Public Pension Watch: California and Illinois Executive Resignations, Spiking v. California Rule, and more!

Also: Betting on Death

Aug 10, 2020

It’s been a bit since I’ve done a visit to the pension-sphere, and a lot has been going on. Just this past week… well, you’ll see below. Usually, I don’t have this much hit at once.

Let’s just deal with the public pensions issues today, shall we?

Calpers CIO out after financial disclosures called into question

ai-CIO: CalPERS CIO Ben Meng’s Departure Linked to Questions on His Financial Disclosure

An emergency meeting of the California Public Employees’ Retirement System (CalPERS) board members will be held on Aug. 17 as state regulators examine whether CalPERS CIO Ben Meng violated state law with his financial filings.
Meng’s sudden resignation apparently stems from issues with his required state financial disclosure form. Officials said these filings show he did not disclose personal stock sales and that he had a potential conflict of interest by holding shares in three private equity (PE) firms that did business with the pension system.

The issues with the disclosures was reported by Yves Smith at naked capitalism: CalPERS Chief Investment Officer Ben Meng Made False, Felonious Financial Disclosure Report; More Proof of Lack of Compliance Under Marcie Frost, and she’s followed up with CalPERS Chief Investment Officer Ben Meng Resigns Following Our Exposing His False, Felonious Financial Disclosure Filings and Private Equity Conflicts of Interest and CalPERS Digs Its Ben Meng Defenestration Hole Deeper: Claims Knowledge of Abuse Months Ago; Notice for Emergency Closed Session Legally Invalid Unless CEO Frost’s Job Is on the Line. Yves goes into lots of details.

While issues with the disclosures (such as multiple names for the same securities, non-comparability between statements) could be explained in changing reporting systems (I know I’ve had such reports run on me, because I work for an asset manager) or plain sloppiness.

But the concern is that he held stocks in companies that did business with Calpers. That’s a big no-no, for obvious reasons. That he had to resign, as opposed to selling the stocks… makes me wonder. That’s not a good look.

The driver on this issue, Yves Smith, has been a thorn in the side to Calpers management for a while, particularly detailing failings, and I’ve used her as a source (along with those reacting to her) for: California Crazy: Governance and Management Problems at Calpers and Trying to Deflect the Blame: Calpers and the Catholic Church (and Trump!). That gives you an idea of the “crisis management” this crew does.

There have been governance issues at Calpers for a very long time, and no, not all public pension funds operate this way. You would think one of the largest pension funds in the world, and the largest public pension fund in the U.S., would try to demonstrate the highest in ethics, world-class professionalism, but….

via GIPHY

By the way, in trying to dig up some of the earlier Calpers problems, I went to the Calpers entry at Wikipedia. The Controversies section is missing a LOT.

Back in 2012, somebody noticed it on the Talk page and I note a Calpers employee asked if they could clean up the article back in 2014. The entry is very skimpy for what Calpers is, and needs work. No, I’m not doing it, because I refuse to edit Wikipedia for free.

More pieces on Meng’s resignation:

Calpers press release: CalPERS Chief Investment Officer Yu (Ben) Meng Resigns
David Crane: Calpers agonistes
SacBee: CalPERS chief’s abrupt resignation preceded by conflict of interest questions
Bloomberg: Calpers CIO’s Mysterious Exit Was Preceded by Months of Torment – this is going to be the most sympathetic account you’ll read.
P&I Online: Questions swirl around CalPERS resignation
National Review: California’s Public Pension CIO Ben Meng Resigns
Fox Business: California pension fund investment chief, under pressure from congressman, resigns

There is supposed to be a meeting on August 17, and I wonder what will come out of that. Except that portion of the meeting is closed to the public. Way to go on governance, guys.

Illinois TRS director out … but it’s unclear why

So, here’s another large public pension fund booting an executive. This fund has over $50 billion in assets, making it the 17th largest pension fund in the Public Pensions Database, near in size to the New York City Teachers fund (in assets).

Chicago Tribune: Executive director of massive Illinois teachers pension fund resigns after investigation into ‘performance issues’

The executive director of the massive Teachers’ Retirement System resigned earlier this week after being placed on administrative leave days earlier following an internal investigation into “performance issues.”
The Teachers’ Retirement System board voted unanimously last Friday to place Richard Ingram on administrative leave “due to performance issues covered by his employment contract,” the board said in a statement issued Thursday.
Ingram then resigned on Monday. He had been executive director of TRS, the state’s largest government retirement fund, for nearly a decade, spokesman Dave Urbanek said.
Urbanek declined to comment on the substance of the “performance issues,” but said the situation does not put pensioners’ payments in jeopardy.
“Sometimes in situations like these, our members wonder about their pensions,” Urbanek said. “The underlying issues here in no way imperil the payment of their pension or the pensions in general.”

Yeah. “Performance issues”. I looked at the PPD entry for Illinois TRS, and while the funded status is horrible, I don’t think it’s Ingram’s fault. It’s always been horrible.

