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  #1391  
Old 09-18-2018, 07:18 AM
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CONNECTICUT
https://ctmirror.org/2018/09/17/repo...widening-debt/
Quote:
Report says pension boards share blame for states’ widening debt

Spoiler:
While past governors legislatures and governors get much of the blame for Connecticut’s massive pension debt, a new analysis says politically appointed oversight boards should share the heat both here and in other states.

A recent analysis from The Manhattan Institute, a conservative, New York-based public policy group, also charged that labor representatives on these boards risk long-term pension stability to achieve short-term union objectives.

“Among the sources of the underfunding malaise are the boards that oversee the pension funds,” the report states. “ … Unfortunately, the incentives of board members lead them away from protecting employees and taxpayers from major financial risks.”

In 2016, states’ pension funds held — on average — enough assets to cover 69 percent of their long-term obligations.

In Connecticut, which underfunded its pension programs for more than seven decades between 1939 and 2010, the state employees retirement system’s funded ratio is 37 percent. The teachers’ pension is better,p at 56 percent, but it also benefitted from a $2 billion deposit the state borrowed — at about 5.8 percent over 25 years — in 2008.

The typical pension board has five to 15 trustees, usually a mix of appointees by governors and legislatures, and current and retired workers selected to represent labor.

In some states, these appointed pension boards decide how billions of dollars in pension assets are invested. In others, like Connecticut, the pension investments are controlled by the treasurer’s office.

But in many states, including Connecticut, these boards play a key role in helping to determine how much states must budget for pension contributions.

In Connecticut, the State Employees Retirement Commission and the Connecticut Teachers Retirement Board not only administer retirement benefits, they also set the discount rate — the assumed average rate of return on pension investments.

This is key because the higher the assumed rate — the more money the panels estimate pension fund investments will earn — the less money governors and legislatures must budget for pension fund contributions.


“Board decisions most in keeping with a plan’s fiscal health would make conservative investments and tend to keep the discount rate lower,” the analysis states. “But that is not what happens.”

Most of the nearly 300 state government pension systems and 6,000 local government-administered retirement systems set discount rates between 7 and 8 percent, according to the Manhattan Institute.

Critics in financial services and academic circles have argued that, since the last recession ended in 2009, a better target is closer to 4 percent, pointing to the yield on certain U.S. Treasury bonds.

Moody’s Investors Service proposed a new methodology in July 2012 that used the return of high-quality corporate bonds as its new guideline, noting that their average yield was 5.5 percent in 2010 and 2011.

And a “state stress-test analysis” released by The Pew Charitable Trusts earlier this year assumed states would average a 5 percent return on investments in the coming decades.

The Manhattan Institute analysis also asserts that unrealistic rates also leads some states to make excessively risky investments with pension funds, sometimes costing taxpayers more dollars in the long run.

Connecticut lowered its discount rates in recent years, but none approach these suggested levels. It lowered the rate for the state employees’ pension, in two stages, from 8.25 percent to 6.9 percent, and for the teachers’ fund from 8.5 percent to 8 percent.

Connecticut state Treasurer Denise L. Nappier told the legislature’s Appropriations Committee last March that a 7 percent rate assumption for the teachers’ pension “would be more reasonable and consistent with our capital market expectations going forward.”


Former AFSCME Council 4 head Salvatore Luciano

The legislature’s Finance, Revenue and Bonding Committee raised a bill last spring that would have transferred authority to control pension investments from the treasurer to an appointed board.

Nappier testified against that measure — which died in committee — arguing the politically appointed panel would have authority over $60 billion in public assets, yet exempt from the requirement under the state Code of Ethics to file statements of financial interest.


State Rep. Fred Wilms, R-Norwalk, who serves on the new Pension Sustainability Commission, said Connecticut’s best course of action is “to move as many employees as quickly as possible into 401(k)-style defined-contribution plans” and out of pensions. “We need to get the state out of the actuarial risk business.”

But Sal Luciano, recently retired executive director of Council 4 of the American Federation of State, County and Municipal Employees, said the Manhattan Institute analysis is flawed on several grounds.

Luciano, who has served on the State Employees Retirement Commission since 2001, said labor and management trustees “are in agreement all of the time,” adding gridlock has been “extremely rare.”

And while state employee unions did consent to requests from multiple Connecticut governors to defer pension contributions in the 1980s, 1990s and 2000s, they did so with a figurative gun to their heads: Allow the state to short-change pension contributions or face major layoffs.

“There were times the unions had a Hobson’s choice,” he said. “They tried to pick the lesser of two evils.”


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  #1392  
Old 09-18-2018, 07:18 AM
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CALIFORNIA
https://voiceofoc.org/2018/09/pensio...ven-oc-cities/
Quote:
Pension Costs Underlie Tax Increases in Seven OC Cities

Spoiler:
Seven Orange County cities are asking voters to approve tax increases in November’s general election, as officials say they need to either raise taxes or make major cuts to city services and public safety.

Garden Grove, Placentia, Laguna Beach and Seal Beach will ask their voters to raise the sales tax by one percent, while Santa Ana is pursuing a 1.5 percent increase, which would make it the highest sales tax in Orange County at 9.25 percent.

Santa Ana is asking voters to approve a new business license tax on commercial pot shops. Tustin is looking to raise the transient occupancy tax – commonly known as a hotel bed tax – from 10 to 13 percent, while San Clemente is proposing raising its hotel bed tax from 10 to 12.5 percent.

Cities statewide are facing grim budget forecasts, driven in part by the ever-growing cost of public employee pensions. Those costs are only expected to grow in the coming decade, as recent policy changes by CalPERS, the state pension agency, require employers to pay off their pension debt more quickly and at higher rates.

At a Garden Grove City Council meeting July 24, Mayor Steve Jones blamed those rising costs in part for the city’s budget woes.

“We just had a 3.6 percent cost increase from CalPERS – unanticipated, and out of our control. It just happened to us,” said Jones. “I don’t know how that’s going to be sustainable, and I don’t know how cities across the state are going to be able to survive that.”

Except for Laguna Beach, the sales tax proposals are a general tax, meaning once approved by voters, the revenue is available for all governmental purposes. The Laguna Beach measure is a special tax that would go toward fire services and putting utilities underground.

In the 2016 election, voters in Fountain Valley, La Palma, Stanton and Westminster approved one percent sales tax increases. La Habra voters approved a half-cent sales tax increase in 2008, a measure which will sunset in 2028.

A January study by the League of California Cities found that over the next five years, cities’ dollar costs for pensions are expected to increase by more than 50 percent, and more than double the percentage of their general fund devoted to pension costs.

Garden Grove’s pension expenses, for example, are expected to grow from $25.9 million (19 percent of the total general fund) in the 2018-19 fiscal year to $64.7 million (37 percent of the general fund) in 2024-25.

Since the Great Recession in 2008, many cities have made cuts and haven’t restored services to pre-recession levels. Officials say they don’t want to cut services further and argue they need to spend more on police, citing growing homelessness and state laws that law enforcement groups say are driving up crime and overburdening local police.

