Federal prosecutors have been investigating the financial transactions of the D.C. Retirement Board, which manages the city’s $10 billion pension fund for retired teachers, police officers and firefighters.
The fully funded municipal employee pension plan has long been the jewel in D.C.’s financial crown, the envy of other cities and a signal of the trustworthiness of the District’s finances to the credit rating agencies that issue municipal bond ratings.
The existence of the investigation was disclosed in a whistleblower lawsuit filed in December against the D.C. Retirement Board by Erie Sampson, the agency’s general counsel since 2008.
Sampson alleges that she was placed on administrative leave in October in retaliation for alerting officials at the retirement board and in D.C. government, including the city’s chief financial officer and members of the D.C. Council, about problems in the retirement board’s accounting and governance — as well as for cooperating with the federal investigation.
A spokesperson for the retirement board declined to comment, citing the ongoing litigation.
The Texas Teacher Retirement System recently announced that it would make its first investment in a special purpose acquisition company (SPAC) totaling $200 million. Pension funds across the nations have spent the last decade seeking out higher investment yields from alternative investments like private equity in response to stagnating returns from more traditional investments. Recently a few funds have started to experiment with even more non-traditional vehicles such as cryptocurrencies and NFTs to improve investment results. Texas’ SPAC investment signals pension funds’ continued interest in these alternative assets.
SPACs are a perfect example of a high-risk, high-reward investment. Risk and transparency issues associated with this type of investment have even motivated the creation of SPAC insurance. Companies like HubInternational sell this insurance to investors for each stage of the SPAC process, ensuring they come out whole. Public pension funds like Texas TRS could theoretically buy this type of insurance on their SPAC investments, thus reducing the risk of the investment. The problem is the cost of SPAC insurance is rising fast, and the return adjusted for these costs is dwindling.
The risks associated with SPACs should make public pension funds very weary. Rather than continuing to take on riskier strategies to achieve lofty investment return goals, policymakers and those managing the retirement investments of public workers should lower assumed rates of investment returns and make other funding reforms that secure the long-term stability of retirement systems.
State lawmakers met with officials of Pennsylvania’s public pension funds Thursday to vet reform measures that have been introduced to increase transparency and oversight of the pension system.
The measures are working their way through the legislative process and could be considered for passage this year. Thursday’s hearing offered participants a chance to voice concerns or probe for costs and conflicts that could derail the measures.
Among the proposals reviewed by pension officials and legislators was a bill that would force the funds to more closely track more than $1 billion of annual investment manager fees, and profit-sharing and other money-management costs. The measure would also require video copies of hours-long board meetings to be made publicly available — online for three years, and then by request.
Leaders of Pennsylvania’s beleaguered teachers’ pension fund are requesting that board members sign oaths of secrecy before receiving a critical update on the botched investment calculation scandal that has led to multiple federal investigations.
On Thursday morning, the chairman of the Pennsylvania Public School Employees’ Retirement System board told members in an email that they must sign a yet-to-be-drafted non-disclosure agreement to participate in a closed-door meeting later this month.
The meeting, scheduled for Jan. 31, is pivotal: Board members are poised to be presented with the findings of a taxpayer-funded inquiry into an investment calculation mistake in late 2020 that wrongly spared teachers a potential hike in their pension payments, leaving taxpayers to make up the difference over time. The calculation was later fixed, and teacher payments increased.
Illinois allocates more of its budget to pensions than any other state, but pension spending has only skyrocketed. A constitutional amendment is the only way to reform the state’s unsustainable and underfunded pension systems.
Daley College Professor Mike Crenshaw is far from retirement, but he constantly worries whether the State Universities Retirement System will be solvent for him.
“I have 20 years until I can retire, and my biggest fear is that the money’s not going to be there,” Crenshaw said.
Because pension benefits are defined in the Illinois Constitution, only a constitutional amendment approved by voters could change pension structures. Amending the constitution would open the door to changing the compounding raises to simple inflationary adjustments – protecting the systems for retirees and ending the excessive drain on taxpayers.
Puerto Rico received court approval to leave bankruptcy through the largest restructuring of U.S. municipal debt ever, ending years of conflict with creditors as the U.S. territory confronts other stubborn economic problems.
Tuesday’s court ruling approved a write-down of $30.5 billion in public debts built up during an economic decline marked by high joblessness, outward migration and unsustainable borrowing that tipped Puerto Rico into bankruptcy in 2017. The restructuring plan calms tension between Puerto Rico and its Wall Street creditors dating to its debt default, the largest ever on bonds backed by the full faith and credit of a U.S. municipality.
The territory entered bankruptcy with $74 billion in bond debt and a $55 billion gap between the pension benefits promised to employees and retirees and the funding set aside to pay for them. Public agencies were beset by cronyism and failed for years to draw up accurate budgets or account for expenses, according to a 2018 investigation commissioned by the board.
