Category: Public Pensions

State legislators: Oregon treasury’s investment choices create risk to us all

Mary Pat Campbell

Link: https://www.portlandtribune.com/opinion/state-legislators-oregon-treasury-s-investment-choices-create-risk-to-us-all/article_65cae490-406b-11ee-a841-a3bbfbc99a7f.html

Excerpt:

The Oregon Public Employee Retirement System (PERS) pension fund has been in the national spotlight recently because of risks from private investments hidden from the public. What risks? Risk to public employees’ retirement, risk to taxpayers who have to pick up the shortfall, risk to workers as private equity asset managers rake in huge profits at Oregonians’ expense, risk to all Oregonians as private equity undermines our communities, and risk to the climate as private equity firms are uniquely exposed to fossil fuel companies.

A recent article in the business section of The New York Times, “The Risks Hidden in Public Pension Funds,” focuses on the Oregon treasury’s unusually large private investments in PERS. The treasury has long hailed its private equity investments for producing high rates of return, overlooking warning signs that the managers report earnings that turn out to be overstated. The Times reported, “they aren’t taking account of the true risks embedded in private equity. Oregon’s pension fund is over 40% more volatile than its own reported statistics show.”

…..

Divest Oregon’s 2022 report, “Oregon Treasury’s Private Investment Transparency Problem,” documents that more than 50% of PERS is in private investments, with various labels (“private equity,” “alternatives,” “opportunity,” even real estate).

These private funds are heavily invested in coal, oil and gas. The treasury increased its investments in fossil fuels in private investments from 2021 to 2022 (the most recent data released by the state) and continues to invest billions in the fossil fuel industry in 2023, for example in the private investment firm GNP. While Divest Oregon applauds Treasurer Tobias Read in his work to create a “decarbonization plan” for PERS, the treasurer must respond to calls to stop new private investments that fund the climate crisis.

Author(s): State Sen. Jeff Golden and state Reps. Khanh Pham and Mark Gamba

Publication Date: 29 Aug 2023

Publication Site: Portland Tribune

Public Pensions: Double-Check Those ‘Shadow Banker’ Investments

Mary Pat Campbell

Link:https://www.governing.com/finance/public-pensions-double-check-those-shadow-banker-investments

Excerpt:

For almost a decade leading up to 2021, bond yields were suppressed by low inflation and central bank stimulus. To make up for scanty interest rates on their bond investments, many public pension funds followed the lead of their consultants and shifted some of their portfolios into private credit funds. These “shadow bankers” have taken market share from traditional lenders, seeking higher interest rates by lending to non-prime borrowers.

Even during the pandemic, this strategy worked pretty well, but now skeptics are warning that a tipping point may be coming if double-digit borrowing costs trigger defaults. It’s time for pension trustees and staff to double-check what’s under the hood.

For the most part, the worst that many will find is some headline risk with private lending funds that underwrite the riskiest loans in this industry. Even for the weakest of those, however, the problem will not likely be as severe as the underwater mortgages that got sliced, diced and rolled up into worthless paper going into the global financial crisis of 2008. And until and unless the economy actually enters a full-blown recession, many of the underwater players will still have time to work out their positions.

The point here is not to sound a false alarm or besmirch the private credit industry. Rather, it’s highlighting what could eventually become soft spots in some pension portfolios in time to avoid doubling down into higher risks and to encourage pre-emptive staff work to demonstrate and document vigilant portfolio oversight.

Author(s):Girard Miller

Publication Date: 8 Aug 2023

Publication Site: Governing

No Hope In Sight For Chicago’s Worst-In-The-Nation Pension Plans

Mary Pat Campbell

Link:https://www.forbes.com/sites/ebauer/2023/08/01/no-hope-in-sight-for-chicagos-worst-in-the-nation-pension-plans/?sh=4fd6218f24c2

Excerpt:

Back on July 18, the Equable Institute released the 2023 version of its annual State of Pensions report, which means that, yes, it’s time for another check-in on these infamously-poorly-funded pension plans. Among the wealth of tables is a list of the best and worst-funded of the 58 local pension plans studied, and, yes, you guessed it, the bottom five spots are Chicago plans, with the bottom three at levels far below all others:

  • Municipal employees, 21% funded,
  • Chicago police, 21.8% funded, and
  • Chicago fire, 18.8% funded.

