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  #1061  
Old 07-10-2018, 02:08 PM
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Mary Pat Campbell
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NEW JERSEY
ESG INVESTING

https://www.ai-cio.com/news/new-jers...esg-investing/

Quote:
New Jersey Making Big Push on ESG Investing
State pension system targets arms sales, using contractors instead of employees, and foreclosures on hurricane victims.
Spoiler:
Since Gov. Phil Murphy took office in January, New Jersey has been pushing environmental, social, and governance (ESG) concerns in its pension investments.

In March, New Jersey withdrew its holdings in all automatic and semi-automatic firearms companies, following a nationwide divestment pattern in pension plans after a mass of shootings. In recent months, it also pressured two private equity firms against foreclosing on Puerto Ricans affected by Hurricane Maria and told Target not to work with trucking companies that see their drivers as contractors rather than employees.

This is just one step in an ESG policy the Garden State is working on for its pension investments; it also aims to tackle corporate governance reforms. There are 30 states that have adopted ESG policies for their pension funds, NorthJersey.com reports.

Chris McDonough, director of the investment division of the $77 billion State Investment Council, the agency that runs New Jersey’s pension funds, told NorthJersey.com that “ESG forces you to take a longer view.” McDonough will be leaving his post at the end of the month for a co-CIO role at consulting firm Investment Performance Services.

Murphy, a Democrat, is a big proponent of ESG investing, often speaking of a “fairer” economy as well as advocating tighter gun control laws. Prior to politics, he was an executive at Goldman Sachs.

However, at 31%, New Jersey is the worst-funded state in the country. Credit rating agencies are pushing for funding increases to its retirement plans, and a 2016 study by the Center for Retirement Research at Boston College shows funds with divestment policies earned 0.4 percentage points less than other plans. The state’s 2018-2019 fiscal budget pledged $3.2 billion toward benefit payments, but it was still less than the actuarial recommendations.
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  #1062  
Old 07-10-2018, 02:22 PM
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Quote:
Originally Posted by campbell View Post
https://pensionpulse.blogspot.com/20...sion-fury.html

Quote:
Pennsylvania's Pension Fury?
Spoiler:
Chris Flood of the Financial Times reports, Pennsylvania state treasurer condemns $5.5bn pension fee ‘waste’:
[article above]
....
It looks like all hell is breaking loose in Pennsylvania and I will be the first to admit that I was aware something was cooking here as I was approached months ago by a lady consulting the state treasurer telling me they're looking closely at fees being paid out to alternative investment managers at SERS and PSERS.

I put her in touch with a bunch of people I knew in Canada and never heard back from her. I also carefully explained the Canadian pension model to her so she understands that the success is built on two principles:
World-class governance: Allows Canada's pensions to hire top talent across public and private markets and pay them properly. This is why over 70% of the assets are typically managed internally, lowering fees and costs, adding meaningful alpha over benchmark index returns over the long run.
A shared-risk model: This means when pensions run into trouble and there is a deficit, the risk of the plan is shared which in turn means higher contributions, lower benefits or both. Pension plans in Canada with a shared-risk model have adopted conditional inflation protection to partially of fully remove cost-of-living-adjustments for a period until the plan's funded status is fully restored again.
I also explained to her that Canada's large pensions also pay big fees to private equity and real estate funds but they are doing more co-investments to lower overall fees (see my recent comment on PSP upping the dosage of private equity).

But to develop a solid, long-term co-investment program where pensions can invest alongside a GP on larger transactions where they pay no fees, they first have to invest in the traditional funds where they pay big fees and they need to hire qualified people to evaluate co-investment opportunities as they arise.

Still, if done properly, a good co-investment program allows pensions to scale into private equity and maintain target allocations without paying a bundle on fees.

I mention this because I guarantee you very few US public pensions have developed their co-investment program to rival that of Canada's large public pensions which is why they're paying insane fees to their private equity managers per dollars invested in their PE portfolio.

The other thing I'd look into is whether the performance of these funds is worth the fees they've been paying into them.

Importantly, is the private equity portfolio too diversified and offering mediocre returns once you factor in leverage and illiquidity?

I recently wrote a comment on pensions taking aim at private equity funds for increasing their use of credit lines to leverage up their returns. Someone emailed me afterward asking me "whether funds get paid their carry on the IRR including the effect of leverage or excuding it"?

I told me I have no clue but my guess is they get paid the carry including the use of leverage much like hedge funds do.

On the issue of management fees and carry (performance fees), it's simply indefensible for any public pension fund not to report these fees in detail in every annual report.

I have nothing against paying fees, especially if a manager is delivering good solid returns over a long period, but for Pete's sake, report what you pay in carry and management fees, and other related costs.

Where I disagree with Joseph Torsella, the state treasurer, is when he compares the performance of SERS' and PSERS' alternative investment portfolio to a simple global bond-equity index portfolio over the last ten years.

This is pure data mining. Since bottoming out in March 2009, we have had one of the greatest bull markets in stocks and bonds so it's stupid to compare alternatives to an index portfolio during a roaring bull market.

I'll go a step further. The big party in equities and passive index allocation is coming to an abrupt end sooner than most are prepared for. The next bear market will be long and painful.

This is why now is the time to invest in alternatives including hedge funds but make sure you're doing so intelligently reducing fees and aligning interests properly.

You need to compare an alternatives portfolio over a very long period that includes bear markets because that is when these investments should kick in to lower downside risks.

I'm not saying there aren't problems at SERS and PSERS in regards to their approach to alternatives but switching over to index funds is the dumbest thing you can do at this time of the cycle.

