New Jersey governor signs pension reform bill applying most higher costs and lower benefits to new hires

Christie signs N.J. pension reform bills

March 22, 2010 Bergen Record

After a day of haggling over details, Governor Christie Monday night signed into law broad changes to pensions and benefits offered to public workers.

The changes, which will largely affect future workers and won’t have much of an immediate impact on the state’s $46 billion pension hole, faced stiff opposition from labor unions every step of the way since
being announced in January.

"I’m thrilled," Christie said after signing his first laws as governor. "Today is a great day for the taxpayers of the state of New Jersey."

Though the package of three bills swiftly passed through the Senate, they had a rocky ride through the Assembly, where some members fought to make changes. At one point Monday, Assembly Speaker
Sheila Oliver (D-Essex) said she did not think the chief bill in the package would pass until
May. But after last-minute negotiating, including an intervention by Christie, the Assembly passed that bill after lawmakers removed a provision to let full-time workers with fewer than 10 years on the job switch to a 401k-style plan. Some lawmakers worried that could hurt the stability of the pension
system.

The bill was shuttled over to the Senate, which approved the change after 7:30 p.m., signed by Christie after 8:15 p.m. He called the bills the beginning of "fundamental reform."

Lawmakers said they were pleased they were able to resurrect pension reforms they were unable to pass in 2006 and 2008. "Senator (Barbara) Buono and myself in 2008 took a stab at it and got our heads banged in," said Senate President Stephen Sweeney (D-Gloucester). "The fact that we’re finally moving forward with this unfinished business, I think the people of New Jersey are big winners today."

Over the past few weeks, labor unions representing teachers, police and firefighters, and other public workers argued the bills would undermine collective bargaining, lead to mass retirements of experienced employees and punish workers for a problem they did not create. "It wasn’t a surprise, and we were disappointed a long time ago," Hetty Rosenstein, state director for the Communications Worker of America, said after the bill signing. "There isn’t a long-lasting impact in terms of savings. ... They
targeted the lowest-wage workers for the greatest cuts. That leaves a very bitter taste
in our mouths. It really is just for a soundbite and political expediency."

The state’s pension gap — calculated at $46 billion as of June — is largely the result of stock market losses and the state failing to make payments into the investment fund. But the number of workers in the system has soared by 20 percent since 1999, while retirees have increased 43 percent, placing a
greater burden on state and local governments.

The new laws ban future part-time workers from the pension system, instead requiring part-timers who make more than $5,000 to join a 401(k)-style plan. It also makes pensions for future hires less generous,
rolling back a 9 percent increase granted in 2001, requires pension payments to be based on one job, and limits payments of accrued sick leave for future workers to $15,000. The bills do not affect those already
retired.

The only bill with a tallied savings is one that would require public workers to pay at least 1.5 percent of their salary toward their health care. That is expected to save local governments at least $314 million a year.

Teachers at the State House Monday said it was unfair to require everybody to make the same percentage payments, no matter what kinds of benefits they received or the size of their family. "There’s not any equitable factor in there," said Patricia Kelly, a basic skills teacher with East Rutherford.

The Senate also approved a measure to place a constitutional amendment on the ballot in November asking voters to ensure the state pays its pension bill. The full payment would be phased in over seven years. The measure must be approved by the Assembly, but does not need Christie’s signature.

Alabama governor signs bill increasing amortization period from 20 years to 30

Alabama governor signs bill to save on retirement

Birmingham News March 23, 2010

MONTGOMERY, Ala. -- Gov. Bob Riley has signed legislation that will provide more funding for the state budgets that will take effect Oct. 1.

The legislation allows the accumulated liability for the state retirement programs to be computed over 30 years instead of 20 years. Riley said the legislation he signed Monday means the state's costs for retirement benefits won't increase in the new fiscal year.

Riley said the change should mean an extra $38 million for the education budget and $5.6 million for the General Fund budget in the new fiscal year. Without the new law, that money would have gone for retirement costs.

Note: State statute previously limited the TRS and ERS amortization periods to 20 years; this bill increases that limit to 30. kb

New York AG investigating pension spiking

Cuomo Expands New York Probe to ‘Pension Padding’

March 18 (Bloomberg) -- New York Attorney General Andrew Cuomo said today that he was expanding a New York investigation to address “pension padding.”