But a Public Policy Institute of California study on one of those laws, Proposition 47, found no evidence Prop. 47 has impacted violent crime rates, although it found “some evidence” that property crimes have increased as a result.

The bulk of employee pension costs – about two thirds — are driven by benefits for police and firefighters, which generally are more generous to compensate for the risks public safety employees endure as part of their jobs.

At a Garden Grove City Council meeting on July 10, Bob Leland, a consultant hired by the city to analyze its budget, told the council that most California cities are facing the same problem.

“But time is not your friend here. You really cannot wait too long on this,” Leland said. “Current budget challenges are either going to require significant cuts to key services or additional, locally-controlled revenues, because at least they are not subject to state takeaways.”

Cities also blame the state for eliminating redevelopment agencies, once a tool for diverting tax revenue to city-run agencies to fund projects in blighted areas.

While cities only receive one cent on every dollar of taxable sales collected statewide, by passing their own tax, they have a revenue stream that’s entirely local.

Even if voters approve the sales tax increases, it’s murky whether that new revenue will be enough to sustain current service levels and keep up with the pace of rising pension costs.

In Santa Ana, officials expect the budget shortfall to grow from $10 million this fiscal year to nearly $40 million by 2021 – a figure which could change depending on whether employees are given further raises, or if the economy goes south.

If approved by voters, Santa Ana’s 1.5 percent tax increase would raise an estimated $63 million in new revenue each year for ten years. Starting in 2029, the rate would fall from 9.25 percent to 8.75 percent, generating an estimated $40 million per year, according to a city staff report.

But the city’s total spending on pensions is also projected to grow by 80 percent over the next five years, from $45 million this fiscal year to $81 million.

In July 2017, Santa Ana officials approved raises for police officers, an additional $3.8 million in annual costs. As part of the deal, police officers agreed to raise their pension contributions from 9 percent to 12 percent of their salary (12 percent is the maximum) and cap city payments for medical costs at current levels, which will offset the labor costs by $1.1 million.

In December, the city also approved $1.5 million in raises for members of its general city employee union.

While other cities, like Garden Grove, have given employees one-time cash payments in lieu of salary increases, costs that don’t count toward pension benefits – any increase to an employee’s base salary will affect how much cities, and taxpayers, are on the hook for their public pension.

Pension Problems

An expansion in public benefits for public employees in 1999, followed by underperforming investment funds after economic crashes in the early 2000s and 2008, have led to the steady rise in the cost of public pensions, quickly outpacing the ability of the state pension system to keep its program funded.

Salaries for public employees have also continued to go up, while retirees are living longer.

CalPERS has made a number of major changes in recent years to try to fund its program.

In 2016, the pension agency announced it will lower its discount rate from 7.5 to 7 percent by 2019.

CalPERS generally assumed it would earn an average 7.5 percent rate of return on its investments each year, known as the discount rate. But investments have generated varied returns, from 18.4 percent in 2014, 0.6 percent in 2016, and 11.2 percent in 2017.

Lowering that estimated rate of return shifts more costs on cities and the state government to make up for revenue the pension agency isn’t getting from its investments.

The state agency has also lowered the time period that governments have to pay off their debts from 30 years to 20 years, which will increase what agencies owe to pay off their debts faster.

Growing Deficits

In Garden Grove, city officials are trying to pare down a projected $8 million deficit for the 2018-19 fiscal year, by instituting an early retirement program, 5 percent budget cut to every department but public safety, and other adjustments. Even after the cuts, the city is left with a $3.6 million shortfall, according to a budget presentation.

Annual deficits will continue to rise, and hit $12.2 million in the 2022-23 fiscal year, according to the presentation.

Since 2009, in addition to cuts, Garden Grove officials have largely dealt with shortfalls with one-time fixes and by drawing nearly $14.5 million from internal funds, funds that are now almost depleted, according to staff. Nearly $15 million in maintenance costs for equipment, streets, storm drains, buildings and parks, have also been deferred, said Deputy City Manager Maria Stipe.

Currently, only the city’s sworn police employees pay the maximum employee pension contribution, 12 percent.

Jones said the city has been trying to operate “lean and mean” since the 2008 recession.

“We have spent the last years prudently trying to make cuts, taking furloughs, so we could avoid mass layoffs like surrounding cities,” said Jones.

Still, the city has increased spending in some areas. In the 2016-17 fiscal year, citing concerns about neighborhood crime, the city council added five new police officers and upgraded three firefighter positions to firefighter/paramedic positions. The city also cancelled a contract with the county for shelter and animal control services and started its own department, arguing that taking the service in-house would be cheaper in the long run.

Jones said the city has tried to develop an ongoing source of new revenue by investing in new hotel developments along Harbor Boulevard. Those efforts have been “incredibly effective,” Jones said, but blamed factors “somewhat outside” the city’s control, like the state’s decision to close redevelopment agencies and pension pressures, on current budget woes.

Garden Grove officials estimate the sales tax measure would raise an additional $19 million a year in city revenue.

In Placentia, city officials say they cut 15 percent of the annual operating budget to make ends meet this fiscal year, about $2.7 million in reductions. The annual deficit is expected to hit $11.3 million in 2028-29, according to a staff report.

This year, the city is budgeted for 18 fewer employees than it did had before the recession in the 2007-2008 fiscal year.

Annual pension costs for Placentia are expected to rise from $3.38 million this fiscal year to $5.88 million in 2024-2025.

According to Assistant to the City Administrator Jeanette Ortega, all Placentia employees contribute the maximum contribution to their pension, or 12 percent of their salary.

Placentia councilman Craig Green also pointed to declining sales tax revenue as a major factor, noting that the growth of online sales is contributing to declines in overall revenue.

“The only way to make up for that is to do a transaction and use tax that Sacramento can’t touch,” said Green. “It’s not healthy, and I’ve always been anti-tax, but the financial sustainability of the city is my primary concern.”

Green noted that in June, the council updated the city reserve policy, which requires portions of the revenue generated by a new general tax to go toward reserve funds.

Seal Beach has operated with a small surplus for the past five years, raising employee wages to keep up with the cost of living and granting some employees merit increases.

This fiscal year, the city faced a $4 million deficit, according to a staff report. After reductions, that deficit was reduced to $80,000, although city officials didn’t respond to a request for comment about those reductions and what the deficit increase is driven by.

While cutting in some areas, the city also added two new, full-time police officers this fiscal year, paying for the expense out of a swimming pool fund.

In the 2016-17 fiscal year, Seal Beach paid $4.8 million toward pension expenses, according to the city’s annual financial statement for that year.

In both Placentia and Seal Beach, the sales tax increase is expected to raise about $5 million in new revenue each year.

In Laguna Beach, the argument for the sales tax increase, which would generate $5.6 million annually, is primarily to fund a $135 million project to put power lines below ground.

The city projects a $595,800 deficit this fiscal year, which will rise to $875,000 by 2020-21, according to the city’s current two-year budget document.

