants into the false belief that their pension check will never bounce.

The nearly 25 million Americans expecting their retirement to be funded by state and local pensions deserve to be told what their plan can realistically afford to pay them.

Total unfunded liabilities at U.S. state and local public defined benefit pension plans are about $1.4 trillion — more than three times their pre-financial crisis level. After a decade of strong investment returns, the funded status of public pension plans continues to worsen.

The next economic downturn will deliver the coup de grâce to some public pensions. As the probability of defaulting on promised benefits increases with falling asset prices and bloated pension liabilities, retirees nationwide will face the grim prospect of receiving greatly reduced benefits during their golden years.

Public pensions issue annual member statements indicating the annual pension payments that participants can expect to receive at predetermined retirement ages, reinforcing the perception that those payments are fully guaranteed and funded.

Sure, the financial health of public plans is described in great detail in their comprehensive annual financial reports and actuarial valuations, but these arcane documents are often several hundred pages thick.

Say you are a hardworking member in the State Employees’ Retirement System of Illinois, whose funded status stands at around 33 percent and your recent annual member statement promised you an annual pension of $30,000 at age 65.

Truthfully, the plan can afford to pay you only $10,000 per year. The number is probably closer to $5,000 if more realistic investment returns are assumed and if projected benefit payments are discounted at a sensible rate.

What to do? First, asset class return assumptions should be identical for all public plans with the same discount rate applied to all plan liabilities, no matter a pension’s funded status. Stop allowing public pensions to calculate the present value of their liabilities using the expected rate of return assumed to be generated on their assets.

Require public plans to follow U.S. generally accepted accounting principles that call for a discount rate based on the yield of high-quality bonds just as private-sector pensions do.

Application of this lower, market-based discount rate would cause reported liabilities to balloon, worsening the funded status of most plans. But at least participants would see a truer picture of their retirement income.

In addition, underfunded public plans should clearly disclose to participants the extent to which their benefits are or might be impaired. If your pension plan is vastly underfunded (i.e., you happen to be a teacher in New Jersey, a police officer in Chicago or even worse, a firefighter in Kentucky), the plan sponsor should be required to quantify the likelihood of a reduced payment.

This would be comparable to the information already contained in the annual funding notices sent to participants in private-sector pensions but personalized for individual members.

Younger workers could adjust their spending and saving habits if they know that the pension plan that promised them a secure retirement is almost broke.

For some, that could mean saving more, purchasing insurance or annuities, downsizing their home or altering the asset mix in their personal investment portfolio. For others, it could mean delaying retirement or making substantial changes to their planned retirement lifestyle.

Intergenerational equity, a basic tenet of the social contract that binds workers and plan sponsors, has been given short shrift. Today’s retirees are receiving their promised pension benefits but, for the majority of public plans, the scheme is financially unsustainable.

With public plan liabilities exceeding their assets, these Trojan Horses of America’s entitlement system create a structural imbalance that cannot be solved without reducing pension benefits.

Public pension trustees and chief investment officers face the difficult task of informing Paul that the ruse is up and Peter will no longer stand for being robbed of his retirement livelihood. Plan sponsors and participants will be forced to ante up with higher contributions.

Those already drawing a pension will shoulder their share of the financial burden too. Pensioners will almost certainly be faced with reduced payouts, potentially putting their ability to afford the basics of life — food, housing and health care — in serious jeopardy.

What’s worse, there is little or no safety net in the event a pension becomes insolvent. Benefits are not insured by the Pension Benefit Guaranty Corporation and state and local government employees can see their Social Security benefits reduced — if they are eligible for them at all.

This is a deep-rooted and complex financial predicament with potentially calamitous economic, social and political ramifications. For all stakeholders, the cure may be worse than the malady in that all potential solutions will involve some degree of prolonged financial sacrifice and suffering, especially for those least prepared.

The employees of America’s state and local governments are undercompensated for the many essential services they provide throughout the 50 states; often risking their lives to better our communities. They deserve to be told the truth, however painful, about the size of their pension check.