Combined with the Chicago Laborers’ pension fund, with a 41% funded status, the pensions for which the city bears a direct responsibility have a total pension debt on a market value of assets basis of $35 billion. (This data is from the actual reports*, released in May, which doesn’t match the Equable report precisely.) Spot fifth-worst is taken up by the Chicago Teachers, at 42.4% funded, and the first non-Chicago system in their list, Dallas Police & Fire at 45.2%, is twice as well funded, percentage-point-wise, as the Terrible Trio.

…..

What’s more, Ralph Martire and his Center for Tax and Budget Accountability continue to promote what he calls “reamortization” as a solution to the problem, both through an April Chicago Sun Times commentary and through the release of a report, “Understanding – and Resolving Illinois’ Pension Funding Challenges” (which is an update of a prior proposal). This proposal, which is directed at Illinois pensions but is clearly meant based on other comments to be an all-purpose fix, sounds innocuous, as merely a sort of “refinancing” as one might with a mortgage, but it’s really much more as he proposes to

  • Reduce the funded status target from 90% to 80%, based on the claim that the GAO deems this funded status to be the right target for a “healthy” plan (whether he deliberately misleads or not, he is wrong here, the National Association of State Retirement Administrators or NASRA clearly explained more than a decade ago that 100% funding is always the right target and the only significance of an 80% level is that private sector pension law requires plans funded less than 80% to take immediate corrective action rather than have a long-term funding schedule, and the American Academy of Actuaries more explicitly calls this a “myth”);
  • Issue large sums of Pension Obligation Bonds, which were questionable already when they first began promoting this but are now a terrible idea with our current high bond rates, all the more so for a low-credit-rating city such as Chicago; and
  • Move contributions from last day of the fiscal year to the first day, which he argues would be a gain of a year’s investment return while forgetting that it requires the city to have this money on Day 1 and forgo the other uses it would have.

Author(s): Elizabeth Bauer

Publication Date: 1 Aug 2023

Publication Site: Forbes

Many Pennsylvania state retirees say they can’t afford inflation on their stagnant pensions

Mary Pat Campbell

Link: https://www.spotlightpa.org/news/2023/07/pennsylvania-pension-public-school-state-worker-sers-psers-inflation-retirement/

Graphic:

Excerpt:

Enrollees in Pennsylvania’s two public sector pension funds — the State Employees’ Retirement System (SERS) and the Public School Employees’ Retirement System (PSERS) — haven’t seen a cost of living adjustment, or COLA, since 2004. Nearly 40 other states grant some sort of COLA to retirees.

Particularly hard hit by this lack of a COLA are the almost 69,000 former public school teachers, state government workers, and other public sector employees who retired before 2001, like McVay. On average, these retirees are in their early 80s.

They retired before the legislature increased pension benefits by 25%. The average pension for a SERS enrollee who retired before 2001 is under $15,000 annually, according to the system. That number for a 2022 retiree is more than $30,000, thanks to the increase as well as a rise in average salaries for workers.

There’s a similar gap for PSERS enrollees. A person who worked for 30 years and ended with a $30,000 salary would have a pension of $18,000 if they retired pre-2001, according to Chris Lilienthal, a spokesperson for the Pennsylvania State Education Association. Under the same circumstances, a person who retired post-2001 would have a pension of $22,500.

Author(s): DaniRae Renno

Publication Date: 27 July 2023

Publication Site: Spotlight PA

Fiduciary principles need to be reaffirmed and strengthened in public pension plans

Mary Pat Campbell

Link: https://reason.org/policy-brief/fiduciary-principles-need-to-be-reaffirmed-strengthened-public-pension-plans/

Executive Summary:

Fiduciaries are people responsible for managing money on behalf of others. The fundamental fiduciary duty of loyalty evolved over centuries, and in the context of pension plans sponsored by state and local governments (“public pension plans”) requires investing solely in plan members’ and taxpayers’ best interests for the exclusive purpose of providing pension benefits and defraying reasonable expenses. This duty is based on the notion that investing and spending money on behalf of others comes with a responsibility to act with an undivided loyalty to those for whom the money was set aside.