That's why I keep telling US pensions to focus on governance and a shared-risk model but nothing seems to be changing down south, it's business as usual which guarantees mediocre long-term results.

Below, Jay Bowen, Bowen, Hanes & Company chief investment officer, discusses pension reform and the unfunded public pension liability crisis in the United States.

Now, I'm on record being very suspicious about Tampa's hot pension fund and have openly questioned its use of one sole asset manager, Bowen, Hanes & Co (see their portfolio of stocks here, it's over 145, not 60, and it's a pretty standard portfolio of well-known names so I find it hard they delivered the returns they claim below).

I am definitely not promoting Tampa's firefighter pension approach especially for a large state plan. That's simply nuts but listen to some of the points he raises below which are interesting. Still, I don't agree with him on adopting an indexing aproach at this time, I find that irresponsible and dangerous.

The time for alternatives is now but choose more liquid alternatives (hedge funds) and do your due diligence right. If you're going to invest in private equity, make sure you're also co-investing with your GPs on larger transactions to scale into the asset class and lower overall fees, but in order to do this properly, you need to hire and pay talented people to come work at your pension.

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  #1063  
Old 07-10-2018, 02:56 PM
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MINNESOTA

https://www.ai-cio.com/news/moodys-c...form-far-cure/

Quote:
Moody’s Calls Minnesota’s Pension Reform ‘Far From a Cure All’
Credit rating agencies say fixes for the severely underfunded retirement system don’t go far enough.
Spoiler:
The credit rating agency Moody’s is not impressed with Minnesota Gov. Mark Dayton’s new pension overhaul.

Dayton’s pension changes are aimed at stabilizing the benefits of more than 500,000 retirees and public workers, but it’ll come at a cost. The benefits of retired teachers and local government workers will be reduced while the state, employers, and employees will increase contributions.

The reforms cut $3.4 billion in future debt coming from Minnesota’s $16.2 billion problem, and could reach full funding in 30 years, but Moody’s said the efforts were “far from a cure-all” in a report last week. Minnesota’s pension system is 53% funded, according to a report from Pew Charitable Trusts.

Although Moody’s estimates the new laws will instantly cut 20% of the $21 billion Teachers Retirement Association’s pension liabilities, it doesn’t go far enough, the agency contends. It notes that the debt is going to be roughly 150% of payroll.

The teacher’s fund’s obligations have nearly doubled over the past decade, the Star Tribune reports. The teacher’s program is one of the state’s four public pension systems. The others are the Public Employees Retirement Association ($28 billion), the Minnesota State Retirement System ($22.3 billion), and the $1 billion St. Paul Teachers Retirement Fund Association.

Other credit-rating agencies’ evaluations have been less harsh, although still critical.

One week after the governor’s reform was signed, S&P said it was a positive step in state funding, but the agency was not fond of employee and employer contributions remaining a percentage of payroll. The report suggested the legislature make additional adjustments to state pension plans to “keep from lagging behind actuarial requirements.”

“The question is: How soon will those adjustments need to be made and will there be the political willingness to do so at that time?” said the S&P report, which also thought the state’s new 7.5% investment rate of return —which the reform dropped from 8% and 8.5%— was too optimistic.

Fitch Ratings did not expect near-term funding improvements as pension funds affected by the global financial crisis could see another economic downturn soon, in addition to higher life expectancies and more retirement payouts.
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  #1064  
Old 07-10-2018, 04:59 PM
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OHIO

https://www.thenews-messenger.com/st...ish/767485002/

Quote:
Damschroder: Do or die for Ohio public employee unions
Spoiler:
Ohio public employee unions must become relevant or perish. That’s the inevitable result of a U.S. Supreme Court ruling that allows nonunion members to stop payroll deductions if covered by a union-negotiated contract. Same job, same pay, same rules is not an environment that requires strong union representation to achieve in Ohio government.

In the big fight facing current, former and future state and local public sector employees, the unions are either clueless or feckless, but without doubt they are worthless. It’s only after the fact, when reckless investments have forced benefit cuts, that the unions organize statehouse protests and file lawsuits.

For Ohio public employee union members, who are helpless as individuals to protect state pensions that collect between 24 percent and 37 percent of their total pay each year, a fearless union standing guard against the pension plunder would be a priceless comfort against ceaseless worry over payment reductions.

Theoretically, the Ohio Retirement Study Council, ORSC, should serve this purpose, but this bicameral, bipartisan body is violating state law and ignoring a sworn oath to perform their duties “honestly, faithfully and impartially.”

One of those duties being ignored is spelled out in the Ohio Revised Code, section 171.04-F: "Have conducted by an independent auditor at least once every ten years a fiduciary performance audit of each of the state retirement systems."

As I reported in my last column, the Ohio Retirement Study Council has spent $637,000 for a fiduciary audit of the $101.4 billion Ohio Public Employees Retirement System from Aon Hewitt, the alternative investment advisers to OPERS.

Chris Tobe, former Kentucky Retirement System trustee and author of "Kentucky Fried Pensions," told me there are millions of reasons why Aon Hewitt does not qualify as independent. “Aon Hewitt has numerous conflicts of interest which should have eliminated it from consideration," Tobe said. "If Aon Hewitt as a fiduciary auditor were to find fault with any of the hundreds of alternative investments they have recommended, it would create a huge legal liability for the firm.”