But the city has generally enjoyed growth in staffing, adding 14 new positions in recent years, according to a budget presentation.

Laguna Beach voters in 2016 approved Measure LL, which increased the city’s hotel bed tax from 10 to 12 percent. Officials estimate $2.2 million in new revenue from the measure this fiscal year, and have allocated that money toward new positions and expanding city services like summer lifeguards.


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  #1393  
Old 09-18-2018, 07:19 AM
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DANVILLE, ILLINOIS
http://www.news-gazette.com/news/loc...efighters.html
Quote:
Pension costs hang over vote on $1.4M grant to hire firefighters

Spoiler:
DANVILLE — In the next three weeks, Danville aldermen must make an already-controversial decision to either accept, or reject, a $1.4 million federal grant to hire six new firefighters.

Some aldermen are not convinced that hiring additional firefighters with federal dollars is the most feasible move.

The sticking point: The grant would pay about 75 percent of the annual cost of six positions for two years and 35 percent the third year.

And after that, the city is on its own.

Alderman Lloyd Randle (Ward 7) said the council must determine what hiring additional firefighters will do long-term to Danville's pension costs, which have increased each year despite the city continuing to decrease the number of firefighters.

"This is a mounting cost that's killing us," Randle said.

The department currently has 39 firefighters, including one training officer. In 2000, the city had more than 60 firefighters. By 2009, it was about 50.

Leaders of the firefighters' local union, International Association of Firefighters Local 429, have argued that personnel have been reduced to a point that it puts at risk the lives of citizens in Danville and firefighters themselves. This grant would help the department meet industry minimum standards for fire department manning.

Randle also said he will not support accepting the SAFER (Staffing for Adequate Fire and Emergency Response) federal grant to hire firefighters if adjustments aren't made to reduce the hundreds of thousands of dollars the city pays each year in overtime in the department.

"We've got to get it figured out or I'm not going to support it," Randle said.

Firefighters made a presentation to the city council about the SAFER grant earlier this summer and told aldermen at that time that the savings to the city would come through the reduction of OT costs — budgeted at $600,000 this fiscal year.

Mayor Scott Eisenhauer said four months into the fiscal year, the fire department's overtime is running over budget, and if the pace continues, the city would end the year $200,000 over.

Adding six new firefighters would cut overtime costs from $600,000 to $100,000, department members estimated in their presentation to the council.

Danville firefighters took the initiative to apply for the federal grant, which the city must formally accept by Oct. 7, or forfeit the funds.

Firefighter Ryan Allison, who wrote the grant application, said the department may not get another chance at this federal money.

Randle and Alderman Rickey Williams Jr. (Ward 1) both said that council members who have firefighter relatives should recuse themselves from a vote on whether to accept the grant.

Three aldermen have either a son or son-in-law who serve in the department.


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  #1394  
Old 09-18-2018, 08:45 AM
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CALIFORNIA
CALPERS
GOVERNANCE

http://www.pionline.com/article/2018...n-proxy-voting
Quote:
CalPERS turns focus to board diversity in proxy voting

Spoiler:
CalPERS voted against 438 directors at 141 companies based on the companies' failure to respond to CalPERS efforts to urge greater board diversity, said Simiso Nzima, investment director, corporate governance.

These votes were the result of a new effort started in July 2017. CalPERS voted against board chairmen, nominating and governance committee members and directors with tenures of 12 years or more, he said. CalPERS is starting to hear from executives at some of the companies at which it cast a no vote that are now willing to engage CalPERS regarding the lack of diversity on their boards, Mr. Nzima said.

Officials at the $361.1 billion pension plan in July 2017 wrote letters to 504 companies in the Russell 3000 asking them to improve diversity on their boards. In December, CalPERS officials sent a second letter to non-responsive companies warning that the pension plan would use its proxy votes to hold boards accountable for their failure to improve diversity.

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As of July 31, 151 of the 504 companies had added at least one diverse director to their boards.

The California Public Employees' Retirement System, Sacramento, is not alone is pressing the issue, Mr. Nzima said.

These companies "are hearing not just from us but other investors as well," Mr. Nzima said.

Due to its size, CalPERS owns the market, he said.

"We own much more than other pension funds and we can reach out to more companies than other pension funds," Mr. Nzima noted.

Once more companies diversify their boards, it will encourage women and minority executives to apply for board seats, he said.

There is no lack of candidates. Indeed, CalPERS and the $228 billion California State Teachers' Retirement System, West Sacramento, jointly created a database a few years ago.

However, there is a difference between lack of supply of qualified candidates and qualified candidates failing to apply for board seats, Mr. Nzima said. If people don't think there is an opportunity to be chosen for a board seat, they won't apply, he explained.

"When (potential candidates) see opportunities are available for diverse candidates, the number of people who make themselves available increases," Mr. Nzima said.

CalPERS will continue to collaborate with other asset owners and money managers on strategies to improve board diversity, he said.

In other action during the proxy-voting season, CalPERS voted against 6,124 non-independent directors at 794 Japanese companies where independent directors make up less than a third of the board. In 2017, CalPERS amended its proxy-voting practice for Japan to increase board independence and to vote against non-independent directors when less than a third of the board's directors are independent. By comparison, in 2017, CalPERS had voted against 6,509 non-independent directors at 864 companies.

In the U.S., CalPERS in the 2018 proxy season implemented an enhanced voting practice on executive compensation, voting against 43% of say-on-pay proposals, compared to 18% in 2017. The primary reason for the vote against the proposals was the companies' failure to align pay with performance. In 2018, CalPERS officials increased their level of scrutiny when reviewing a company's pay and performance practices, casting a wider net of company plans it would oppose and including more factors such as CEO pay ratio information.


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  #1395  
Old 09-18-2018, 08:45 AM
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CHICAGO, ILLINOIS

https://www.breitbart.com/big-govern...-million-loss/

Quote:
‘Shaky’ Real Estate Deal Brokered by Obama/Daley Associate Costs Chicago Pension Funds $54 Million Loss

Spoiler:
A report finds that several “financially-strapped” Chicago pension funds invested $68 million in a “shaky” real estate deal brokered by a man associated with Chicago Mayor Richard Daley and Barack Obama that ultimately resulted in a $54 million loss.
The “high-risk” investment deal was reportedly arranged by Chicago lawyer Allison S. Davis — a longtime Daley family associate and the man who gave a young Barack Obama his first major Chicago job. Mayor Richard M. Daley’s nephew, Robert G. Vanecko, was also a principal in the deal, according to the Chicago Sun-Times.

The deal, going by the name DV Urban, was aimed at buying and rehabilitating several properties in a few Chicago neighborhoods and, with Daley as Mayor and three of his top operatives at City Hall in on the deal, it was easily and quickly approved.

According to the Sun-Times, eleven years later, the deal had obviously gone bust at great cost to the several city pension funds. As soon as the stories chronicling the failed investments hit the presses in 2009, Daley’s nephew, Vanecko suddenly withdrew his involvement in the scheme.