But the approximately $4 trillion in the trusts of public pension plans may tempt public officials and others who wish to promote—or, alternatively, punish those who promote— high-profile causes. For example, in recent years, government officials in both California and Texas, political polar opposites, have acted to undermine the fiduciary principle of loyalty. California Gov. Gavin Newsom’s Executive Order N-19-19 describes its goal “to leverage the pension portfolio to advance climate leadership,” and a 2021 Texas law prohibits investing with companies that “boycott” energy companies to send “a strong message to both Washington and Wall Street that if you boycott Texas Energy, then Texas will boycott you.” Both actions and others like them, attempt to use pension assets for purposes other than to provide pension benefits, violating the fundamental fiduciary principle of loyalty.

The misuse of pension money in the public and private sectors has a long history. The Employee Retirement Income Security Act (ERISA), signed into law by President Gerald Ford in 1974, codified fiduciary principles for U.S. private sector retirement plans nearly 50 years ago and is used as a prototype for pension fiduciary rules in state law and elsewhere. Dueling sets of ERISA regulations issued within a two-year period during the Trump and Biden administrations consistently reinforced the principle of loyalty. State legislation and executive actions, however, have weakened and undermined it, even where it is codified elsewhere in state law.

Thirty million plan members rely on public pension funds for financial security in their old age. The promises to plan members represent an enormous financial obligation of the taxpayers in the states and municipalities that sponsor these plans. If investment returns fall short of a plan’s goals, then taxpayers and future employees will be obligated to make up the difference through higher contribution rates.

The exclusive purpose of pension funds is to provide pension benefits. Using pension funds to further nonfinancial goals is not consistent with that purpose, even if it happens to be a byproduct. This basic understanding has been lost in the recent politically polarized public debates around ESG investing—investing that takes into account environmental, social, and governance factors and not just financial considerations.

It is critically important that fiduciary principles be reaffirmed and strengthened in public pension plans. The potential cost of not doing so to taxpayers, who are ultimately responsible for making good on public pension promises, runs into trillions of dollars. Getting on track will likely require a combination of ensuring the qualifications of plan fiduciaries responsible for investing, holding fiduciaries accountable for acting in accordance with fiduciary principles, limiting the ability of nonfiduciaries to undermine and interfere with fiduciaries, and separating the fiduciary function of investment management from settlor functions like setting funding policy and determining benefit levels.

Author(s): Larry Pollack

Publication Date: 11 May 2023

Publication Site: Reason

Why Municipal Pensions Should Kick-Start an Innovation Fund

Mary Pat Campbell

Link:https://www.governing.com/finance/why-municipal-pensions-should-kick-start-an-innovation-fund?utm_campaign=Newsletter%20-%20GOV%20-%20Daily&utm_medium=email&_hsmi=266390798&_hsenc=p2ANqtz-9XCnmkpBsz7qeaom3Wd8LYY7HJUvGw_23wYI3K2k_OJd4ifQ6BmeoSGQSkdqdPtxzuK5YefHRPo_EMn8DeMV66jxxg-vECbMbX4zn0u7Ma9C6-9B4&utm_content=266390798&utm_source=hs_email

Excerpt:

Most of the media coverage of the collapse of Silicon Valley Bank was focused on the long lines of depositors who feared losing their money and the eventual bailout by the FDIC. The sequel to that story is that the failure of that bank and several others left a gaping void in the nation’s entrepreneurial economy — the place where new jobs spring out of the innovators’ alchemy of novel technologies, management skill and risk capital.

As a result, many early-stage growth companies in America are now stranded in a financing no man’s land between the highest-risk seed capital stage funded by individual angel investors and the multibillion-dollar private equity sector that still looks for eight- and nine-figure deals featuring companies already making sales on their way to a stock exchange listing. The startups’ cash cliff has been cited as the cause of a “mass extinction event” — a dead cylinder in the U.S. economy’s growth engine.