But whatever the Aon Hewitt report says, their $500 an hour document does not fulfill the legal requirement for an independent fiduciary audit. In fact, because the contract veers outside the lines of the law, Ohio statutes allow the contract to be voided and the state to sue for recovery of money spent. Aon Hewitt would still have the power to get paid, they would simply need to sue the ORSC staff and members as individuals because they are personally financially liable under Ohio law for official actions they take outside their legal authority.

In soliciting fiduciary audit bidders, the ORSC sought response from “qualified” rather than “independent” firms.

Moreover, in quoting ORC-171.04-F, the ORSC request for proposals eliminates notice that the fiduciary auditor is legally required to be “independent.” If an Ohio public employee were to speak out against illegal intent by this powerful body, he or she would have little impact and would be labeled a malcontent. But if a union blew the whistle it would attract wide attention and protect assets their members have earned and paid for.

The critical need to shield average citizens from increasingly brazen financial predation drew the attention of Pope Francis in May. His thoughts could give Ohio public unions a cause beyond funneling money collected as a condition of employment to losing Democratic campaigns.

“In front of the massiveness and pervasiveness of today’s economic-financial systems, we could be tempted to abandon ourselves to cynicism, and to think that with our poor forces we can do very little," the Pope said. "In reality, every one of us can do so much, especially if one does not remain alone.”

When both the Pope and this wayward Methodist see the need for effective collective action, Captain Obvious is on the case. Maybe the public unions will wake up, speak up and shake up the political terrain simply by protecting the most economically significant asset tied to Ohio public employment.

John Damschroder, a Fremont native who worked in Gov. George Voinovich’s administration, writes about business and economic development in Sandusky County.


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  #1065  
Old 07-12-2018, 11:33 AM
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CHICAGO, ILLINOIS

http://www.chicagotribune.com/news/c...y.html#new_tab

Quote:
Mayor Emanuel cuts Chicago pension debt, but future hits to taxpayers are still expected
Spoiler:
The city’s annual comprehensive financial report offered a classic good news/bad news scenario on pensions: Mayor Rahm Emanuel has dramatically cut the long-term pension shortfall, but at a steep cost to Chicago taxpayers.

As of the end of 2017, City Hall was about $28 billion short of what’s needed to cover future pension payments to retired city workers. That debt was about $7.7 billion less than at the end of 2016.


But there’s a bit of accounting wizardry at work: Finance officials who prepared the yearly report assume the city will be making higher contributions to its four pension funds in coming years, as required under various state laws Emanuel engineered to prevent them from going broke.

That means the city will have to come up with a way to raise hundreds of millions of additional dollars a year to contribute to the city’s four pension funds for municipal workers, laborers, police officers and firefighters. That, in turn, is almost certainly going to mean even higher taxes.

Such decisions, however, don’t have to be made until the end of next year, when Emanuel would be starting his third term in office or Chicago would have a new mayor.

READ MORE: Average Chicago homeowner to pay $110 more in property taxes this year »

Over three years starting in 2020, required yearly taxpayer contributions to the four pension funds are expected to grow by $864 million, according to city estimates released last year. That comes after Emanuel already hit up taxpayers for more than $800 million a year for pension contributions through higher property taxes, a bigger 911 emergency communications fee on phone bills and a new water and sewer service tax.

Nevertheless, Carole Brown, Emanuel’s chief financial officer, touted the lower pension debt as a sign the mayor was finding ways to meet city financial obligations that were ignored before he first took office in 2011.

Wall Street bond rating agencies have been a bit less enthusiastic. Although they have acknowledged the city’s finances are in better shape, city debt backed by property taxes still hovers in junk-to-low investment grade territory.

Brown also pointed to other signs of stronger city finances, including a $1.1 billion increase in capital assets because of upgraded streets, lights, transit systems, airport facilities and sewer mains; a new way of financing bonds through sales taxes that resulted in a strong bond rating on that portion of the city’s debt; and a slightly higher balance in the city’s day-to-day operating fund.

Nevertheless, the annual financial report also showed that Chicago is still struggling to make ends meet. Debt backed by property taxes, often looked at to gauge a city’s financial health, grew by more than $500 million, to nearly $10 billion. The city, however, expects to refinance some of that debt at lower interest rates through the new sales tax-backed bonds.


ah, the old "we'll be paying more later" trick. what bullshit.
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  #1066  
Old 07-15-2018, 02:34 PM
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NEW YORK
CORRUPTION

https://www.reuters.com/article/new-...-idUSL1N1U8217

Quote:
UPDATE 1-Ex-NY state pension fund manager gets 21 months prison for bribe taking

Spoiler:
NEW YORK, July 12 (Reuters) - A former portfolio manager at New York state’s retirement fund was sentenced to 21 months in prison on Thursday for engaging in a scheme to steer trades to two brokerages in exchange for bribes that included vacations, cocaine and prostitutes.

Navnoor Kang, 39, former director of fixed income and head of portfolio strategy at the New York State Common Retirement Fund, was sentenced by U.S. District Judge Paul Oetken in Manhattan. Kang pleaded guilty to two counts of conspiracy in November.

In addition to the prison sentence, which was much lighter than the 10 years sought by prosecutors, Kang was ordered to forfeit $78,716 in criminal proceeds and pay $242,724 in restitution to the retirement fund.

Mark Geragos, a lawyer for Kang, said he was “gratified” by the sentence.

“I think the judge did a compassionate thing,” he said.

The Common Retirement Fund is the investment arm of the New York State and Local Employees’ Retirement System and the New York State and Local Police and Fire Retirement System. It currently manages an estimated $206.9 billion in assets.