Cuomo said in a statement he is looking into the manipulation of salary and overtime payments that lead to inflated state pensions at the expense of taxpayers. He said he was sending letters to 28 state agencies, authorities and local government employers with some of the highest salary or pension payments seeking payroll and related data for pension recipients.

“Public employers, like private employers, need to follow best practices in order to ensure that taxpayer dollars are safeguarded,” Cuomo said in the statement.

According to recent census data, Cuomo said New York had a pension cost of $486 per resident in 2007, the highest in the nation.

Maryland Senate approves shifting teacher pension costs from state to local governments

State Senate approves teacher pension shift

Counties would be asked to pay more beginning in 2011

March 23, 2010 Baltimore Sun

The Maryland Senate gave preliminary approval Tuesday night to a plan that balances future state budgets by shifting hundreds of millions of dollars in teacher pension payments to local governments.

The shift won't begin until the fiscal year that begins July 2011. Proponents say the move is fiscally responsible, but critics said it marked a disturbing new era where state education funding is threatened.

"This is a sad day," said Sen. Paul G. Pinsky, a Prince George's County Democrat. He said the Senate vote marked the "erosion" of a landmark 2002 education funding formula that infused the state's public schools with hundreds of millions of dollars. "The counties are going to have additional pressure," he said.

The pension shift was one of a series of votes the Senate took on a package of $120 million worth of cuts made to Gov. Martin O'Malley's budget by a Senate spending panel. The cuts were adopted by a Senate committee last week, and the 47-member Senate was endorsing them Tuesday.

The new pension plan would require local governments to contribute an additional $63 million in the budget fiscal year 2012. Within two year they their payments would rise to $337 million.

Supporters said that the state's fiscal forecasts predict shortfalls between revenues and expenses for years in the future, a trend that Wall Street firms that play a role in setting the interest on Maryland's debt dislike.

"The state is under a lot of stress," said Sen. Richard S. Madaleno Jr., a Montgomery County Democrat who supported the pension shift in the budget committee.

The state this year owes $900 million in teach pension payments, and that is expected to grow to $1.2 billion in the coming years. About a quarter of the amount is now funded with federal stimulus money, which will not be available next year.

The Senate voted 28-19 to approve the pension change, but the entire budget is still pending approval in the Senate and changes could still occur. House of Delegates approval would come next.

Opinion: Georgia proposal permitting retirement system to purchase dead peasants insurance is almost too creepy to believe

Note: I have received inquiries from several states recently about similar proposals being discussed or introduced by legislators. kb

Bureaucrats to die for state?

Columbia County Tribune (Augusta, Georgia) March 23, 2010

This is almost too creepy to believe.

Columnist Tom Crawford the other day took notice of House Bill 1380, introduced by our own state Rep. Ben Harbin and fellow Georgia House Republican Mark Burkhalter.

If passed, the bill would allow the state's retirement system to purchase life insurance coverage for all current and retired state employees. It would also allow such purchases by city and county governments and school systems. The beneficiary of these policies would be the state pension plan or the governments, which would be able to borrow against the value of these policies, and would also reap the payout (plus a payback of the premiums) when the insured employees and retirees die.

This concept is called broad-based insurance, or corporate-owned life insurance, abbreviated as COLI. But it's usually known by its less-bureaucratic name: "dead peasants insurance," or sometimes "dead janitors insurance."

The concept was new to me, especially as a method of balancing state budgets. But it turns out it isn't a new idea at all. In fact, dead peasants insurance is big business - for insurance companies. They rake in billions each year in premiums from the practice, and thus far have successfully used their lobbying muscle to prevent Congress from enacting further restrictions on it.

Who holds such policies? It isn't public record, but Houston, Texas, attorney Mike Myers - who specializes in lawsuits against employers over the policies - maintains a list on his Web site of employers believed to carry life insurance on their rank-and-file employees.

The list includes such companies with a local presence as Walmart, Georgia Power, AT&T, Bank of America, Wachovia, Coca-Cola, Olin Corp., Procter and Gamble, Panera Bread Co. and Walgreen.

So, if this passes, would the state pensioners and employees have to be told that the state has taken out a life insurance policy on them? Nope. Apparently Georgia is one of a handful of states that don't require such notification.

So if you're a Georgia employee, get ready: You're about to become far more valuable to the government dead than alive.

Opinion: Public pension fund investment return assumptions and risky investments portend big problems

Fairy Tale Pension Projections

By John E. Petersen | March 2010

Assumptions about return rates and risky investments foreshadow big problems.