I have a feeling this is one of those “you get reported to HR” type of things. They had to get a lawyer to investigate… so I hope it’s just the normal sort of hanky-panky that sometimes happens in large groups of people. It will be impressive if all the people involved were discreet. That would be very old school.

But Greg Hinz posits a different explanation: Head of state’s largest pension fund quits after probe

According to the agency’s last annual financial report, it concluded fiscal 2019 on June 30, 2019, with $53.3 billion in assets but $134.4 billion liabilities, leaving it with a funded ratio of just 40.6 percent.
In a preface to the report, Ingram openly discussed the possibility that TRS could go “insolvent,” a development he blamed on consistent underfunding by state government. The same report, however, disclosed TRS’ return on assets in fiscal 2019 plummeted from $4 billion to $2.6 billion.
Gov. J.B. Pritzker’s office has not commented, but sources familiar with TRS tell me there were disputes over investment philosophy and how low to set the fund’s assumed rate of return. Setting that figure lower would force the state to contribute more each year now, something that would pull money from other, arguably more politically popular funding programs.
Pritzker has appointed a majority of TRS’ current 15-member board.
UPDATE: Illinois Times, a Springfield newsweekly, is reporting that also having recently left TRS is Jana Bergschneider, who was chief financial officer.

Guys, if it were just an issue of the investment philosophy, they wouldn’t need a lawyer to investigate anything, other than, perhaps, the terms of his contract (and I assume his “contract” is like most other people’s, for all that he’s a public employee: he’s at will).

So… I’m thinking that he was likely a juicy target because he was becoming a pain in the ass, with the dropping of the valuation rate. There may have been some non-professional activities unrelated to investments… and, I guess they got a lawyer to see if they might have some liability for various lawsuits. Or it could be any number of things.

Ingram is not commenting, and it sounds like Illinois TRS’s board is also not commenting. So… again, I’m assuming it has nothing to do with actual asset management, but a personnel issue.

California Rule v. California Spiking: a tie

This one is a mixed bag. A court ruling came down in California with a good result, in that the legislature could deem certain activities non-pensionable… but the “California rule” stayed in place. I will discuss that after the news piece.

California Rule left alone, but high court affirms anti-pension spiking law

The California Supreme Court failed to take up the California Rule in its most recent decision in a pension case, instead issuing a narrow ruling on the case’s merits.
The court did affirm the state’s right to eliminate pension spiking, a reform outlined in the Public Employees’ Pension Reform Act of 2013, a law championed by former Gov. Jerry Brown.
“We have no jurisprudential reason to undertake a fundamental reexamination of the (California) rule,” Chief Justice Cantil-Sakauye wrote in the court’s unanimous decision.
The opinion focused on the specific merits of the 2012 lawsuit filed by the Alameda County Sheriff’s Association. More than a dozen others on both sides of the issue also filed briefs in the case.
….
The justices affirmed the 2013 law prohibiting pension spiking, a practice that enabled public workers to bulk up overtime hours or cash out accumulated leave at the end of their careers to inflate their pensions in retirement. Pensions in California are based on salary levels achieved in the final years before retirement.
The state’s attorneys, under Brown and Gov. Gavin Newsom, had encouraged the court to consider the cases challenging PEPRA more broadly and limit the California Rule. They further argued that local and state governments need more flexibility to reduce future pensions for current workers in order to manage budgets during difficult economic times.
The court found that PEPRA clarified existing rules and closed loopholes rather than introducing more far-reaching changes, which the court called a “proper objective” in keeping with legislators’ lawmaking authority.

So they punted on the question of the California Rule. Dangit.

So, for those new to the lingo, let me explain a few things:

Spiking: With respect to public defined benefit pensions, spiking means inflating one’s pension payments via all sorts of legal tricks, such as taking on excessive overtime, adding other pensionable service, etc., for the last year, or, in some cases, last week of one’s employment.

I wrote about this case in June, and I had no idea in which direction it would go. I knew, from experience, how it would go in Illinois, but California, interestingly, is not as fiscally messed up as Illinois.

California Rule: unlike Illinois, where pension protection is written into its state constitution, California’s “California Rule” is based on various court rulings re: contract/property rights for public employees in California. The “rule” is that whatever pension benefits promised you when you started working can never be adjusted downward, but only ratcheted up.

Let me give you an example. Suppose the benefit promised when you started work at age 25 was 2% per service year times your average salary for 5 final years (or even 5 highest years). Twenty years later, the employer wants to change that per-year credit to 1.5%, but saying those first 20 years get the 2% credit.

Under the California Rule, no, you can’t say “You earned those 2% credits in your first twenty years, but now the next 20 count for 1.5% each”, you can only ratchet that multiplier higher.

Well, the court here did not address the California Rule. They just said the law clarified what was pensionable income.

More pieces on the case:

It’s a bit disappointing, but it’s not as bad as the result in an Illinois court would have been. The “California Rule” really should be called the “Illinois Rule”, inasmuch the Illinois Rule has been much, much stronger.