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Several years later, and after a federal grand jury took up the fraud, the city pension administrators kicked Obama’s former employer out of the deal and tried to take control of the investments to save them from further ruin. Eventually, all the real estate properties in the original deal were shed, including a failed redevelopment plan of the former Chicago Defender headquarters and a costly project to rehab a burned out grocery store.

The various projects undertaken by the Obama/Daley associates ended up losing $54.2 million of pension fund dollars. But that was not the total extent of the loss. The pension funds also spent $2.6 additional dollars in legal fees to try and wrest control of the plan away from Davis and Vanecko as well as $14,400 in court fees.

The final accounting by the paper shows that the deal lost 80 percent of the funds invested into the development schemes. The city pension funds that lost the money includes the Chicago teachers, police, garbage collectors, bus drivers, and municipal employees funds.

“It’s one thing not to have a positive return. But it’s a whole ‘nother thing when you have negative returns and lose your principal,” Chicago Teachers pension fund official Charles Burbridge said. “DV Urban’s the worst that comes to mind.”

According to the paper, some of the pension funds that lost money include:

The teachers’ fund lost $19.7 million
The police lost $12 million
The city laborers lost $8 million
The bus drivers lost $2.4 million
The municipal employees union lost $12 million
Meanwhile, DV Urban was paid around $9 million in “development fees” by the funds to manage the failed deals.

The loss of funds for the unions amounts to the loss of one year’s worth of pension payments for 720 retirees.



The full extent of the loss has sent the various pension funds scrambling to re-evaluate how they invest their members’ retirement funds, the paper reports.


https://fixedincome.fidelity.com/ftg...ded465e4_110.1
Quote:
Chicago latest to face Illinois intercept for delinquent pensions

Spoiler:
CHICAGO – Chicago is the latest Illinois city to find itself facing the diversion of state funds to make up for pension contribution shortfalls.

The Chicago firefighters’ pension fund has joined the list of retirement systems triggering a state law that allows for the diversion of state-related funds to make up for the shortfalls. Chicago denies it owes any money to the fund.

The Firemen’s Annuity and Benefit Fund of Chicago filed two claims for $3.3 million. They accuse the city of a $1.8 million shortage, plus interest, in its $199 million 2016 contribution owed under state statutes and a $1.5 million, plus interest, shortage in its $208 million 2017 contribution as of Sept. 1, according to the letter submitted to Comptroller Susana Mendoza’s office.

In Chicago's case, the comptroller can only intercept the city's grants from the state government; state-collected funds such as sales taxes are off limits.

“The board of trustees has a fiduciary duty to ensure that all monies due and owing to the fund are contributed to the fund consistent with the requirements of the Illinois Pension Code. On behalf of participants and beneficiaries, the board of trustees will continue to take all necessary steps to fulfill that duty,” firefighters fund board president Daniel Fortuna wrote in an emailed statement.

The fund sent several correspondences to the city and has attended meetings and conference calls with city representatives seeking the delinquent amounts, according to the claim submitted to the comptroller by attorney Sarah Boeckman, of Burke Burns & Pinelli Ltd., the fund’s fiduciary counsel.

“The city continues to allege that it fulfilled its statutory obligation…not withstanding the fact that the city has failed to pay the fund required statutory contributions for payments years 2016 and 2017,” the letter dated Sept. 4 continued.

Mayor Rahm Emanuel’s administration contends it hasn’t shortchanged the funds.

“The city has complied with its statutory contribution requirements and does not owe the Firemen’s Annuity and Benefit Fund the additional amount demanded. All amounts collected from the levy are remitted to the fund, as are the amounts deposited with the city treasurer. In accordance with past practice, the city also remitted to the Fund all 2016 and 2017 collections from prior year levies,” reads a statement that did not address whether the city would contest the withholding.

Sources said the police fund may also soon act to cover what it considers are delinquencies. The fund’s director was not available until Tuesday. The muni and laborers’ new statutory contributions that ramp up to 2023 have only kicked in this year. The law is vague on priority status of claims and that issue was not resolved in the court during the recent Harvey intercept case because the parties settled the case.

Since receiving the claims, the comptroller’s office has set aside $1.3 million in grant payments.

The ball is now in the city’s court. It can allow the diversions to continue until the claim is paid in full or it can contest them within 60 days.

“We have put the funds on hold but we don’t forward them” until the contest period and review process are completed, said comptroller spokesman Abdon Pallasch.

If the city does not contest the withholding, the comptroller’s would eventually send the diverted grant funds to the fund until the claims are paid off. If the city contests the claim, the comptroller’s office would launch a review to determine its eligibility to claim city grant funds.

The pension fund is taking advantage of the new collection process created in statewide public safety funding reforms. It allows for the diversion of various state collected taxes dubbed “state funds” to make up for pension shortfalls. Harvey’s public safety systems were the first to act on the collection process earlier this year.

Chicago is not subject to the diversion of “state funds” but it is subject to the withholding of “state grants” under its own reform legislation that amended the state pension code.

“Should the recapture provisions of the pension code be invoked as a result of the city’s failure to contribute all or a portion of its required contribution, a reduction in state grant money may have a significant adverse impact on the city’s finances,” the city wrote in its 2018 annual financial analysis.

The city’s police and fire pension overhaul legislation also allows the funds to go to court to “bring a mandamus action in the Circuit Court of Cook County to compel the city to make the required payment, irrespective of other remedies that may be available to the fund,” the state law says.

Under that law, Chicago’s 2016 to 2020 contributions are set amounts under a payment ramp leading up to an actuarially based contribution in 2021.

The ramp ends with the 2020 contribution of $245 million jumping to $355 million the following year. The spike in public safety contributions that year and two years later for the municipal and laborers’ funds -- under legislation that became law last year for the latter two -- will result in a $1 billion increase by 2023 in the roughly $1 billion now paid toward pensions.

How to cover the ARC costs when they hit is the subject of heated debate and a driving factor behind the city’s exploration of a $10 billion pension bond issue.

The firefighters' fund, which serves 9,600 members, accounts for $4.6 billion of the city’s 2017 $28 billion net pension liability, up from $4.1 billion in 2016. The fund is the weakest of the city’s four at a 20.1% funded ratio.

The city’s four funds are collectively funded at 26.5% and the legislative overhaul pushed through by the city is designed to put the funds on a path to a 90% goal by 2055 for public safety and 2058 for muni and laborers.

Earlier this year, the distressed Chicago suburb of Harvey was the first Illinois city hit by a pension-intercept claim. It drew widespread attention in part because of Harvey’s move to cut deeply into its police and firefighter ranks over the loss of funds.

The city challenged the claims in court and revenue bondholders also intervened as they feared the loss of state collected funds pledged to bond repayment. The comptroller’s office upheld the claims but the city and its funds agreed to a settlement that allowed the city to keep 65% of its “state funds.”

The North Chicago’s firefighters fund also filed a claim, which was settled. The Illinois Municipal Retirement Fund, which covers non-safety employees outside Chicago and Cook County, has filed claims against the Harvey Library District, the Ford Heights Public Library, the city of Centreville, and Centreville Township.