Inside a sales brochure for an investment fund, you'll see a phrase like: "Current performance may be lower or higher than past performance, which cannot guarantee future results." Individual investors know there's an element of gambling in making investments, and that the higher the returns are on today's investment, the likelier they'll fall in the future.

Long-term investing is an ongoing challenge for state and local pension systems. Investment return rates are the major factor in deciding how much to set aside to meet future pension promises: The higher that rate is assumed to be, the less money must be contributed today. Government employers want to earn high returns on their investments, and that mandate to increase earnings can lead to many problems.

The level of annual contributions from employees and employers is now around $110 billion; benefit payments to retirees is $175 billion. More than 19 million workers and 8 million retirees belong to the public systems. And the number of retirees is growing five times faster than the number of working members, according to the U.S. Census Bureau.

The past decade hasn't been good for pension systems. Total returns on equities, according to the Standard and Poor Index, were a bit below zero from the end of 1999 through 2009. During the 2008-2009 financial crisis, the market value of investments held by pension funds fell by an estimated $1 trillion — about 30 percent, according to Federal Reserve data. At the end of 2009, public funds held an estimated $2.7 trillion in assets — well below the $3.2 trillion held at 2007's end.

Most public employee funds assume unrealistic investment return rates, which has led many to invest in riskier vehicles and projects. Take the $5 billion real estate project in New York City — it wiped out billions of dollars in equity, including $850 million in write-offs for state public pension systems.

Public pensions are fixed benefit plans that accumulate funds to pay future benefits. With aggressive return rate assumptions averaging 8 to 9.5 percent, pension systems accumulate added liability for future payments. When this happens, the system must save a fraction of each dollar to, after adding future earnings, make the stipulated pension payments.

The math is complex, but the concept isn't. If equities (stock) earn 11 percent and debt (bonds) 5 percent, then an 8 percent return rate is expected of a portfolio equally weighted with equity and debt. When looking at long-term return rates (1920s to early 2000s), retirement systems averaged returns on equities at about 11 percent and bonds at 5 percent.

But things have changed, and return rates, especially on stocks, have gyrated wildly. Long stretches of time (1930s, 1970s to mid-1980s and the 2000s) have shown there may be little or no return on equities.

A recent survey reported in The Wall Street Journal said individual investors hoped to earn about 14 percent on equity investments over the next 10 years, but after inflation and cost of transactions, the next generation's net return might be more like 4 to 6 percent — a big difference.

Believing a fairy tale about earnings has led too many people into saving too little, and governments to set aside too little to meet their pension funds obligations. But over-optimism's political rewards are great. Higher returns allow for smaller asset accumulation, lower contributions and lower taxes to pay the employers' share. So there are political benefits in trying too hard.

Had public pension systems assumed a 6 percent return instead of 8 percent, the funds they'd have to set aside to reach a target level of funding after 15 years (the average years remaining for workers before retirement) would be about one-third greater-roughly $35 billion additional future annual contributions. Given many systems' current underfunded condition, billions more would be needed to make up for the underfunded legacy.

The solution? Terminate fixed-benefit programs. Freeze the promised benefits as of a certain date, and convert future accumulations into defined contribution plans where employees bear the risk. Though unpleasant for public workers, it's preferable to the unsustainable arrangement in which governments default on pension payments. While drastic, it brings decision-making into the bright light of the tough choices in an aging, slow-growth, high-risk economy.

The day is over when the slack in public savings could be picked up by bubble-induced growth in asset prices. Public employees, whose pensions have been insulated from the working class' new austerity, will share in the national uncertainty.

Girard Miller: Reflections on public pension investment return assumptions

Two New Looks at Investment Assumptions

Governing Magazine March 18, 2010

Reviews of the way public pensions measure their ROI and account for liabilities could have a major impact on state and local budgets.

Two unrelated studies in the public pension arena could create more budget-balancing challenges for public officials. One is an announcement by CalPERS, the behemoth California pension fund, that it is reviewing its investment-return assumptions. The other is the Governmental Accounting Standards Board's (GASB) review of pension accounting procedures. Both could affect the calculation of pension costs for state and local governments.

First to California: Presently, CalPERS assumes a 7.75 percent rate of return on investments for its actuarial calculations. In light of dismal investment performance in the financial markets over the past decade, some critics have charged that the assumption is too optimistic and leaves taxpayers holding the bag whenever the portfolio fails to meet that benchmark. Add to that the admonition of a prominent investment manager that investment portfolios overall will "be lucky to earn 6 percent," and the stage has been set for a serious and thoughtful review of CalPERS's investment program and its performance expectations.