Public pension story round-up

I keep a depository of public pension stories at the Actuarial Outpost. You can see the 2020 Public Pensions Watch here. You don’t need to have an account to read the posts. I don’t blog about them all (and I rarely comment on them at the AO – I use it as my external memory.)

A sampling of stories from the past week:

Fox & Hounds: CalPERS, Corruption And Cronyism
naked capitalism: Mayberry v. KKR Plaintiffs File Amended Complaint, Refuting Standing Issues in Recent Kentucky Supreme Court Decision – this has to do with use of private equity in Kentucky pensions
John Bury: No Schools → No Teachers → No Pensions
Elizabeth Bauer at the Chicago Tribune: Commentary: Pension help could be on the way, if we choose it
Retirement association sues New Mexico pension board
P&I: Moody’s dings Colorado for dropping $225 million pension contribution from budget
Reason: The Surprisingly Risk-Free Origin of Public Pension Investment Return Assumptions – I had a discussion with Jeremy Gold (RIP) about this years ago… it was an interesting history lesson
Reason: What Happens to Taxpayer-Funded Pensions When Public Officials Are Convicted of Crimes?
New York Common Fund Loses 2.7% in Fiscal Year – some of this is a timing issue: the NY common fund’s fiscal year ends March 31.
American Academy of Actuaries: Asset Allocation and the Investment Return Assumption – I may write more about this later
Washington State: Pension council rejects lower growth assumptions
Massachusetts: Despite Demands For Reform, The MBTA’s Pension Fund Is Still Secretive And Underwater
Empire Center: [New York] State Pension Fund Lost Money in 2020, Pointing to Higher Costs Ahead
Mercatus: An Analysis of Connecticut’s Public Employee Retirement Plans
Pennsylvania: Teachers’ pension fund adopts new, more transparent travel policy after revelations of hidden L.A. trip costs
The Center Square: Oregon Supreme Court strikes down lawsuits against state pension laws
In absence of pension forfeiture laws, ex-Minneapolis officer’s benefits may leave state with hefty bill
Liz Farmer: Public Pensions Rally in Chaotic Stock Market, But Bigger Bills Still Coming for Governments

And finally….

Questionable investments

But not necessarily for the reason the author is writing about.

Ted Siedle: Your Pension May Be Gambling On Human Life, Profiting From COVID Deaths

Before I quote him, I want to note that many people had moral objections to life insurance (maybe some still do), and especially don’t like the concept of publicly-traded life insurance companies. Betting on death! Sinner!

via GIPHY

Okay, back to Ted:

Whether you know it or not, your pension may be gambling on highly-speculative life settlement funds which profit when people die prematurely from COVID. Life settlement funds are controversial for a host of obvious and not-so-obvious reasons. These investments in a pension ensuring the retirement security of workers is doubly problematic.
Many public and private pensions are gambling on highly speculative funds that invest in so-called “longevity-contingent assets,” such as life insurance policies insuring the lives of individuals who are generally at least 70 years old. The insured individual must have a life expectancy ranging from, say, not less than two years to not more than 15 years. A given fund may have exposure to hundreds of lives in the portfolio with an average insured age of over 80 years old.
The sooner the terminally ill and other elderly insured individuals die, the better—as far as your pension is concerned.

I will point out that both annuities and long-term care insurance also do well when the insured people die sooner than priced for.

Life settlements, which used to be called viaticals, do strike one as “icky”… but then public pensions also do well when the pensioners die early…. which should clue you in to the real problem with these assets.

Siedle does talk about the iffy valuations of these assets, and I agree… but then, DB pensions also have iffy valuations. OOoooh, second strike.

I’ve had this conversation with others before: the big problem is that these assets have the same risk profile as your liabilities… and not in a good way.

Everybody sells the upside, but let us consider the downside.

Life settlements give cash payments to insured people, in exchange for getting the death benefit when the insured dies. The investors have to pay the policy premiums, while the insured person gets a lump sum of cash. If that person lives a lot longer than you originally expected… as an investor, you’re screwed. But at least you can stop paying the premiums when it no longer makes sense.

Well, the prior iteration of life settlements, called viaticals, had a boom time with people dying from AIDS in the 80s and 90s… right up until the point there started to be effective treatments.

The risk is longevity risk — that people live longer than you expected.

This is one of the core risks of defined benefit pensions.

If your pensioners and the people you’re betting on to die both live longer than you expected due to medical breakthroughs, you get hit simultaneously on the asset and liability sides. In short, this is not proper risk management. This is doubling down on longevity risk. I’ve had to talk some people down from this being an attractive pension asset. No, it’s not.

COVID-19 is giving a little boost to all these assets and pensions this year with extra deaths, but not as much as you’d think. The next actuarial reports will probably show some favorable mortality experience for fiscal year 2021, or maybe 2020, depending on their timing. But what about the asset experience? And lost contributions?

Okay, I know this is all a downer. Look, I got you a flower:

Enjoy!

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