Municipal bond market participants watched the Harvey case because the new intercept raises short- and long-term questions. Rating agencies have warned a flood of other pension funds could follow the Harvey funds’ lead and there are several hundred Illinois police and firefighters’ systems that have been shorted by their government sponsors. The intercept also has sparked worries that bondholders’ legal claims will fall behind pensioners as distressed governments try to preserve funding for critical services.

Burke Burns & Pinelli, which also does business with the city and its sister agencies as bond counsel and underwriters’ counsel, has been fiduciary counsel to the firefighters' fund for more than 20 years.


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Old 09-18-2018, 08:48 AM
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NEW YORK CITY

http://thechiefleader.com/news/news_...e7c1c47a8.html
Quote:
5 City Pension Systems Invest in Climate Change

Spoiler:
The city pension systems will invest $4 billion in climate-change-solution companies and projects over the next three years, doubling the existing green-energy investments.

Mayor de Blasio and Comptroller Stringer made the announcement Sept. 13 along with pension trustees Henry Garrido, executive director of District Council 37 and Michael Mulgrew, president of the United Federation of Teachers.

Already Diverting

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The pledge follows a decision by city officials back in January to divest its fossil-fuel stocks and to sue the world’s major oil and gas companies for allegedly concealing the environmental consequences of burning fossil fuels

“We will be the first American city to commit 2 percent of our pension funds to climate solutions,” the Mayor said, telling an enthusiastic audience of environmental activists that while there had been a global movement to get cities to set aside just 1 percent, “as New Yorkers we have to be the boldest.”

He said that in the years since Superstorm Sandy, whose impact killed 44 people and caused $19 billion in property damage, the evidence “was only mounting” that civilization had to turn to “energy sources that will no longer poison us.”

“Rising temperatures; stronger, more-destructive hurricanes; and increasing precipitation tied to climate change have already affected neighborhoods and communities across all five boroughs and are projected to become increasingly severe and costly over the coming decades,” according to the press statement issued by Mr. de Blasio and Mr. Stringer. “Only by eliminating the use of fossil fuels and reducing the carbon pollution that drives climate change can these challenges be fully addressed.”

‘Momentum for Change’

“We are not just investing in wind power and building retrofits. We are investing in momentum for change,” the Mayor said during the press availability. “If the top 50-pension funds committed 2 percent, that would be enough to convert half of the homes in the United States to solar power.”

City Comptroller Scott Stringer said that abandoning fossil fuel and embracing sustainable investing “reduced risk” and “maximized opportunities” for the five city pension systems, which combined are the fourth-largest in the nation. The city will be looking at companies involved with alternative energy, green building, pollution prevention, and sustainable water systems.

“The future is with big ideas in clean technology, not with big polluters,” Mr. Stringer said.

“There seems to be this undercurrent that a lot of people who hear us talking about climate solutions think it some kind of leftist utopian view of the world, when in reality it is real,” Mr. Garrido said. “As trustees, we did the responsible analysis and we looked at just what one degree of global warming would mean and what two percent means and what it would mean for our investments.”

Mulgrew: Time to Get Real

“I can’t believe I have to keep hearing arguments about climate change for real,” Mr. Mulgrew said. “These people need to go back to school; something went terribly wrong in their education…or they need an analyst or they might need to go to confession because it is all about money. It’s absolutely real.”

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“In the past few years, extreme weather phenomena have directly impacted many neighborhoods in Queens,” said Queens Borough President and pension trustee Melinda Katz. “These impacts show that we need to take bold action now to protect New York City from the future effects of climate change. Today’s announcement is an important step in that direction that also makes sound financial sense for our funds, since investments in clean-energy technology will prove increasingly profitable as the world turns away from fossil fuels.”

In the aftermath of President Trump’s decision to withdraw from the Paris Climate Accords, a bipartisan coalition of 400 U.S. Mayors representing 70 million people pledged to pick up the climate-change baton.

Some Unions Wary

Moves by the city and Albany to divest from fossil-fuel stocks have gotten pushback from some unions.

According to a report from Global Analytic Services, Inc., such a sell-off in the state system could result in a $200-million loss to the pension system over five years and mushroom into a $2.8-billion hit over 20 years.

The report, by an independent actuary, was commissioned by the Suffolk County Association of Municipal Employees, which represents 10,000 active and retired Suffolk County workers.


https://www.benefitspro.com/2018/09/...20180818073849
Quote:
NYC police and fire pensions invest $134M in exotic quant fund
At first blush, it’s an odd pairing: The quant shop follows trends in hard-to-trade assets from European power to cryptocurrencies.
Spoiler:
(Bloomberg) –Fighting fires. Upholding the law. Investing in a quant fund loaded up with some of the most exotic and volatile derivatives trades on Wall Street.
It’s all in a day’s work for New York’s finest.

The pension funds for New York City’s police and fire departments last month allocated a combined $134 million to London-based Florin Court Capital. At first blush, it’s an odd pairing: the quant shop follows trends in hard-to-trade assets from European power to cryptocurrencies.
This would be an exotic trading strategy at the best of times for even advanced investors like the storied pension institutions of New York City. Right now, it stands out because frenzied markets have battered the average returns posted by trend-following quants, also known as commodity trading advisers.

Yet the appeal of momentum-trading strategies — most of which trade liquid instruments like bond and stock futures — endures because investors are on the hunt for what some in the industry call “crisis alpha,” or funds that will outperform when markets crash.

It’s reinvigorated appetite for CTAs, which returned a profit each time equities fell at least 15 percent between 1985 and 2016, according to a study by Man Group.
“Given where equity markets are and where interest rates seem to be headed, they’re looking for extra diversification,” Doug Greenig, the founder of Florin Court and a former chief risk officer of Man’s AHL unit, said of the pension allocation. “The exotic, alternative markets angle was critically important to them.”

A bad year
At a very basic level, CTAs are programmed to buy assets with upward momentum and short those in free fall. The group is among the worst performing hedge fund types this year, thanks to trendless markets that have been experiencing short-lived spikes.

But recent turmoil — particularly in emerging markets — has helped reanimate their money-making potential.

Greenig is the first to admit it’s been a tough year for trend-following, though Florin has benefited from operating in the less liquid corners of the market.

The firm returned 0.9 percent this year through August, compared with losses of 2.9 percent for standard CTAs over the same period, as measured by a Societe Generale-compiled basket of the largest managers. The overall universe fell 0.6 percent, according to Hedge Fund Research.

Less liquid assets tend to exhibit more pronounced and uncorrelated trends, creating opportunities for quants to ride the market, Greenig said.

“French power is just not correlated with Colombian interest rates or European credit,” he said. “Some of the markets have a lot of juice in them and make sustained, dramatic moves.”

Follow the trend
As for the New York City Police Pension Fund and the New York City Fire Pension Fund, which combined oversee about $50 billion, in truth they are no strangers to quantitative funds or even to trend-followers.