Kang worked at the fund from January 2014 to February 2016 and was responsible for investing $53 billion in fixed income assets, according to prosecutors.

During that time, prosecutors said, Kang took bribes from Deborah Kelley, a former managing director at broker-dealer Sterne Agee, and Gregg Schonhorn, a former vice president at broker-dealer FTN Financial Securities Corp.

The bribes amounted to more than $100,000 worth of gifts including travel, meals, prostitutes, sports tickets, drugs and cash, prosecutors said. In return, prosecutors said, Kang steered state pension business to the two firms.

The business yielded millions of dollars in commissions for the two broker-dealer firms, of which Kelley and Schonhorn personally took a 35 to 40 percent share, prosecutors said.

Both Kelley and Schonhorn have pleaded guilty. Kelley was sentenced to 1,000 hours of community service in September, while Schonhorn has not yet been sentenced, according to court records.

http://www.investmentnews.com/articl...-21-months-for
Quote:
Former manager for New York pension fund sentenced to 21 months for taking bribes for brokers
Navnoor Kang was arrested in 2016 and accused of accepting gifts, including drugs and luxury watches, in pay-to-play scheme

Spoiler:
A former portfolio manager for New York's main pension fund must serve 21 months in prison for accepting gifts including concert tickets, drugs and luxury watches from brokers in exchange for steering billions of dollars in business to their firms.

Navnoor Kang, 38, who managed fixed income at the New York State Common Retirement Fund, was arrested in December 2016 and accused of taking thousands of dollars in bribes from brokers.

"I want to express my regret and deeply apologize to the court and to the government for the mistakes I made," a tearful Mr. Kang told the judge. "I accept responsibility for my actions."

Prosecutors had urged U.S. District Judge J. Paul Oetken to sentence Mr. Kang, who pleaded guilty, to at least 10 years in prison. They called his actions a "flagrant abuse of his position of public trust."

His actions were "accomplished through exploitation of his trusted position and his willingness to lie and deceive at every turn," prosecutors said in a sentencing memorandum.

Mr. Kang, the Houston-born son of immigrants from India, had sought a sentence of house arrest, saying his trading decisions were focused only on the value of the securities to the fund and that his fixed income investments were monitored closely. Mr. Kang said neither the state nor the fund had lost money due to his conduct, which he said was a "departure from his otherwise law-abiding life."

According to prosecutors, Mr. Kang started working for the fund, the third-largest public U.S. pension fund, in early 2014 following stints at Goldman Sachs Group Inc., Guggenheim Partners and Pacific Investment Management Co., and was responsible for investing more than $53 billion in fixed-income securities.

Mr. Kang accepted bribes from Deborah Kelley, a managing director at Sterne Agee & Leach, and Gregg Schonhorn, who previously served as vice president of fixed income sales at FTN Financial. Mr. Kang knew Mr. Schonhorn and Ms. Kelley before he arrived at the pension fund, and had accepted an $8,000 Rolex from Schonhorn in 2012 and gifts from another broker in exchange for business from Guggenheim, prosecutors said.

After moving to the New York fund, prosecutors say Mr. Kang almost immediately began accepting bribes in exchange for steering business, which resulted in millions of dollars in commissions for the firms and the brokers.

The brokers' firms weren't on the list of those allowed to do business with the state pension fund when Mr. Kang started working there, but he soon got them approved. The value of transactions from New York pension business soared to more than $150 million a year at Sterne Agee, and about $2.4 billion at Schonhorn's firm, prosecutors said.

Schonhorn took Mr. Kang on weekend trips to Montreal, where he paid for airfare, hotel, meals, bottle service at a nightclub and cocaine, and lavished the portfolio manager with cash for prostitutes — even buying him a $17,000 Panerai wristwatch, according to prosecutors.

Ms. Kelley bought Mr. Kang and his girlfriend VIP tickets to a Paul McCartney concert in New Orleans as well as meals, drinks and tours in the city, and also paid for a weekend ski trip to Park City, Utah, prosecutors said.

Schonhorn pleaded guilty and cooperated with authorities. He's yet to be sentenced. Ms. Kelley was sentenced to three years' probation after pleading guilty.

Stifel Financial Corp. agreed to buy Sterne Agee Group in February 2015 in a $150 million cash-and-stock deal merging two of the biggest U.S. brokerages outside of New York.

The case is U.S. v. Kang, 16-cr-837, U.S. District Court, Southern District of New York (Manhattan).


https://www.institutionalinvestor.co...ow-Prison-Time
Quote:
Ex-NY Pension Employee Got a Ski Trip, Luxury Watch — And Now Prison Time
Navnoor Kang has been sentenced to 21 months in prison for engaging in pay-to-play while he was fixed-income chief at the New York State Common Retirement Fund.


Spoiler:
After a lengthy trial, Navnoor Kang — the former head of fixed income and portfolio strategy at the New York State Common Retirement Fund — has been sentenced to 21 months in prison for accepting gifts from brokerage firms in exchange for trading business.

On July 12, a judge in the Southern District of New York handed down the sentence, which was shorter than prosecutors expected, Kang’s lawyer Tina Glandian confirmed Friday by phone.

According to court documents, Kang began accepting bribes in 2014. These came from Deborah Kelley — a former Sterne Agee & Leach managing director who was already sentenced — and Gregory Schonhorn, an ex-FTN Financial vice president of fixed income sales, who settled with the Securities and Exchange Commission in March.