Sprawling bureaucracy and a high cost of doing business discouraged investment, especially after the expiration of some corporate tax breaks in 2006 pushed some pharmaceutical and other manufacturers to depart. To make up for a shrinking tax base, officials borrowed to paper over deficits and skimped on pension contributions.
Many residents of Puerto Rico, political leaders, and some investors have called for an independent audit of how the huge debt was built up, according to Judge Swain’s decision.
Oregon’s public pension fund, which manages tens of billions of dollars in retirement savings, appears to have privately given its blessing to a 2019 deal by an investment fund to acquire NSO Group, the controversial spyware company.
A source with close knowledge of the matter and emails seen by the Guardian suggest that a senior official at the pension fund signalled his strong support for the takeover of NSO as early as 2018, months before the deal was announced.
Last month, Oregon officials said they were “deeply disturbed” by reports that NSO Group “enabled widespread human rights violations”.
As one stalwart finance officer once told me, “Our pension funds basically sucked up all the new revenue we’d been hoping to set aside to properly fund OPEB.” Those and other priorities for spending each incremental revenue dollar continued to crowd out the opportunity to institute consistent actuarial funding for OPEB benefits; the path of least resistance for policymakers who lack foresight and a sense of fiscal responsibility has been to keep kicking the can.
So it is that between 2015 and 2019, the state and local sector had clearly sorted itself into three classes of employers: (1) those who had trimmed or modified their OPEB commitments and liabilities to sustainable levels, (2) those who had begun actuarial funding of an OPEB trust fund, and (3) those doing nothing and leaving the problem to their successors and future taxpayers.
The unfunded liabilities of Illinois? suburban and downstate public safety pensions rose to $13 billion in the last year of compiled results reported to the state, continuing a 29-year climb that underscores the deep strains on local government budgets.
The unfunded tab for the 295 firefighter funds and 352 police funds outside of Chicago grew to $13 billion in fiscal 2019 from $12.3 billion in 2018 and $11.5 billion in 2017. Police accounted for $7.5 billion of the total and firefighters for $5.5 billion, according to a new report from the state legislature?s Commission on Government Forecasting and Accountability.
The rising tab could help the Illinois Municipal League?s case in arguing for lawmakers during their 2022 session to loosen funding requirements.
The League wants a re-amortization of the funding schedule that would extend the target date for achieving 90% funding beyond fiscal 2040, and lower the funding target to 80% from 90%. While both would ease the burdens on governments market participants have warned they are Band-Aid fixes that don?t solve the underlying funding strains.
If inflation pushes up interest rates and accelerates wage growth, that could take some of the pressure off of public pension plan performance. Since the Great Recession, pension plans have been steadily lowering their assumed annual rate of return to better match the low-interest rate environment. Pension plan actuaries factor that rate when in calculating a government’s annual pension bill. Lowering that rate results in a higher bill because governments have to make up the difference.
More stable returns. Rising inflation can result in higher returns from a pension plan’s fixed-income assets. Unlike the volatile equities market, the nice steady investment return from fixed-income securities is much nicer to rely on from a planning perspective. In fact, bonds used to be pensions’ bread and butter until interest rates began falling in the 1990s.
That could result in lower pension bills for governments with healthy plans. Or in the case of struggling plans like Chicago or Kentucky, it could at least slow the pace of their rising pension bills.
Higher worker contributions. What’s more, noted Brainard, accelerated wage growth also means those workers paying into pension plans will be contributing slightly more. “What wages will do when inflation is 2% is a lot different than when it’s 6%,” he said.
When CalPERS does something as obviously nonsensical as planning to dump $6 billion of its private equity holdings, nearly 13% of its $47.7 billon portfolio, when it just committed to increasing its private equity book from 8% to 13%, it’s a hard call: Incompetent? Corrupt? Addled by the latest fads (a subset of incompetent)?
And rest assured, the harder you look, the more it becomes apparent that this scheme is as hare-brained as it appears at the 30,000 foot level. But unlike another recent hare-brained private equity scheme, its “private equity new business model,” beneficiaries won’t have the good luck of having it collapse under its own contradictions. CalPERS has loudly announced that Jeffries & Co. will be handling these dispositions, so they will get done….at least in part. But the fact that CalPERS’ staff has gone ahead and merely informed the board, as opposed to getting its approval, is yet another proof of how the board has abdicated its oversight and control by granting unconscionably permissive “delegated authority” to staff.
The one bit of possible upside would not just be unintended, but the result of CalPERS acting in contradiction to its expressed objectives: that its allocation to private equity would undershoot its targets by an even bigger margin than otherwise.
The California Public Employees’ Retirement System (CalPERS) has engaged financial services company Jefferies about the potential of selling up to $6 billion of its private equity stakes, according Buyouts magazine. This comes just after CalPERS announced it would be increasing the percentage of its portfolio allotted to private equity to 13% from 8% in November.
CalPERS board member Margaret Brown told Secondaries Investor in November that the fund is considering investing in secondaries and divesting from some of its legacy private equity investments.
“We have some really old private equity that’s just sitting there and doing nothing,” she said.