According to New York City Police Pension Fund public documents, its quant allocations include D.E. Shaw & Co. along with Quest Partners LLC, whose main offering is a CTA.

Yet Florin, which manages $750 million and is backed by Swedish allocator Brummer & Partners, appears to be the only trend-follower focused on illiquid assets used by the New York funds.

This exotic breed of CTAs has been an increasingly popular choice given the crowded nature of standard products, Greenig said.

Still, with returns picking up for all types of trend-following, CTAs across the board may see new inflows. Florin posted a 6.3 percent return in August, while Soc Gen’s CTA index posted 2.6 percent.

“The one part people still care about is the alternative or exotic market space, but the tone may be changing,” he said. “People like to see returns and then they start getting excited.”


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Old 09-18-2018, 08:49 AM
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KENTUCKY

http://www.weku.fm/post/kentucky-sup...sion-case-week
Quote:
Kentucky Supreme Court Hears Pension Case This Week

Spoiler:
The challenge against Kentucky’s new pension law will be heard by the Supreme Court of Kentucky on Thursday. The hearing will pit Kentucky’s two preeminent political rivals against each other and puts retirement benefits for thousands state workers in the balance.

Listen Listening...1:00
At issue is whether lawmakers broke the law by employing frequently-used procedures that allow them to pass bills quickly at the end of a legislative session.


One of the procedures is to strip a bill of its contents and replace it with new language in order to avoid holding additional public hearings late in a legislative session.


The other is to waive the requirement that bills be formally presented on three separate days before they are eligible to be voted on by the full state House and Senate.


The pension law was blocked by a lower court. The bill makes many changes to retirement benefits, especially for future workers.
Gov. Matt Bevin says the changes are necessary to keep the state’s pension systems viable. Attorney General Andy Beshear is arguing against them.

https://www.courier-journal.com/stor...ia/1333254002/
Quote:
Bevin says judge's Facebook response shows his bias on pension reform

Spoiler:
FRANKFORT, Ky. – The Bevin administration is accusing Franklin Circuit Judge Phillip Shepherd of showing bias for recently responding on Facebook that he was interested in an upcoming demonstration at the Capitol against lawmakers who supported the pension bill passed by the General Assembly last spring.

In a video posted on his Twitter and Facebook pages late Friday, Gov. Matt Bevin criticized Shepherd for clicking he was "interested" in the Oct. 6 political rally advertised on a Facebook page called "Kentucky Moving Party."

And on Monday, Bevin's Chief of Staff Blake Brickman called Shepherd's Facebook response "very disturbing" in an email he sent to the 71 Republican legislators who voted for the pension bill.

But Shepherd said in a statement later Monday that his response was not an endorsement of the event.

"Look, I live about two blocks from the Capitol. That's why I wanted to find out about this event. I wasn't interested in attending the event. I was interested in avoiding it, and I didn't know how to get more information without clicking 'interested,' " Shepherd said in response to the Courier Journal's request for comment.


Shepherd said, "I'm glad the demonstrators have their right to protest, and the Governor has the right to express his feelings on Facebook. But my real hope is that my car doesn't get blocked in by a U-Haul truck on October 6."

Bevin posted the video as the Kentucky Supreme Court prepares to hear arguments on Thursday in the lawsuit brought by Attorney General Andy Beshear and others to strike down a law enacted by the General Assembly last spring to help Kentucky’s troubled public pension systems.

In June Shepherd ruled in Beshear’s favor, saying the rapid process Republican majorities used to introduce and pass the bill in a single day violated the state constitution’s requirement that bills be read on three separate days in each chamber. Shepherd also ruled the bill did not get enough yes votes to pass in the House.

More: Pension reform ruling a victory for Louisville teachers, advocates say

In his video, Bevin said, “Just recently there was a Facebook post encouraging people to come and march on the Capitol, to drive around in U-Haul vans and to offer to move our legislators out for having passed Senate Bill 151. They put out an invitation for people to join them. Who do you suppose was one of the very first people to sign up as being interested? Phil Shepherd.”

Bevin said, “This thing shouldn’t even be allowed. In no serious court would this be considered acceptable.”

The Facebook page, called Kentucky Moving Party, gives its viewers the opportunity to click if they are "going" or are "interested."

Because of Shepherd’s Facebook response, Bevin asked on Friday in his final filing with the Supreme Court in the pension case that if the high court decides to remand the case to Franklin Circuit Court, that it reassign the case to the other Franklin circuit judge.

You may like: Bevin invokes Wimpy's hamburger line in pension reform lawsuit

State Rep. Jerry Miller, R-Louisville, has — like Bevin — criticized Shepherd in the past. And Miller confirmed getting Brickman's email Monday. "It bothers me that a judge would indicate he's interested in a purely political event," Miller said. "Imagine if (current U.S. Supreme Court nominee) Judge Brett Kavanaugh clicked that he was interested in attending an anti-abortion rally."

But Rep. Jody Richards, a Bowling Green Democrat and former House speaker who voted against the pension bill, said he accepts Shepherd’s explanation.

“I have great respect Judge Shepherd. I've always found him to be honest and fair,” said Richards, who said that Shepherd in the past has made rulings he was not happy with at the time.

Also in the video he posted Friday the governor criticized Marc Murphy, a Louisville lawyer who provides political cartoons on a freelance contract basis to the Courier Journal and courierjournal.com. Bevin's criticism was apparently a response to a Murphy cartoon last week that asked questions about Bevin giving a $215,000 raise last month to state government's Chief Information Officer Charles Grindle.

That raise put Grindle's salary at $375,000 a year, which is at least $160,000 higher than the salary of the chief technology oficer of any other state, according to a government salary survey by the Council of State Governments.

The governor criticized Murphy for "not been very transparent about his own inclinations,” specifically a letter Murphy wrote to a judge in 2016 seeking leniency for Tim Longmeyer, who was convicted for bribery in federal court for running a political kickback scheme while serving as former Gov. Steve Beshear’s personnel secretary.

Bevin read an excerpt of the letter where Murphy describes Longmeyer as a public servant.

Longmeyer admitted to a bribery charge that alleged he used his influence as state government's personnel secretary to pressure insurance companies with state contracts to hire a particular consulting firm, which kicked back hundreds of thousands of dollars to Longmeyer. He kept part of it and used part to make illegal political contributions. He is serving a 70-month sentence in federal prison.

Murphy was among many friends and family members of Longmeyer who wrote to U.S. District Judge Karen Caldwell seeking leniency.

Courier Journal editors have been aware of Murphy’s correspondence to the court related to Longmeyer, and a 2016 article mentioned that Murphy was one of the letter writers and that he draws political cartoons for the news organization.

Bevin said that Murphy has given campaign contributions to Shepherd, Andy Beshear and Steve Beshear.

Read this: Tim Longmeyer: Beshear's chief of staff pressured me in contract case

Murphy said in a statement responding to Bevin that as a cartoonist, “I am an editorialist, not a reporter. I am biased against conduct and policies, not parties. I was critical of nearly everything Gov. Beshear did except Medicaid expansion.”