Sean Holland is a principal at Comave Advisors. He previously served as an investment committee member for one of the largest U.S. public pensions, the New York State Teachers’ Retirement System. James Laurie is a Portfolio Manager at RBC. Both Holland and Laurie are alumni of New York University Stern School of Business' MS in Risk Management program.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #257  
Old 02-08-2019, 10:33 PM
limabeanactuary's Avatar
limabeanactuary limabeanactuary is offline
Mary Pat Campbell
 
Join Date: Jan 2010
Studying for Anglo-Saxon
Favorite beer: Bass Ale
Posts: 14,144
Default

RHODE ISLAND

https://www.forbes.com/sites/edwards.../#25b60be24490

Quote:
Rhode Island Forced to Stay Another Year in Fund Sold To Pension By Gina Raimondo
Spoiler:
My 2013 forensic investigation of the Rhode Island pension recommended the Securities and Exchange Commission examine the state’s investment in an opaque venture fund managed, and sold to the pension in 2006, by former General Treasurer, current Governor Gina Raimondo before she entered politics. Recently the pension was told it will have to remain in the floundering investment for a third year—well beyond the state’s 10-year commitment. Pension stakeholders don't like unpleasant surprises.

In late 2018, The Providence Journal reported that Point Judith Capital, the Rhode Island venture capital-turned-Boston private equity firm co-founded by Governor Gina Raimondo before she entered politics, had informed the Rhode Island pension it was going to have to remain in the floundering investment for yet another year, even though the state’s initial $5 million, 10-year commitment had long expired.

The pension was scheduled to exit Raimondo’s venture or private equity fund two years ago in 2016 but the firm, supposedly exercising its discretion under a secret agreement the state supposedly signed, extended the life of the investment in 2017 and again in 2018—“at points in time when the investment was described as underperforming at best.”


Point Judith reportedly told the state pension it had no say regarding the 2019 extension and, worse still, according to the Providence Journal, the firm was unwilling to waive the fees it charges.

A spokesman for General Treasurer Seth Magaziner told The Journal that the 2006 Point Judith agreement stated that “80 percent of the fund’s investors were needed to secure such an extension and ... more than 80 percent of other investors voted to extend.”

Just another day at the Employees’ Retirement System of Rhode Island.

In my opinion, the facts related to the ERSRI investment in the venture/private equity fund managed by then-investment amateur Raimondo and sold to the pension by Raimondo personally, rise to a level of outrageousness deserving of an expletive-laden rant by Cardi B.

For starters, the public has never been allowed—for thirteen years now—to see the agreements or other documentation related to the pension’s investment in the Point Judith fund.

We’ve just been told—for the first time—by Treasurer Magaziner that the secret agreement allows Raimondo's fund to hold onto state money another year if 80 percent of investors agree. Why weren't we told this earlier? Does the 2006 Point Judith agreement provide for further extensions of the life of the fund? Will the pension ever get its money back? Why would state pension fiduciaries ever sign an agreement permitting, to date, 3 years of extensions to a 10-year investment and possibly more?

As a result of the lack of virtually any public, verifiable information about the Point Judith firm, investments and performance, in 2013 I requested from then-Treasurer Raimondo any documents related to the Point Judith investment, including any marketing materials; consultant recommendations; annual reports; statements of portfolio holdings; valuations of portfolio assets; and performance summaries.

The response I received simply stated “Enclosed please find the Power Point presentation that was presented to the SIC and a synopsis of the quarterly returns. Pursuant to Rhode Island General Laws … annual financial audits, Cliffwater’s private equity analysis, and partnerships agreements are not considered public documents.”

In short, Treasurer Raimondo decreed I would not be allowed to investigate amateur fund manager Raimondo. (Perhaps not surprising, her successor Treasurer Seth Magaziner, has continued to withhold from public scrutiny Point Judith and other documents related to the pension’s investments in alternatives.)

This response to my 2013 records request was utterly inconsistent with then-Treasurer Raimondo’s prior public statements regarding the Point Judith documents.

In an April 5, 2013 interview, then-Treasurer Raimondo was asked, “What were the returns like at Point Judith, and are the pitchbooks, portfolio holdings and investment returns available publicly from Point Judith?”

Raimondo’s response was: “The returns, all that stuff is public (emphasis added), so whatever they submit, just like any other private equity firm, whatever they submit on a quarterly basis would be public (emphasis added). They submit quarterly reports on their investment performance, and we have that and that would be public (emphasis added).”