The bribes included a luxe ski trip to Utah, hotel reservations, dinners at upscale restaurants, bottle service, tickets to the U.S. Open, cocaine, a fancy watch, and cash to use for prostitutes and strippers, according to prosecuters.

In exchange for these gifts, Kang changed the retirement fund’s approval process for fixed income investments. Instead of having another person sign off on trades, Kang completed them himself.

“Kang’s trades resulted in the payment of millions of dollars in total commissions to Sterne Agee and FTN, of which Schonhorn and Kelley personally earned approximately 35 to 40 percent,” according to court documents.

But these gifts did not fly completely under the radar. In 2015, Sterne Agee’s new owner began investigating Kelley’s gift-giving activity, which prompted her to encourage Kang to join her in lying about the trip to Utah, among other things. He went along with it.

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However, things took a turn when the Securities and Exchange Commission began investigating the matter that year. Kelley and Kang attempted to again lie about what happened. However, they were found out. The two were not only were charged with engaging in bribery, but also with witness tampering as a result, court documents show.

Kang, who was indicted in December 2016, claimed that he engaged in the schemes because he was struggling to support his parents, who lived solely on his income. Prior to joining the pension fund, Kang had worked for Guggenheim Partners and Goldman Sachs, where he grew accustomed to the trappings of a certain Wall Street lifestyle: long hours, drugs, booze, and the finer things in life, according to court documents.

[II Deep Dive: Former New York State Pension Director Allegedly Hid Pay-to-Play Scheme]

Kang had been something of a prodigy before his downfall. In his late twenties, he joined PIMCO, and was promoted three times in less than two years.

He eventually moved to Guggenheim as a managing director, but was subsequently fired in 2013. Kang claims he was dismissed for rejecting the sexual advances of a male superior at work, according to court documents filed by the defense. Guggenheim claims that it was for failing to comply with the company’s gift reporting process after receiving an $8,000 wristwatch from an investor and failing to disclose it.

Given that his pay at New York’s pension fund did not enable him to keep up with the lifestyle and continue to support his family, Kang quickly turned to taking bribes, prosecutors asserted.

His salary at the $207 billion public fund was $135,689 in 2014 and $164,083 in 2015, according to public records. He would have made $166,464 in 2016.


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  #1067  
Old 07-15-2018, 03:37 PM
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CALIFORNIA

https://d3n8a8pro7vhmx.cloudfront.ne...pdf?1531409742

Quote:
Understanding CalFIRE v. CalPERS and the State of California

Spoiler:
The Basics
CalFIRE Local 2881 (CalFIRE) v. California Public Employees Retirement System
(CalPERS) and The State of California is a critical case with potential nation-wide impact.
Following a ruling in favor of CalPERS, CalFIRE appealed, lost again, and then appealed to
the Supreme Court of California. As of May 2018, the case has been fully briefed and is
waiting for a date for oral arguments.
Who brought this case and why?
The Union, CalFIRE Local 2881 initiated the case. It was initially filed only against CalPERS,
but the State of California joined the case when CalFIRE appealed to the State Supreme
Court after losing both the original trial and their appeal that followed.
CalFIRE (and other unions in California) want CalPERS to continue to offer "Air time," a form
of pension spiking, to state employees. The practice was halted as part of the Public
Employee Pension Reform Act (PEPRA) that took effect on January 1, 2013.
What should I know about PEPRA?
PEPRA, the Public Employee Pension Reform Act, primarily affects California public
employees hired after January 1, 2013. The legislation, signed by Governor Jerry Brown, a
Democrat, reduced pension benefit formulas and increased employee pension contributions
for new employees, and it severely restricted several forms of pension spiking, including "Air
time," for both current and new employees.
What is “Air time” and why is it so important to CalFIRE?
"Air time" is the practice of purchasing years of service credit without actually working those
years. For a lump sum payment, an employee could purchase up to 5 years of service credit.
This meant that an employee with 15 years of credit could purchase five additional years and
then retire with the pension benefits generally due an employee with 20 years of service, for
the rest of their life. This meant that employees could receive significantly higher pension
benefits without doing the work.
"Air time" was supposed to be self-funded, the lump sum payment was to cover the cost of
the additional benefits and be of no burden to taxpayers. Unfortunately, due to some
incorrect assumptions and math, the lump sum paid by employees was far less than the
actual cost of the benefits thereby putting an additional burden on the pension plan and
taxpayers.
Recognizing the significant advantage to employees that could afford to make the lump sum
payment, CalFIRE chose to file suit in an attempt to retain the opportunity for its members to
purchase "Air time."
© Retirement Security Initiative, June 2018 www.retirementsecurityinitiative.org
Why weren’t all the reforms applied to current state employees?
The California Rule has limited the ability to apply pension reform. This "Rule" is a state court
interpretation of state and federal constitutional law that prohibits changes that reduce
pension benefits already earned and prohibits changes to benefits for future work unless
those changes improve the value of future benefits not yet earned.
Tell me more about the California Rule?
In 1955, the Supreme Court of California ruled in a case, Allen v. City of Long Beach, and
explicitly stated, "...changes in a pension plan which result in disadvantage to employees
should be accompanied by comparable new advantages." Interpretation and court decisions
over the last six decades have resulted in the "Rule" that prevents retroactive reductions to
pension benefits and prohibits reductions to pension benefit accruals in the future. CalFIRE
argues that the elimination of "Air time" is the reduction of future benefits.
Why is this case so important?
This case could be decided narrowly or broadly. A narrow decision would affirm or reject the
right of employees to purchase "Air time." A broad decision would mean that benefits not yet
earned might be reduced thereby creating an opportunity for pension reform.
What have the courts ruled so far?
Both the original case and the appeal have been ruled in favor of CalPERS and the State of
California. In its decision, the 1st District Court of Appeal wrote,
"While plaintiffs may believe they have been disadvantaged by these amendments, the
law is quite clear that they are entitled only to a ‘reasonable' pension, not one providing
fixed or definite benefits immune from modification."
Many expect a ruling from the Supreme Court of California by the end of 2018. That ruling
will be the definitive end of this case and may be start of serious pension reform in California.
What happens next?
If there is a broad ruling, then the door will be open to reform of the current system. The
California Rule is often put forward as the basis for blocking public pension reform in other
states, even though few have formally adopted it. For instance, in Kentucky, the argument of
the Attorney General against recently passed pension reform by the legislature is based on
applying the California Rule.
Should there be a narrow decision, then two other cases, Marin Association of Public
Employees v. Marin County Employees' Retirement Association and one in Alameda,
Alameda County Deputy Sheriff's Association et al. v. Alameda County Employees'
Retirement Association, also pending in the Supreme Court, will proceed. Each of these
cases challenges the current interpretation of the California Rule and the ability to modify
future pension benefits not yet earned.
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Old 07-15-2018, 03:45 PM
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ILLINOIS
BUYOUT