Murphy said Longmeyer is a friend and he knows Longmeyer’s family. “I was asked by his defense counsel, also a friend, to write the court in the ordinary process of sentencing to provide my unique perspective as a federal criminal practitioner. It was a good and fair letter," he said.

Also in the video, the governor makes a brief reference to stories in the Courier Journal about Grindle's raise.

“All of this kerfuffle over the CIO for this state and what his compensation is or isn’t, all of this we posted onto Transparency.ky.gov. The media didn’t uncover this. We put it out there for people to see,” Bevin said.


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Old 09-18-2018, 02:58 PM
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CHICAGO, ILLINOIS

http://www.chicagotribune.com/news/o...918-story.html

Quote:
Commentary: Will Emanuel put Chicago taxpayers at even greater risk?
Spoiler:
If you follow politics in this city and state, you’ve experienced elected officials debating dumb ideas. Like when the Chicago City Council passed a resolution exonerating Mrs. O’Leary and her cow. Or when the Illinois House declared October “Zombie Preparedness Month.” Or when Chicago aldermen pushed for a ban on energy drinks except for coffee because Ald. Ed Burke, 14th, likes it.

Consequential policy decisions don't get a full and complete airing. The latest loopiness: The City Council, guided by Mayor Rahm Emanuel’s budget office, may be asked to decide whether to borrow $10 billion to shore up the city’s pension funds. So far, there has been little public debate and no committee hearings on the notion, which Emanuel’s team hasn’t formally proposed. Meanwhile, the council has spent weeks — years, actually — analyzing the pros and cons of horse-drawn carriages.

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If you’re a Chicago taxpayer, I can assure you the pension bond proposal would impact your quality of life more than mares on the Magnificent Mile. If passed, a borrowing plan like the one City Hall is mulling would rank among Chicago government’s dumbest ideas. Really. Spare us the pig lipstick.

There are as yet no firm details, but in essence the pension idea plays roulette with taxpayer money. Chicago would borrow $10 billion, dumping it into the pension funds for short-term gain, and praying that investment returns over the life of the bonds outpace the interest that taxpayers would owe on the borrowing. Plus we’d owe the $10 billion. Worse, the proposal would put up a taxpayer asset, such as future sales tax revenues, as collateral to entice big institutional investors.

The scheme would be a new version of how we got here — decades of smokescreens that allow politicians to dodge tough decisions to pay today’s debts today, aided by complacent public employee unions that continue backing them. Sure, the politicians say, we’ll pay for the pensions we promised our workers — someday in the future. For now, it’s easier to borrow.

The pension funds for municipal workers, laborers, teachers, firefighters and police officers are alarmingly underfunded. And despite hikes in water fees and property taxes to stabilize them under Emanuel, the unfunded liabilities continue to grow.

Former Gov. Rod Blagojevich pushed a $10 billion pension borrowing scheme through the legislature in 2003. According to Wirepoints.com, a financial website that has reported extensively on the plan, only $1 billion has been repaid 15 years later, and the unfunded liabilities of the state’s pension funds have soared.

This is what you get when you reflexively support one-party, status quo government. More of the same. Similar pension borrowing gambits led to bankruptcies in two California towns, Puerto Rico and Detroit. Follow the losers, Chicago?

For straight talk and solace, I turned to my Twitter friend, Jane the Actuary. She’s actually Elizabeth Bauer, who lives in a Chicago suburb, and blogs on government financing and the Roman Catholic Church, and writes for Forbes.

“This is a game of trying to manipulate to get something for nothing,” she says of the city’s pension bond proposal. “There’s a reason why the stock market pays a higher rate than a bond. You take a higher risk and you’re expected to get rewarded for that higher risk. To put that on taxpayers … as opposed to simply accepting that they need to make these contributions is not the right thing.”

Trust in Jane the Actuary.

Chicago, like Illinois, is in financial straits because voters keep electing public officials who don’t work together to solve the city’s and state’s biggest problems. The officials deliver on not delivering.

Instead, elected officials in state government should have started creating lower-cost benefits for new state and local government workers decades ago. They should have sent various cost-cutting proposals up the flagpole to test what the Illinois Supreme Court might tolerate. They should have stopped sweetening benefits for workers. They should have embarked on a mission to change the pension clause of the Illinois Constitution, as Arizona did. That clause in effect declares that no matter how desperate a money crisis a government in Illinois suffers, its pension payments “shall not be diminished or impaired.”

Jane’s suggestion? Link the graduated income tax amendment that Democratic gubernatorial nominee J.B. Pritzker wants with a pension change. If you’re going to jam higher taxes down our throats, at least get rid of the “diminished or impaired” clause in the Constitution that ties taxpayers’ hands.

Instead of listening to Jane, Illinois voters keep choosing higher taxes. That’s depressing. So excuse me while I decompress with Jane over a cup of coffee — until it’s banned in Chicago. We’ll ride in a horse-drawn carriage, if they aren’t outlawed yet. And we’ll discuss the upcoming October zombie apocalypse.

Just like government, we’ll tackle the big problems.

Kristen McQueary is a member of the Tribune Editorial Board. She can be reached at kmcqueary@chicagotribune.com.


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Old 09-19-2018, 06:11 AM
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ILLINOIS

http://www.nprillinois.org/post/subs...tored#stream/0

Quote:
Substitute Teacher For A Day Wants Bigger Pension Restored

Spoiler:
The Illinois Supreme Court heard arguments Tuesday from a man who earned a state teacher pension after substitute teaching -- for one day.

David Piccioli is a retired lobbyist for the Illinois Federation of Teachers. The one day he spent in the classroom back in 2007 nearly doubled his pension. Piccioli was able to do this by using newly-enacted legislation to purchase retroactive credit for his time as a union official.

Listen Listening...0:57 Listen to the story.
That legislation, which was sent to then Gov. Rod Blagojevich in late December of 2006, only allowed a small portion of union employees to become certified and complete teaching service before the 2007 law took effect and become eligible to receive these benefits. While other union leaders were theoretically eligible, Piccioli is the only one who cashed in.

Piccioli paid roughly $190,000 to the Teachers Retirement System (TRS) to receive that back credit for his previous union service. According to court documents, Piccioli made these payments over the course of four years by borrowing from his annuity, selling stocks and bonds and also "scrimping and living a frugal lifestyle." The Tribune reported Piccioli, at one point, earned a salary of $206,000.

Years later, after the matter received attention in the press, legislators passed another law to strip Piccioli of most of the benefits. Piccioli was refunded the money he paid into TRS for the past credits. However, he says the Illinois Constitution does not allow the diminishment of state pensions.

"I obeyed all laws to join TRS," said Piccioli. "I paid all contributions. There's no cost to taxpayers, so there's no reason for this legislation taking away pension rights and I hope the court reaffirms that pensions cannot be diminished."

During oral arguments, Piccioli's attorney addressed the optics. Recognizing they did not look good, but also pointing out that Piccioli was not involved in lobbying for the 2007 act and had nothing to do with passing the bill.