When the Providence Journal later requested the same information, it too was shot down. Most recently, in 2018, the paper said:

“The Journal has again requested, but not yet received, a copy of the investment agreement. The newspaper has also requested, and not yet received, any correspondence documenting the state treasury’s attempt to extricate the state’s remaining money unless the fund managers waive the fees.”

So much for transparency and accountability in Rhode Island.

Bad enough that the public cannot evaluate the merits or performance results of the Point Judith investment, stonewalling by the pension makes it impossible for taxpayers and pension participants to determine whether pension fiduciaries are themselves doing their jobs.

If you can’t see the terms of the investment agreements, you can’t possibly determine whether the pension should have agreed to them.

In my 2013 forensic investigative findings I noted that the Treasurer had made numerous public statements regarding the performance of the Point Judith fund, as well as released summary performance figures which were strikingly divergent: 22%, 12%, 10.9%, 6.2%. An expert commentator had calculated the four-year performance to be -16.7%.

As noted in the late 2018 Providence Journal article, the more recent performance results continue to widely diverge:

“A year ago at this time, the treasurer’s office reported that Point Judith had earned the pension fund 0.6 percent on average each year…

Flash forward to 2018: “The average annual return is 5.7 percent over the life of the fund,″ England (Treasurer Magaziner’s spokesman) said.”

Another concern I noted in my 2013 report was that the fees paid by the pension to Point Judith were significantly higher than the then venture capital industry standard fees of 2 percent and 20 percent. Further, since Point Judith Capital was a small, unproven manager at the time of the state’s investment there was no reason to believe the firm should have commanded a higher fee.

In my opinion, this most recent 2019 extension of the Point Judith fund raises additional questions, including:

When did the pension become aware of the most recent extension?

How do we know the 2006 Point Judith agreement, in fact, states that 80 percent of the fund’s investors are needed to secure such an extension?

How do we know more than 80 percent of other investors indeed voted to extend?

What concrete evidence does the pension possess documenting the voting?

Who are the other investors in the fund?

How many of the other investors are, like Raimondo, insiders of the fund?

For all I know, Raimondo's Point Judith fund may turn out to be the best investment the state pension has ever made-- a rip-roaring, spectacular success. I certainly hope so.

Someday, eventually, we'll find out how well, or badly, it has performed.

In the meantime, this toxic brew of politics, secrecy, incomplete and inconsistent surprise disclosures involving pension assets should be intolerable to Rhode Islanders. Adding insult to injury is the fact that pensioners had their benefits cut to pay Raimondo's "pension bonus"-- fund fees to supplement her government service earnings over the past 13 years. This is no way to run a pension.



Edward Siedle
Edward Siedle

__________________

Now offering online seminars, live seminars, and everything else under the sun and over the moon for actuarial exams.
Reply With Quote
  #258  
Old 02-11-2019, 12:35 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

ILLINOIS

https://www.chicagobusiness.com/joe-...nsions-finally
Quote:
Report recommends biting the bullet on pensions—finally
Something along the lines of the Civic Committee's “Restore Illinois” recommendation appears to be the state's best shot at staving off disaster.

Spoiler:
Give the folks at the Civic Committee of the Commercial Club of Chicago credit for a comprehensive approach to solving Illinois’ financial and economic crisis.

The “Restore Illinois” plan released earlier this week touches every base, from pension shortfalls to tax hikes, local government consolidation and workers' compensation reform. But the plan revolves around roughly $6.4 billion in new taxes to close Illinois’ annual budget deficit, pay overdue bills, establish a rainy-day fund, and eliminate the gargantuan pension funding gap that’s strangling the state.

It’s telling that such a proposal comes from leading downtown business executives, who wouldn’t stump for tax hikes in ordinary circumstances. But Illinois’ circumstances are far from ordinary. The gap between pension obligations to state employees and funds available to cover those payments is $130 billion and growing. The structural operating deficit is projected to rise from $2.8 billion next year to $3.3 billion in 2024. The state’s credit rating is teetering on the edge of junk status, and fiscal uncertainty is undermining business confidence in the state.

What’s more, options for defusing the crisis are limited. Democrats with little interest in true fiscal reform control the governor’s mansion and state Legislature. A state constitutional provision blocks reductions in promised pension benefits.