That’s where the idea of an “innovation fund” partnering with a dozen or so midsize local government pension funds could fill the void in this still-risky growth stage. Pension trustees could harvest lush investment returns on a nationally diversified portfolio with lower fees than the venture capital industry typically exploits. As a bonus, they could collectively fuel the engines of economic growth nationwide. Emergent businesses based in a state where a pension fund participates would have a fair shot at some of that capital if they could pass stringent due diligence reviews and fiduciary governance oversight by angel investment experts in their industries.

It’s a concept that originated years ago from the now-retired founder of one of the nation’s most prominent pension consulting firms. Today, the drawback on his original vision is that the larger public pension funds have outgrown the startup economy. As the chief investment officer of the California State Teachers’ Retirement System, the nation’s second-largest public pension fund, recently noted in a TV interview, they manage so many billions in each asset class, and with so many rules, requirements and restrictions, that it’s difficult for them to effectively put money into the venture capital marketplace. And even then, it’s got to be the chunkier, later-stage money earning a lower return than angel investors are seeking. Accordingly, my proposals here are a second-generation revision for which I alone am accountable.

What’s missing today is early-stage Series A and B funding. Putting money into promising firms raising $5 million to $20 million of fresh capital in these transition stages following their angel funding round would never move the dial on the Goliath pension portfolios’ investment returns. For their trustees and staffs, it’s just not worth the effort and headaches of monitoring hundreds of pubescent companies that are too young for them.

Author(s): Girard Miller

Publication Date: 11 July 2023

Publication Site: Governing

Chicago Confronts $35B Pension Crisis, Among Nation’s Worst

Mary Pat Campbell

Link: https://www.governing.com/finance/chicago-confronts-35b-pension-crisis-among-nations-worst?utm_campaign=Newsletter%20-%20GOV%20-%20Daily&utm_medium=email&_hsmi=266392609&_hsenc=p2ANqtz-908JiZoECoiHOSFWeUAutUv8VbdD2wEgfZjFzCrsEv6iI9JACAt9QL1zdrKBCqmO35ZPGv3sCgZURy904H11nrX4AQ5RWJg5Ti63o3xBq99exXZg0&utm_content=266392609&utm_source=hs_email

Excerpt:

One of Brandon Johnson’s first moves as Chicago mayor was to buy himself time to address the city’s biggest financial problem: the more than $35 billion owed to its pension funds.

Just days after his May inauguration, Johnson persuaded state lawmakers to shelve legislation that would’ve added billions to the pension debt, while pledging to establish a working group to come up with solutions by October.

Now, the clock is ticking for the progressive Democrat to fix the worst pension crisis among major U.S. cities.

Just as Chicago reels from a spate of shootings and carjackings, inequities exacerbated by the pandemic and high-profile corporate departures, its pension gap creates a financial burden that threatens its recovery and the mayor’s agenda.

The situation makes for a cautionary tale for municipalities across the country facing long-neglected contributions and funding shortfalls. Already, the third-largest U.S. city spends roughly $1 of every $5 on pensions, while more than 80 percent of property-tax dollars go toward retirement payouts.

….

In 2022, for the first time, the city put in an actuarially calculated contribution for all four pensions funds – a step that helped it shed the junk rating.

Author(s): Shruti Date Singh, Bloomberg News, TNS

Publication Date: 14 July 2023

Publication Site: Governing

DiNapoli: Woman Pleads Guilty to Theft and Must Pay Back $459K in NYS Pension and Social Security Payments

Mary Pat Campbell

Link:https://www.osc.state.ny.us/press/releases/2023/07/dinapoli-woman-pleads-guilty-theft-and-must-pay-back-459k-nys-pension-and-social-security-payments?utm_content=20230715&utm_medium=email&utm_source=weekly+news

Excerpt:

State Comptroller Thomas P. DiNapoli, United States Attorney for the Northern District of Georgia Ryan K. Buchanan and Inspector General for the Social Security Administration Gail S. Ennis today announced that Sandra Smith, a resident of Georgia, has pleaded guilty to the federal crime of theft of government funds and must pay back $459,050 in New York state pension and Social Security payments that were issued to her deceased mother-in-law.