"He was not in charge of lobbying pension issues, never lobbied pension issues," argued Esther Seitz, Piccioli's attorney. "In fact, the record is clear that he did not know that the union was involved in lobbying this bill until many years after it was enacted. But optics, especially when viewed through the rearview mirror, should not drive legal outcomes."

TRS argues the original 2007 law, allowing Piccioli to receive inflated benefits, was itself unconstitutional. Assistant Attorney General Richard Huszagh told the Supreme Court it was an attempt to give special privileges to Piccioli’s union.

“This came in at the end of the legislative term without much fanfare with a description that said this was a technical correction for a prior clean-up bill for early retirement legislation," he said. "So we have a special favors bill.”

A lower court upheld the clawback law in 2017. There's no timeline for when the Illinois Supreme Court might issue a decision. The case is Piccioli v. TRS, No. 122905.


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https://www.routefifty.com/finance/2...stment/151370/

Quote:
An Important Pension Lesson: Why You Shouldn’t Use ‘Discount Rate’ and ‘Investment Rate’ Interchangeably
COMMENTARY | New Jersey’s former state comptroller and budget director discusses why pension rules for the discount rate are confusing, not comparable and troubling.

Spoiler:
Much is written about the shortfalls in state and local pension systems—in many states the unfunded liabilities are very significant—and if computed properly they would be even larger. For this discussion, I want to focus on two terms crucial during pension discussions: discount rate and investment rate.

Perhaps more than any other decision the rate used for these two items has a significant impact on determining the amount of money that should be appropriated each year to fund properly pension commitments.

Many people use the two terms interchangeably—and use the same rate for both decisions. But, in fact they are not the same. When used properly the investment rate—better referred to as assumed investment rate of return—refers to the assumption used to project current and future investment income. For example, a state pension fund may assume that its portfolio of investments will earn 7.5 percent. The discount rate refers to the rate used to estimate today’s value of future pension liabilities.

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A critical job of the actuary is to project the liability of the pensions system. This requires projecting benefits paid in the future and “discounting” those projected benefits to the present —and using a proper discount rate is critical.

The Problem in Using Rate of Return as the Discount Rate

Using the assumed rate of return for the discount rate—as many pension systems do—is is a deeply flawed approach and contrasts significantly with finance theory in that a proper discount rate should reflect the riskiness of the liability and not the riskiness of the assets. (It also contrasts significantly with how private firms and other countries value pensions.) Specifically, because pensions are generally protected by law and are likely to be paid even if poorly funded, this means the discount rate should reflect bond-market rates for low-risk assets, such as Treasury bills. Ordinarily these rates will be far lower than the assumed investment return on a portfolio that includes stocks and bonds, because the latter rate assumes the portfolio will earn more, but at some risk.


Why would a higher discount rate be used for projecting liabilities? According to a report issued by the State Budget Crisis Task Force in 2012, a higher than appropriate n inflated discount rate has at least three impacts: (1) it creates pressure to invest in riskier assets; (2) pension plans appear healthier thus potentially creating incentives to reduce contributions or enhance benefits; and (3) it keeps employer contributions, and therefor appropriations, artificially low.

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Using a lower discount rate properly reflects the liabilities of the pension system. There is no consensus among finance experts as to what specific discount rate reflects the riskiness of pension liabilities, but also no disagreement that reflecting pension riskiness using the lower rate is the correct approach.

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GASB Guidance

No federal agency or board issues rules for how state and local governments must fund their systems. However, the Government Accounting Standards Board (GASB) issued accounting and actuarial guidance effective fiscal year 2015 that, as a general rule, requires that an assumed investment rate of return (7.5% as an example) can be used for calculating liabilities.

However, there is a major exception for plans that are projected to run out of money. Such plans must use a blended rate that reflects an averaging of (a) the assumed rate of return and (b) a municipal bond rate for a 20 year tax-exempt bond with a rating of AA/A or higher (perhaps 3.5% today). The averaging calculation reflects when the plan is projected to run out of money (the further in the future, the more the averaging reflects the assumed return and the less it reflects the municipal bond rate.)

Impact of GASB Guidance

Clear? I doubt it. Could anything be more confusing? Instead all state and local governments should be required to use a more risk-free discount rate to determine liabilities—a logical conclusion, but not the rule. Rather we have a mixture of “rules” with the lower blended rate required only for those states that have the worste funded pension systems. The impact: estimated liabilities for poorly funded plans have increased, while estimated liabilities for some “more stable” pension plans have not —or only partially.


A result is that reports issued by most organizations reporting on pensions, use these different criteria when comparing the level of unfunded liabilities—in effect, comparing apples and oranges. Granted under any criteria the states with poorly-funded pension systems, such as those in Illinois, Kentucky, Connecticut and New Jersey, will still be at the bottom of the list but how far they really are compared to those in the other states cannot be readily determined.

Moody’s Investor Service which keeps close tabs on pension data todoes prepare reports using a consistent and more proper discount rate to insure comparability among states—the correct way to report. This ‘adjusted’ data developed by Moody’s indicates the real total unfunded liability for all states is $3.9 trillion rather than the reported $1.6 trillion that is typically come up with —when using more favorable discount rates.

GASB should issue new guidance that requires a risk low discount rate for all. (See below for further discussion.)

Observations and Recommendations

A report entitled, Strengthening the Security of Public Sector Defined Benefit Plans, prepared by the Nelson Rockefeller Institute of Government at the State University of New York, reinforces these observations and draws several important conclusions:


Pension liabilities are universally underestimated by discounting with an assumed investment return rather than a discount rate reflecting risk of benefit payments.
Pension accounting and funding standards and practices encourage investing in risky assets to reach projected yields.
Workers, retirees and taxpayers ultimately bear the risk.
The risks are poorly disclosed and understood.
Governments are not sufficiently disciplined to make adequate contributions –and consequently push significant costs onto future generations.
Based on these observations, the report suggests the following:

Pension funds of all state and local government should value liabilities and expenses with a low risk rate—not the assumed investment rate.
Pension funds must disclose more fully the consequences of investment risk.
There needs to be an external downward pressure on investment risk.
Governments must keep their end of the bargain and make realistic actuarially determined contributions.

Many state and local governments continue to make promises that cannot be kept and face increasing pension payments that are consuming more and more of annual budgets—thus either “crowding out” critical program needs or requiring tax increases. This problem is further exacerbated by state and local government pension funds using assumed rates of return for the investments which are too aggressive and by using discount rates for liability calculations that are significantly overstated. Unfortunately because of these poor policy choices many governments might very well need to re-think the size and scope of their pension systems and make significant changes.

Richard Keevey is the former budget director and comptroller for New Jersey—appointed by two governors from each political party. Keevey held two presidential appointments—CFO at the U.S. Department of Housing and Urban Development and the deputy undersecretary for finance at the Department of Defense. Currently, he is an executive in residence at the School of Planning and Policy at Rutgers University and a lecturer at Princeton University’s Woodrow Wilson School of Public and International Affairs.


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