In light of all that, something along the lines of “Restore Illinois” appears to be our best shot at staving off disaster. The plan would raise revenue for debt reduction by adding a percentage point to personal and corporate income tax rates, taxing retirement income, and levying sales tax on more services. It also proposes $2 billion in spending cuts.

Some $2 billion of the additional money would be allocated to supplemental annual pension contributions to stop growth in the funding gap and save billions by fully funding the plans sooner. Another $1 billion would go toward building a reserve fund, $1.5 billion to paying overdue bills, and the rest to covering the operating deficit.

ADVERTISING

As my colleague Greg Hinz wrote on Feb. 5, the plan bows to reality. Yes, a better approach would be to amend the constitution to allow reductions in pension benefits. But such an amendment is a nonstarter under newly elected Gov. J.B. Pritzker and Illinois House Speaker Michael Madigan, who answer to public employee unions unwilling to countenance any benefit cuts.

Still, the proposal could be improved. It doesn’t go far enough in taxing services, for example, suggesting only that the sales tax be extended to enough services to raise $500 million. But Illinois could bring in $1.2 billion by taxing all the services taxed by Iowa, researchers at the Illinois Commission on Government Forecasting & Accountability estimate. The plan also proposes eliminating estate taxes and portions of the franchise taxes, which raise a combined $495 million. The group argues these taxes make Illinois an outlier among the states, but they smack of special pleading. Keeping those taxes while expanding the sales tax further would generate more than $1 billion, creating wiggle room to trim the income tax hike.

The plan takes only a vague swipe at spending cuts. Half its proposed savings would come from unspecified “operational improvements.”

Most important, the proposed tax hikes come without strings or an ending. Although the plan says Illinois should “consider rolling back the recommended tax increases” when a reserve fund is established and overdue bills paid off, it leaves the matter to politicians’ discretion. That means lawmakers could spend the additional money as they see fit, in perpetuity. We know how well that works.

Rather than increasing Illinois’ basic income tax rate, I’d rather see a separate surtax of limited duration. And the money raised should go into a restricted account, untouchable for any purposes other than paying down debt and funding pensions. When those objectives are achieved, the surtax should expire, and free taxpayers from the legacy of Illinois’ fiscal mismanagement.


https://www.chicagobusiness.com/opin...ple-north-dont
Quote:
What downstaters get that people up north don't

Spoiler:
The article ("City's most elite biz group backs a big tax hike for state pensions") only nibbles at the truth in why people are leaving Illinois by suggesting that it "might" be because of higher taxes, or it "could" be because of the uncertain future. In fact it is the combination of these two ingredients that is bound to continue greasing the skids of Illinois' decline in the standard of living almost everywhere except the very area Crain's does such a good job of covering—Chicago proper.

I am a downstate retired business owner that is very glad to have sold a business that continues to prosper even today. It is tied directly to agriculture, and I sold it to owners who aren't corporate-bound to Illinois, so I expect they will continue doing well here. However, I have several friends who also own ag-related businesses that are not going to be as lucky, as their companies are smaller and tied essentially to the business laws of the state. They will simply disappear and, in some instances, may be absorbed by outside ownership that will be capable of avoiding much of the fiscal angst described in the above article.

Whether the combined efforts of a Democrat-controlled Legislature and governor's office can quickly create new and grossly unfair additional taxes remains to be seen, but many of us are betting this will be the newest concerted push. Whether the effort mindlessly tears down the fabric of Illinois agriculture is up for conjecture, and believe me when I say downstate coffee shops are full of this kind of talk. Small towns are disappearing as schools continue consolidating and businesses dry up.

Let's hope common sense prevails long before this, or otherwise it just might be a good idea right now for Illinois to start seriously considering separating everything north of Interstate 80 from the rest of the state and call this new territory Chicago, leaving the vast majority of lands and assets to the south to eventually assume a geographic and fiscal posture much like Iowa. I'm guessing this radical thinking doesn't get a lot of play "up north," but it is another subject of discussion gaining less derision than it used to in these same downstate coffee shops.