https://www.mercatus.org/bridge/comm...buyout#new_tab

Quote:
Assumptions Matter for Illinois Pension Buyout

Spoiler:
This post has been edited to reflect updated calculations by the author.

Illinois, a state well-known for its severe budget problems, has turned to some creative policy solutions aimed at providing pension buyout options for state workers. Simply passing a budget puts the state leaps and bounds ahead of where they were this time last year; last June they were still about a month away from passing a budget to close out a two-year budget gap. The reforms in this year’s budget show more promise for long-term solutions, but still have a long way to go to fully address Illinois’ financial and transparency issues.

By focusing on reforming pensions in this year’s budget, Illinois policymakers are signaling that they want to get serious about long-term solutions. Doing so moves beyond the mindset that merely increasing taxes will solve the structural funding issues weighing down the state’s pension plans. But up until now, Illinois policymakers have been constrained given the state’s constitutional limits to pension reform.

This is why the new pension reforms are voluntary. Under the bill, there are two buyout options. One is directed at beneficiaries who are vested in one of the pension plans, but are no longer active members. They can voluntarily choose to accept 60 percent of the present value of their vested pension benefit in exchange for dropping out of the system. The other buyout option is for beneficiaries who have not retired yet. They can choose to receive a lump sum payment of 70 percent of their pension balance and a 1.5 percent cost-of-living adjustment (COLA) that is not compounded in exchange for their previous three percent compounded COLA. All beneficiaries who accept the buyouts will roll over their benefits into retirement funds similar to the way that private sector employees roll over their 401(k) benefits when changing jobs.

Are these buyout options a good deal? At first glance, they certainly seem like it from the state’s perspective. The first buyout option for vested members is estimated to save the state $41 million and the second option could save $382 million. The question remains whether this is a good deal from the perspective of state workers.

Beneficiaries who opt into these buyouts only get 60 or 70 percent of what they were originally promised. Opponents of the reforms have called the deal unfair. Indeed, reducing lump sum payouts by such factors has not proven acceptable in buyouts for private-sector plans. The general idea of buyouts, however, has proven successful in the private sector, albeit with larger payments. The practice has been much less common in the public sector, with Missouri being the other only public sector example.

As described in a Mercatus research paper from 2016, workers in especially insolvent and fiscally distressed pension systems may be well-advised to take a buyout deal. In their paper, former Mercatus researchers Mark J. Warshawsky and Ross Marchand write:

“…once the unsustainability of many government plans is apparent, those affected retirees and long-time workers will become legitimately worried that their retirement benefits are highly uncertain and likely subject to one-off arbitrary and chaotic cuts in bankruptcy, insolvency, and political processes operating in a poor fiscal environment…When it becomes clear that many state and local governments cannot pay off their massive underfunded pension obligations – even with increased taxes – these retirees and older workers may be willing to accept a lump-sum that represents a significant, but not necessarily full, share of the actuarial value of their promised benefits.”

Illinois’ lump-sum payment calculations fall short of this recommendation because they rely on interest rate assumptions that do not fully reflect reality.

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Illinois ranked 49th overall in the latest edition of our “Ranking our States by Fiscal Condition” report. With revenues that only covered 96 percent of expenses in FY2015 and long-term liabilities making up 317 percent of total assets, or $12,118 per capita, the state finds itself in an ongoing dire fiscal situation. But Warshawsky and Marchand’s lump-sum payout policy recommendation has another key component that Illinois’ buyouts lack. They stress the importance of giving pension plan participants accurate information about the funded status of their pensions. Illinois’ lump-sum payment calculations fall short of this recommendation because they rely on interest rate assumptions that do not fully reflect reality.

Warshawsky and Marchand recommend that when buyout options are appropriate, government plan sponsors should offer a payout equal to the present value of each participant’s retirement benefits accrued to date, reduced by 100 percent minus the funded percentage of the plan at the time of the offer. They also recommend adding five percentage points as a sweetener to provide extra encouragement for retirees and older workers to take up the offer, though policymakers could alter this to be more or less generous.