“Exploiting the death of a family member for personal profit is a heinous crime,” DiNapoli said. “The defendant took advantage of our state pension fund and the Social Security Administration but as a result of our joint investigation her crimes were discovered. She now faces the consequences of her actions. My thanks to U.S. Attorney Buchanan and the Social Security Administration Office of the Inspector General for their partnership in ensuring justice was served and restitution was made in this case.”

Smith pleaded guilty to two counts of theft of government funds. Under her plea agreement, she will pay $264,699 in restitution to the state pension system and $194,351 to the SSA.

The defendant’s late-mother-in-law, Minnie Smith, was an employee of the New York State Insurance Fund for 20 years until retiring in 2005. To be closer to family, she moved from Brooklyn to Georgia afterward and passed away there on Sept. 14, 2006.

As her mother-in-law’s caretaker, Sandra Smith had access to her bank account, which she kept open after her mother-in-law’s death to enable the theft of continued payments from the New York state pension system and Social Security. The thefts were discovered and investigated by the Comptroller’s Division of Investigations and the SSA-OIG.

Smith, 49, pleaded before Judge Eleanor Ross of the United States District Court for the Northern District of Georgia.

Author(s): press release

Publication Date: 11 July 2023

Publication Site: Office of the NY State Comptroller

Detroit police, fire pensioners push back on bankruptcy ruling to extend payments

Mary Pat Campbell

Link:https://www.detroitnews.com/story/news/local/detroit-city/2023/07/11/detroit-police-fire-pensioners-push-back-on-ruling-to-extend-payments/70401452007/

Graphic:

Excerpt:

The Police and Fire Retirement System of Detroit filed on Monday a motion for reconsideration, pushing back on a federal bankruptcy judge’s ruling in favor of the Duggan administration’s plan to extend the city’s pension payment obligations over 30 years rather than 20 years.

The city’s police and fire retirees are continuing litigation that has been ongoing since August when the city administration initially filed suit against the pension system to enforce a 30-year pay-out schedule. On June 26, Judge Thomas Tucker ruled in the city’s favor, stating that a 30-year amortization period is “indeed part of the (bankruptcy) Plan of Adjustment and that the Police Fire Retirement System cannot change it.”

The new motion seeks clarification of the court’s possible imposition of a 6.75% rate of return that was specifically set to expire after 10 years under the Plan of Adjustment, the bankruptcy exit plan. After June 30, the pension fund’s rate of return and its amortization funding policy are within the purview of the Police and Fire Retirement System’s Board of Trustees and Investment Committee, according to the pensioners’ filing.

At the 30-year determined rate, the city will complete its debt obligations in 2054. Police and fire retirees want their pension fund to be made whole sooner.

Author(s): Sarah Rahal

Publication Date: 11 July 2023

Publication Site: The Detroit News

Indicted Former Ald. Ed Burke to Start Collecting More Than $96K Annual City Pension, Records Show

Mary Pat Campbell

Link: https://news.wttw.com/2023/06/15/indicted-former-ald-ed-burke-start-collecting-more-96k-annual-city-pension-records-show

Excerpt:

Indicted former Ald. Ed Burke (14th Ward) will collect an annual city taxpayer-funded pension of more than $96,000, even as he awaits trial on federal corruption charges, according to records obtained by WTTW News.

Burke, 79, who did not seek a 15th term on the Chicago City Council, left office after 54 years on May 15.

When he stepped down, Burke was the longest serving member of the City Council, earning more than $120,408 annually.

Burke will start receiving pension payments of $8,027 per month in sometime in August, and they will continue for the rest of his life, according to records obtained by WTTW News from the Municipal Employees’ Annuity and Benefit Fund of Chicago.

….

Burke is set to stand trial on Nov. 6 on 14 counts alleging the powerful politician repeatedly — and brazenly — used his elected office to force those doing business with the city to hire his private law firm. Burke has pleaded not guilty, and used millions of dollars of stockpiled campaign cash to fund his defense.

If Burke is convicted on those charges, he could lose his pension, since his conduct occurred as part of his official duties as an alderperson.