Having chided the CalPERS organization for its governance practices in the past year, I applaud these efforts to come clean on the investment front. Last month, they reported a 50 percent loss in their real estate portfolio in 2009. That write-down was obviously painful for them. But, it was a clear and honest effort to recognize their losses and get on with it, rather than hide behind flimsy portfolio valuations and appraisals the way the banking industry has done. This new announcement by CalPERS's CIO that he's willing to review the investment return targets and the asset allocations that drive them is healthy for the CalPERS system. The staff and the trustees may conclude that some of their far-flung investment strategies are no longer worth the risk. Or, they may decide to stay the course after giving it a no-nonsense review. At least they will be doing so in a transparent and thoughtful way. Good for them. I give the beleaguered CalPERS investment team an A+ on this class.

Other public pension funds should follow suit. The national average rate-of-return assumption for large pension funds was 8 percent in the last survey of the national administrators' association. If CalPERS takes public action to reduce its rate below 7.75 percent, the trustees and executives of other public pension plans will have to ask themselves: What are they seeing, that we haven't thought about? Clearly, those with assumptions above 8 percent must ask themselves whether they are pipe-dreaming.

CalSTRS, the giant sister pension fund for teachers, is considering a similar review of its 15-year-old assumption of an 8 percent return.

The downside of this kind of review process is that a more conservative investment return assumption will require the actuaries to increase the employers' annual required contributions to the pension plan. Employer costs in California and elsewhere are surging higher already as a result of the investment losses of 2008, so a reduction in the returns expected over the next 30 years would only make matters worse for employers in this decade. In the long run, of course, "the benefits will be the benefits" and the more the employers pay into the system now, the less they will pay later, regardless of the actual investment returns. This is ultimately an intergenerational cost-accounting issue, but it's important because our children will end up holding the bag if the long-term assumptions prove too optimistic.

An accounting question. Meanwhile, the accounting wizards at the GASB in Norwalk, Connecticut, are expected to release preliminary views this June on their multi-year pension-accounting study. One of the hotly debated issues that GASB has studied is the actuarial discount rate, and whether the expected rate of return on investments is the right number to use.

A school of actuaries and financial economists has argued that a risk-free rate of return is the better number because nobody can be certain that riskier investments will ever match the assumptions. They call this the Market Value of Liabilities (MVL) school. In today's markets, that would reduce the discount rate for pension fund actuarial calculations from the 8 percent average cited above to something closer to 5 percent. The result would be a whopping 50 to 70 percent increase in employer required contributions.

Speculation in the industry is that GASB has not bought into the entire MVL school of thought. But there is an intriguing variation buzzing around the GASB-gossipers: Unfunded liabilities should be discounted at the employer's borrowing rate of interest, not the investment rate of return. Unfunded liabilities are the pension liabilities already earned but not offset by assets. They are essentially the "soft debt" of the pension fund (or OPEB trust, in the case of a retiree medical plan). Since the unfunded liabilities of a pension plan are not assets, but are liabilities, the accounting concept would be that an investment rate of return based on assets (that don't exist now) is the wrong factor for calculations.

It's far too early to know if GASB will pursue this line of thinking in its preliminary documents — let alone in the entire deliberative process, which will take at least another year and include substantial public commentary. However, the use of a governmental borrowing rate would inevitably involve a lower discount rate and hence higher employer contributions. I would argue that a taxable borrowing rate is the more appropriate standard under this approach since states and localities cannot borrow tax-exempt to fund a pension or retirement plan investment portfolio under federal arbitrage laws. That would cut the budgetary pain of this approach in half for many employers.

Hopefully the economy and tax revenues will have recovered in the next two years before any potential accounting changes would take effect. That would take a little of the budgetary sting off of these developments. Right now, that seems like a realistic scenario.

Ask before you re-hire employees. Either of the above developments could result in higher costs for employers. Savvy public managers and elected officials will start asking their pension colleagues just how bad things could get for them under either or both scenarios: a lower investment return or a change in accounting standards. Public officials will look silly if they add more employees in 2011, only to lay them off later in order to pay the pension bills that blindside those who fail to look downfield first.

Institutional investors pursue more favorable fees and terms with private equity firms

Investor Principles Rankle Buyout Shops

Wall Street Journal March 23, 2010

The gloves are finally coming off.