DON GRIFFITHS
Nauvoo
https://capitolfax.com/2019/02/08/qu...medium=twitter

Quote:
Question of the day
Spoiler:
* From the governor’s transition report…

Pensions and debt management

Illinois must take significant steps to make substantial progress in confronting its unfunded pension liabilities. Concentrating on one area will not be sufficient. Instead, a portfolio of initiatives across different levers will likely be required.

Increase funding to the pension system

Opportunities exist to find unique and new ways to increase funding. The state could apply a direct revenue stream to help pay down the pension debt. These revenue streams could have provisions to ensure they are only used for payment of pension debt and benefits. Asset transfers could also be used as a means to add value to pension systems. For example, if the state were to move an asset to a pension fund, it could be used to reduce the unfunded liabilities for the pension system and increase the funding ratio, leading to potentially reduced interest costs on pension debt.

Improve the investment engine

The returns that Illinois currently achieves on its pension funds could also be increased by improving the investment engine. To generate higher returns and with the added benefit of enhanced efficiency, Illinois could work with local constituencies to consolidate pension funds for similar systems within verticals (e.g., fire, public safety). This move would help smaller funds not only achieve higher returns but also reduce the cost of fund administration and give managers greater visibility into investment decisions and trade-offs.

Re-shape the pension payment curve

To put the pension funds on a more sustainable path, the committee discussed whether the state could consider re-shaping the pension payment curve. For instance, the state could create a sustainable amortization schedule combined with other changes to improve the system which could meet short term budget needs while improving the funded ratio in the long term. The goal here is to find a rational payment plan that increases the funded ratio each year while still meeting the cost of paying benefits to current and future retirees. Such action would need to be taken in conjunction with changes that increase funding, improve investments, and/or increase stability such that debt markets see that Illinois is serious about comprehensively solving the pension funding deficiency.

Modernize Bonded Debt Provisions

Illinois should also explore ways to improve its existing bonded indebtedness provisions to provide government officials with more flexibility in managing debt. The state should consider changes including but not limited to: maturity limitations, current statutory refunding and/or restructuring requirements within constitutional limitations, and available security. This could help the state create innovative financial vehicles to manage all of its debt including the pension debt while also strengthening Illinois’ creditworthiness.





* The Question: What do you think about the highlighted idea of moving state assets into the pension funds?
__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #259  
Old 02-11-2019, 06:30 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

CHICAGO, ILLINOIS

https://www.chicagobusiness.com/opin...e-not-our-side

Quote:
In pension crisis, time is not on our side
Chicago's largest employers are recommending the state pay off more than $130 billion in pension debt largely through a series of tax hikes. It's not a perfect plan. But it gets one thing right: The crisis can't wait.

Spoiler:
It's not every day that a group of corporate chieftains makes a forceful and concerted argument for a tax increase. And yet, Chicago's largest employers, members of the Civic Committee of the Commercial Club of Chicago, did just that on Feb. 5, recommending to new Gov. J.B. Pritzker a plan to pay off more than $130 billion in state pension debt largely through a series of significant tax hikes.

Under the blueprint unveiled by the Civic Committee, the city's most elite business organization, the state would increase personal and corporate income taxes by 1 percentage point across the board, pulling in $4 billion in the process. The state would net an additional $1.9 billion by beginning to tax retirement income—Illinois is among only a handful of states that don't do this already—and would raise $500 million by extending the sales tax to cover more consumer services. The resulting $6 billion a year in higher taxes would be matched by $2 billion in spending cuts.

That $8 billion nut, the Civic Committee reckons, is what the state needs to pay off its IOU backlog in reasonable time, put Illinois' public employee pensions on an actuarially acceptable funding path in four years, cover the existing deficit in the state budget (which, we learned Feb. 8, will be $3.2 billion in the coming fiscal year) and create a necessary rainy-day fund.

A proposal like this coming from an organization representing corporate giants like McDonald's, United Airlines, Northern Trust, Morningstar and Citadel would be next to unimaginable in any other state. Illinois is, however, the rolling dumpster fire of the public finance world, and CEOs are typically a pragmatic bunch, discerning in this case that there isn't much appetite in a Democratic-controlled Springfield for the hard structural reforms needed to put Illinois on sounder financial footing—and recognizing that time is of the essence even if the Pritzker administration did appear ready to wrestle with the pension crisis. The Civic Committee's plan notably does not call for constitutional changes that would generate savings by requiring workers to pay more, accept reduced benefits, or both. That's unfortunate. But the organization seems to be betting that a nearer-term infusion of new revenue will buy the state the time it needs to pursue more fundamental reforms.