The best-case scenario would base the “funded percentage” on a market valuation of plan liabilities using economically wise interest rate assumptions. Following this recommendation and using a market valued funded ratio from fiscal year 2016, for example, would assess Illinois’ plans at 21 percent funded. To complete Warshawsky and Marchand’s recommended calculations, we would subtract 21 from 100 to get 79. For a retiree who opts into the buyout, we would subtract 79 percent of their accrued retirement benefits and then add the extra 5 percentage points in order to get to their final lump-sum. Illinois’ buyout options are not based on these numbers, but on rosier funded ratios and less reliable calculations instead.

Without fully explaining how the lump-sums are calculated, or which interest rates are used, policymakers are concealing the fact that beneficiaries would receive more than what the state can afford. Suppose I used to be a public worker, but have since retired from service. Let’s also assume that my pension balance is $500,000. Under the bill that just passed, I could choose to receive 60 percent of my balance, or $300,000, as a lump-sum. As previously explained, however, this estimate relies on unrealistic interest rate assumptions.

If I was offered an alternative buyout option that used more economically accurate assumptions, I would be getting a smaller buyout. Under this hypothetical alternative scenario, I would receive a lump-sum of $130,000 or 26 percent of my original balance, rather than the 60 percent currently on the table. The table below compares these buyout options as well as the other buyout option currently available to current public workers.

Public Workers Would Receive Smaller Buyouts under Better Economic Assumptions


The two offered options are based on calculations from pension buyout options presented in the recent Illinois budget. The hypothetical option is based on the recommendation from Warshawsky and Marchand that plan participants be given accurate information. These calculations are based on Illinois' fiscal year 2016 market funded ratio of 21 percent and a combined market unfunded actuarial accrued liability of $445.79 billion. The 15-year treasury rate used for that time period was 1.675 percent.

I am not running these calculations to suggest beneficiaries are receiving more than they deserve, but rather to highlight what exactly goes into their calculation and to suggest that Illinois’ financial situation is even worse than they let on. Depending on what interest rate is used, the nature of the unfunded liability changes, which in turn changes the size of the potential lump-sum. In debates about whether or not Illinois’ pension buyouts are “a good deal,” this is largely ignored.

By using unrealistic interest rates for these buyouts, policymakers are concealing just how severe their financial situation is. For a given buyout option, the terms should reflect the true funded status of the pension plan. Applying more realistic interest rates to Illinois’ recent buyout options reveals that their situation is so bad that being completely transparent with beneficiaries would require significantly cutting lump-sums. It is not surprising that policymakers have decided to go with less honest interest rates.

Some retirees and older workers will find it fitting for their financial situation–and concern about Illinois’ future decisions about pensions–to accept a buyout. Hopefully, though, policymakers will be more transparent so all parties can be more informed before moving forward on such a life-changing decision. The interest rate selection in the latest reforms works in favor of public workers who opt in to receive lump-sums, but only postpones the inevitable for beneficiaries who stick around.

The key essence of Warshawsky and Marchand’s policy recommendations recognize the underlying reality of most pension problems. For some extremely insolvent plans, the more that time passes without reform, the lower the likelihood that the state will be able to pay out their pension liabilities as originally promised. Although no policymaker wants to go back on their promises, the longer they postpone sustainable reform, the more they must deal with the reality of their past mistakes. Buyouts, properly structured, provide a compromise to meet all of these competing priorities. However well-intentioned, Illinois pension buyouts don’t balance these priorities well.

Even if this best case scenario occurs, the savings would still fall short of the $7.1 billion backlog of unpaid bills.

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If a significant number of workers take up the recent buyout offers, Illinois could save as much as $432 million. Moody’s Investors Service cited the new budget and these projected savings as a credit-positive move for Illinois. S&P, however, released statements that expressed doubt about the budget’s ability to seriously tackle Illinois’ financial problems. Moody’s predictions rely on at least 22 percent of vested former workers and 25 percent of retiring current workers participating in the buyout programs. Even if this best case scenario occurs, the savings would still fall short of the $7.1 billion backlog of unpaid bills. This, paired with the fact that Illinois is going to use general obligation bonds to fund the buyouts, only further provides evidence to question the fiscal stability of the recently passed budget.
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Old 07-15-2018, 04:34 PM
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Mary Pat Campbell
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CONNECTICUT
OPEBs

https://www.forbes.com/sites/christo.../#5b90c7aa5006

Quote:
We Need To Start Talking About Post-Employment Benefits

OPEB liabilities are perhaps the greatest single under-reported and under-scrutinized unfunded liability
Connecticut has as much as $36 billion in unfunded OPEB liabilities
Spoiler:
State and local governments are struggling to keep their unfunded pension liabilities under control and are using misleading actuarial and pension fund performance assumptions to cover-up the severity of the problem. However, there is another huge gorilla of unfunded liabilities that many states and municipalities are also facing, namely “Other Post-Employment Benefit” (OPEB) liabilities. This is primarily lifelong healthcare benefits, but can also include other benefits such as dental, vision, and prescription coverage. It may even include insurance such as disability, long-term care, and even life insurance.

OPEB liabilities are perhaps the greatest single under-reported and under-scrutinized unfunded liability within our state and municipal employee retirement systems. Just as with pension liabilities, where pension systems typically underestimate how long their beneficiaries will live (using old and out of date actuarial assumptions), and over-estimate how much their pension system will earn in a year, so too with OPEB. I saw this first hand both as a Member of the Connecticut House of Representatives, and then as Connecticut State Treasurer.