Having played nice for years, private-equity firms and their investors—pension funds, endowments and foundations—are exchanging punches over the terms and fees paid to buyout shops.

The sparring has begun over what seems to be an obscure set of principles issued by a trade group of private-equity investors, known as limited partners.

In a 17-page document, the group, the Institutional Limited Partners Association, calls for big changes in the hidebound ways of private equity. The principles, which call for suggested caps on fees, increased disclosure, and greater investor oversight, have rankled some buyout executives. Some have complained that the investors are illegally conspiring against them. ILPA denies it.

The investor group has outsize influence, with 215 members controlling more than $1 trillion in private-equity assets. The principles are a rare show of strength among limited partners, who have historically caved to demands of private-equity firms. Though the terms aren't binding, ILPA hopes the "wish list" of fund terms will level the playing field.

Because ILPA's members include the world's largest and influential investors such as the California Public Employees' Retirement System and Teacher Retirement System of Texas, no one is complaining out loud. But at least three large private-equity firms have retained outside counsel to examine potential antitrust issues. A spokeswoman for law firm Boies, Schiller & Flexner LLP said that a large private-equity client has hired it to examine the issue.

The firms' lawyers are concerned over specific conduct of several prominent ILPA members. The nation's two largest pension funds—the California State Teachers' Retirement System and Calpers—have held discussions with each other about whether to insist that private-equity firms agree to the principles, according to people familiar with the talks. Texas Teachers has told at least one firm that the principles were non-negotiable and had to be accepted, according to people familiar with the situation.

Lawyers for private-equity firms also point to a public remark made by Calpers spokesman Clark McKinley in trade publication Pension & Investments. "We are collaborating with other investors in an effort to get better alignment with private-equity partners, including more favorable fees. This requires more than a unilateral action by any one investor," Mr. McKinley said.

"If that were on a law-school exam, you'd expect a student to say that this kind of collective action raises a considerable antitrust concern," said Edward Rock, an antitrust law professor at the University of Pennsylvania. "When customers get together and say we can't get them to lower their prices unilaterally but can only do it collectively, that looks a lot like price fixing."

Though price-fixing accusations more typically involve collusion among sellers, federal courts have consistently ruled that buyer cartels also are illegal. In a seminal 1948 case, the Supreme Court ruled that an agreement between California farmers to pay a uniform price for sugar beets violated the federal antitrust laws.

Kathy Jeramaz-Larson, executive director of the Toronto-based ILPA, says the organization's lawyers have vetted the principles and there are no antitrust issues. She points out that there aren't any specific terms in any of the documentation. "This is an educational document and an effort by the [investor] community to set forth best practices," said Mr. Jeramaz-Larson.

Mr. McKinley, the Calpers spokesman, declined to comment on its discussions with Calstrs but said that "the ILPA principles are indeed a collaborative effort." A spokesman for Calstrs said the pension fund "supports the ILPA's principles and they are just that, principles." A spokesman for Texas Teachers said it "has no agreement with any other investor regarding the use of the ILPA principles."

One of the more contentious issues relates to fees. The principles state that management fees "should cover normal operating costs for the firm and its principals and should not be excessive."

Also, the principles suggest that all additional fees charged—such as so-called deal fees that firms pay themselves for completing a transaction—should accrue solely to the investors rather than split between the investors and the private-equity firm.

As private-equity firms raised record-large funds during the buyout boom, management fees—typically 2% of assets—became huge sources of income for some firms. A $10 billion fund, for example, could generate as much as $200 million a year in management fees alone. "The firms shouldn't use management fees as profit centers," Ms. Jeramaz-Larson said. "We want them to make their money off of the carry," a reference to the 20% of a fund's profits that private-equity firms normally charge.

Some changes already are afoot. For instance, Blackstone Group LP has cut it fees on a new fund planning to invest in infrastructure deals, reducing the carried interest—the percentage of profits paid out to the firm—to 10% from 15%. Goldman Sachs Group Inc. made a similar move with its latest infrastructure fund, reducing the so-called carry from 20% to 10%.

Buyout executives acknowledge that there even if there are legal problems with ILPA members' conduct, there is likely to be little sympathy for the plight of private-equity firms. "Even if there was an antitrust problem from a legal perspective," said one senior private-equity executive at a large firm, "I don't see the Justice Department coming to the rescue of Henry Kravis and Stephen Schwarzman."