Author(s): Heather Cherone | Jared Rutecki

Publication Date: 15 Jun 2023

Publication Site: WTTW

CalPERS, CalSTRS, Genworth Among Those Affected by Moveit Data Breach

Mary Pat Campbell

Link: https://www.ai-cio.com/news/calpers-calstrs-genworth-among-those-affected-by-moveit-data-breach/

Excerpt:

The California Public Employees’ Retirement System, the California State Teachers Retirement System and Genworth Financial Inc. revealed that some of their clients’ personal information was involved in a data breach that hit third-party vendor PBI Research Services’ Moveit Transfer Application, used by thousands of organizations. 

PBI provides services to pension funds to identify member deaths so that proper payments are made to retirees and beneficiaries and to prevent overpayments or other errors. For life insurance firms like Genworth, the company helps identify the possible eligibility of beneficiaries for death benefits or for policies beneficiaries may not know exist.

According to CalPERS, while the data breach did not impact its information systems, it did impact the personal information of approximately 769,000 members, including retired members, some of whom are inactive members and may soon be eligible for benefits. The pension fund is offering free credit monitoring to retirees and beneficiaries with impacted personal information and is also mailing tips on how to protect their information. CalPERS is also providing information on its website and through its customer contact center.

….

Genworth declined to elaborate on its June 22 SEC filing, in which it said it was notified by PBI of the breach and that it “believes that the personal information of a significant number of insurance policyholders or other customers of its life insurance businesses was unlawfully accessed.” Genworth stated it is “working to ensure that protection services are provided to those impacted individuals” and that it believes the breach did not impact any of its information systems, including its financial systems, and that there has not been any material interruption of its business operations.

Author(s): Michael Katz

Publication Date: 26 Jun 2023

Publication Site: ai-CIO

MBTA retirement fund is headed for a financial reckoning

Mary Pat Campbell

Link: https://www.bostonglobe.com/2023/06/19/opinion/mbta-retirement-fund-finances/

Excerpt:

The MBTA Retirement Fund is going over a cliff, and the reasons why are well known. But neither the T nor its unions are in a hurry to do anything about it.

The new MBTA Retirement Fund Actuarial Valuation Report shows the fund’s balance as of Dec. 31, 2022, was $1.62 billion — about $300 million less than what it was just 12 months earlier. Its liability — the amount it will owe current and future T retirees — is over $3.1 billion, meaning the fund is about 51 percent funded. In 2006, it was 94 percent funded. A “death spiral” generally accelerates when retirement system funding dips below 50 percent.

In April, the Pioneer Public Interest Law Center got the MBTA to hand over an August 2022 arbitration decision regarding a pension dispute between the T and its biggest union. It contained a critical win for the authority: Arbitrator Elizabeth Neumeier decided that most employees would have to work until age 65 to earn a full pension, saving the MBTA at least $12 million annually.

But the Carmen’s Union sued to invalidate that portion of the decision, and the parties returned to the bargaining table. The new pension agreement they hammered out doesn’t include the historic retirement age victory; T management negotiated it away.

….

As of Dec. 31, 2022, 5,555 active employees paid into the fund, but 6,783 retirees collected from it. The biggest reason for the mismatch is the age at which T employees retire. Those hired before December 2012 can retire with a full pension after 23 years of service, regardless of age. Those hired after December 2012 can retire with a full pension at age 55 after 25 years.

The arbitrator finally gave the MBTA the win it so desperately needed, and T management promptly gave it back. Many MBTA managers have long opposed changing the age at which employees can earn a full pension, fearing the reaction of T unions.

….

Hard as it may be to believe, the T retirement fund’s financial outlook is even worse than it appears. Financial projections assume the fund’s assets will earn 7.25 percent annually. Over time, actual returns have been more like 4 percent to 7 percent.

These misleading projections are based on other faulty assumptions. In her 2022 decision, Neumeier refused the MBTA’s request to use newer actuarial tables, ruling that changing would be costly and that there was no compelling reason to update the tables. The ones in place are from 1989 — so old that they assume all T employees are men. Since women tend to live longer, the tables materially understate the retirement fund liability.

Author(s): Mark T. Williams, Charles Chieppo 

Publication Date: 19 Jun 2023

Publication Site: Boston Globe