When our politicians use assumed rates of return that are unrealistically high, and out of date mortality tables, both pension and OPEB liabilities skyrocket because it permits policy makers to underfund both, or if you are the State of Connecticut, not to fund OPEB at all. It is estimated that Connecticut has as much as $36 billion in unfunded OPEB liabilities as of this year. Further, because of the state’s population of around 3.5 million, this amounts to over $10,000 per resident. This is on top of the billions of dollars the state already faces in unfunded pension liabilities. Crazy!


In 2008, ten years ago now, the Governmental Accounting Standards Board (GASB) estimated total OPEB liabilities to be over $1.5 trillion. Updated estimates will be much, much worse! Suffice it to say, going with GASB’s 2008 estimate, American taxpayers, face an enormous mountain of pension and OPEB liabilities that are underestimated, underfunded, and under-discussed. For all our retirees, from those who serve or served in our schools, communities, counties and states, unless things change, the coming reckoning will be worse than a mistake it will be a blunder by our politicians.


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Old 07-15-2018, 04:35 PM
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CHICAGO, ILLINOIS
POLICE AND FIRE
https://www.truthinaccounting.org/ne...-broke#new_tab

Quote:
Chicago police and fire pension plans: growing flush or going broke?
Spoiler:
Different 'authoritative' sources say very different things.

Public-sector defined-benefit pension plans report “funded ratios,” a metric commonly used to assess their financial status. Calculating the ratio involves projecting future benefits promised to employees, discounting those promises to their current (present) value, and comparing the present value of promised benefits (in the denominator) to the invested assets in the plan (the numerator).

If a plan currently has less invested assets than the present value of discounted benefit promises, its funded ratio will be less than 100 percent (most are), and the plan will report a net pension liability in the annual financial report.

What constitutes an adequate funded ratio? This is a matter of some debate, with many industry participants willing to accept a conventional wisdom that something like 80 percent is “adequate.” Other, more responsible observers are unwilling to accept anything less than 100 percent percent as adequate.

So, where are the Chicago police and fire pension funds today on their funded ratios?

The latest annual financial report for the City of Chicago’s firefighter pension fund (2017) showed a funded ratio (technically called the “plan fiduciary net position as a percentage of the total pension liability”) of 20 percent.

Not 100 percent, not 80 percent. Twenty percent.

The City of Chicago’s police pension fund wasn’t much better, coming in at about 24 percent in 2017.

Things get very interesting—and progressively harder to understand—when you consider questions relating to how to discount those future benefit promises to their present value.

A strong case can be made that these plans should use risk-free interest rates to discount the liabilities, but public-sector plans have traditionally used expected rates of investment return, which are significantly higher than risk-free rates. Some critics say this practice leads to inflated funded ratios, given that they use higher than appropriate discount rates (which lead to lower present values for the benefit promises). Some critics also decry how this choice of discount rate can lead to higher risk-taking in investment portfolios, with taxpayers facing the downside.

And speaking of complicated, the Governmental Accounting Standards Board in recent years has changed the way state and local governments calculate their discount rates. Expected rates of return on investment are still allowed, but only for periods in the future when invested assets are projected to exist. If plans expect to run out of assets, they are required to use a municipal bond yield to discount promised benefits after that.

Currently, municipal bond yields are well below expected investment returns, which yields higher present values for liabilities (and lower funded ratios) for plans if and when they have to adopt the new “blended” discount rates.

And that is what has happened to the Chicago police and fire pension plans in recent years. They both are using blended discount rates, given that they project themselves to be running out of assets a few decades into the future.

Trouble is, there is more than one way to skin a cat, and there is more than one way to project future financial conditions for pension plans.

State and local government pension plans also prepare and issue “actuarial valuation reports.” Longer story short, for both the police and fire pension plans in Chicago, these reports include tables projecting funded ratios rising from woeful levels today to 90 percent a few decades into the future.

For example, the latest actuarial report for the Chicago fire pension plan projected the funded ratio to rise from 20 percent in 2017 to 90 percent by 2055—a funded status goal also required, in theory, in current law. This projection shows the market value of the assets supporting the plan rising from $1 billion in 2017 to $8.6 billion by 2055.

Do you see where I’m going?

How can the Chicago fire pension plan expect assets to rise 8-fold over the next few decades, yet also be required to use a blended discount rate because it expects to run out of assets?

An important part of the answer lies in the fact that the actuarial projections allow for consideration of future contributions relating to current as well as future plan participants, while the GASB calculation is restricted to current participants.

So which perspective is “right?” They are measuring different concepts, but one way to check up on things is to look at the changes in the projections for contributions in the actuarial reports in recent years. Five years ago, the Chicago firefighter fund was projecting progressively sunnier skies.

But as current conditions began to arrive, the plan significantly cut back on near-term contribution expectations, and lifted the projections for contributions in the future—a sign that they may have been, and still are, too optimistic.

Back in 2013, the actuarial valuation report for the fire plan was projecting contributions to rise from $260 million in 2017 to $294 million by 2021. By 2017, however, the plan projections showed just $228 million for 2017, while the projection for 2021 rose from $294 million (as of 2013) to more than $360 million (as of 2017).

One can argue that the more restrictive GASB calculation is itself too liberal, given that it effectively capitalizes future tax revenue (supporting future contributions) as assets. In the private sector, companies aren’t allowed to capitalize future sales revenue as assets.

Granted, governments have some “sovereign” powers, like the power to tax. As coercive as this authority can be, it isn’t a sure thing. And sovereignty isn’t owned and controlled by the government. In the United States of America, the government is not the only sovereign—if it is at all.

“We The People.” That’s how the Constitution starts.




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