In essence, the Civic Committee is proposing to do what Mayor Rahm Emanuel did with city pensions—impose the taxes needed to move toward the annual funding recommended by actuaries—only do it more quickly. Such "front funding" of pension debt indeed has been recommended by numerous officials lately, including Pritzker. But there has been no agreement on the question of where to find the needed revenue.

Unfortunately, there are no pain-free answers to that question, Illinois. The only thing the Pritzker administration can do now is point the way toward solutions that spread the pain around as fairly as possible.

ADVERTISING

Despite the inherent shortcomings of its plan, the important thing the Civic Committee has done with its report is to underscore the immediacy of the crisis. Other solutions—such as a constitutional amendment that would allow the state to renegotiate its existing agreements with public employees and perhaps to even create a progressive income tax—may have their place in the state's ultimate fiscal cure, but ideas like these will take time to enact. Years, in fact. And with pension costs ballooning by the day, time is not on Illinois' side. It never was.


__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #260  
Old 02-13-2019, 09:22 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 86,116
Blog Entries: 6
Default

CALIFORNIA
CALPERS
https://www.ai-cio.com/news/large-eq...blems-calpers/
Quote:
A Large Equity Drawdown Would Cause Major Problems for CalPERS
Poor equity performance is the biggest risk for the largest US pension plan, review shows.


Spoiler:
A review of the investment portfolio of the $337.2 billion California Public Employees’ Retirement System says that a “severe and or sustained drawdown” in its global equity portfolio is the biggest risk to the retirement plan.

The review contained in agenda material for the system’s investment committee meeting on February 19 says that over the past 20 years, two such events have occurred: the global financial crisis and the tech crash and recession.

“Such losses today would leave the funded status of the plan below 50%,” the review noted. CalPERS currently has around a 71% funding ratio, below the 80% benchmark that healthy pension plans shoot for.

CalPERS said its model showed if the global financial crisis, which took place from October 2007 to March 2009, occurred today, the pension plan would have a 32% investment loss, resulting in a decline of $107 billion in assets. The funding level for the pension plan would drop to 42%, the simulation shows.

Retirement plan officials say in the review that if the tech crash and recession, which lasted from January 2000 to March 2003, occurred today, it would have resulted in a 21% decline in the portfolio, or $71 billion. The funding ratio for the plan would drop to 49% under that simulation.

Global equities is CalPERS’s largest asset class with an asset value of $160.1 billion as of Dec. 31.

The trust level review notes that investment results at CalPERS are primarily driven by growth assets. Besides public equities, CalPERS’s $27.8 billion private equity asset class is also considered a growth asset.

CalPERS reported a -3.5% portfolio return for the calendar year of 2018 due to volatile markets. The worst-performing asset class was public equities, with a -8.9% return, followed by a -5.3% return in inflation assets, and a -1.3% return in fixed income. Private equity, the other growth asset, saw returns of 12.5% in the calendar year, while real assets, which includes real estate, had a 4.2% return.

The pension plan’s new chief investment officer, Ben Meng, is expected to discuss the returns at the meeting.

Ultimately, the returns that count for CalPERS and its funding level are those of the state fiscal year, which runs from July 1, 2018, to June 30, 2019.

CalPERS officials have not yet discussed what effect an upswing in the stock market in January had on its portfolio. At the California State Teachers Retirement System (CalSTRS), the second-largest US plan, investment performance totaled -3.2% for calendar year 2018. However, when January 2019 was taken into account, CalSTRS was at a break-ever point for the 2018-2019 fiscal year.

A separate report by CalPERS general investment consultant, Wilshire Associates, to be presented at the February 19 meeting, said the US stock market was down -14.29% for the fourth quarter of 2018 and -5.27% for the year. The fourth quarter was the worst quarter for the stock market since 2011, Wilshire said.

__________________
It's STUMP

LinkedIn Profile
Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 08:13 PM.


Powered by vBulletin®
Copyright ©2000 - 2019, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.25838 seconds with 9 queries