STUMP » Articles » Reading the News with Meep: Illinois Pensions and Madigan, Calpers to Restrict New CIO, New Jersey Millionaire's Tax and More! » 21 September 2020, 17:30

Where Stu & MP spout off about everything.

Reading the News with Meep: Illinois Pensions and Madigan, Calpers to Restrict New CIO, New Jersey Millionaire's Tax and More!  


21 September 2020, 17:30

As noted, the Actuarial Outpost is being transitioned somehow, and I will likely have to make my own pension story repository….depending on what the owner of the AO website does.

In the meantime, I will share with you the pension and other related stories I have been reading.

Illinois Public Pensions and Mike Madigan

I have to containerize the Illinois stories, as they can overwhelm. Don’t worry, I’ll never pop an Illinois pension or finance story on you unawares. Friends don’t do finance jump-scares.

Real Clear Politics: Speaker Madigan’s Corruption Nurtured Illinois’ Pension Debt by Adam Schuster.

Adam, how do you feel about Mike Madigan?

Madigan is the longest-serving statehouse speaker in U.S. history, starting in 1983. Since 1998, he’s also been the chairman of the Democratic Party of Illinois. Those dual roles let Madigan accumulate more concentrated power over public policy than any state leader in the country.

For more than three decades, Madigan has been at the center of virtually every bad decision that gave Illinois its soaring debt and crashing credit.

So…. not a fan, then?

Madigan was a delegate to the 1970 constitutional convention. He voted for the pension clause that states government retirement benefits cannot be “diminished or impaired.” Based on that clause, the Illinois Supreme Court overturned pension reform in 2015 and stated it prevents any effective pension reforms unless the Illinois Constitution is amended to nullify it.

I’ve written about the Illinois state constitution here. That pensions clause is older than me.

Madigan was a House sponsor of Senate Bill 95 in 1989. That legislation created the 3% compounding retiree raises that Moody’s Investors Service said was “key to the growth in the state’s net pension liabilities.” It also gave politicians new ways to spike their pensions, adding $41,000 annually to the pension of state Sen. Emil Jones, its Senate sponsor.
Madigan then sponsored an early retirement program in 2002 that allowed more than 11,000 state employees to retire as early as age 50 with full benefits. It cost taxpayers $2.3 billion. One year later, he supported former Gov. Rod Blagojevich’s plan to sell $10 billion in pension bond debt. The phony balance-sheet improvement those bonds created was used to justify $1 billion pension payment holidays in 2006 and 2007, supported by both Madigan and top government unions.

These sorts of things do add up.

More Illinois pensions:

Calpers governance

Obviously, this saga isn’t over yet. In my prior post on Calpers governance, I noted some upcoming Board meetings. Let’s see what happened.

Let’s look at that last one:

The board of the California Public Employees’ Retirement System (CalPERS) is ready to impose severe restrictions on the personal investments of its next chief investment officer.

The restrictions come after the resignation of CIO Ben Meng last month and a state ethics investigation into Meng’s holding of the stock of private equity firm Blackstone Group.
The restrictions formally revealed Wednesday at a CalPERS board committee meeting by the pension plan’s administrative staff would be among the strictest in the US among institutional investors.

The incoming CIO would be forced to sell all stock and potentially other investments or place them in a blind trust.
The committee also asked administrative staff to examine placing investment restrictions on senior investment staffers working for CalPERS, the largest US pension plan with $415 billion in assets.

In addition, staff will also examine whether board members should be subject to the investment restrictions.

In the meantime, the committee’s chairman, Rob Feckner, instructed administrative staff to tell search firm Korn Ferry, which is looking for a new CalPERS CIO, to inform potential candidates that they would be subject to investment restrictions.
For years, CalPERS had faced recruiting issues with its investment staff partially because it is located in Sacramento, a second-tier city that is not a financial center. The pension plan is also unable to pay the top-notch multi-million plus salaries that investment personnel can make in private firms.

One speaker at the committee meeting, Dillon Gibbons, senior legislative representative for the California Special Districts Association, said he was concerned about imposing investment restrictions.

He said CalPERS is already going to have problems recruiting the right person given its position away from the financial centers of New York and San Francisco.

“Sacramento is the intellectual capital of nothing,” he said.

Maybe, given this age of remote work, they could have the person based somewhere other than Sacramento? Just a thought.

Albany has similar problems, I know. Albany ain’t the intellectual capital of anything, either. But many of the key financial offices for the state are in New York City, not Albany. New York’s Department of Financial Services has its main office in the Wall Street area. For obvious reasons. The investment guys for the NY State pension fund are almost definitely in the Comptroller’s NYC office (also near Wall Street).

I can see that CalPERS might need to have staff for political lobbying in Sacramento, but there’s no reason the investment people should be there.

Another committee member, Margaret Brown, expressed concern that the CalPERS board was moving too fast without properly researching what other pension plans do in terms of investment restrictions on their CIO.

“This is a knee-jerk reaction to an oversight failure,” she said.
Two CalPERS board members, State Controller Betty Yee and Brown, have called for a public airing of Meng’s actions.

Jones had refused to allow for a public hearing.

Another fallout from the Meng resignation is Frost will now be sharing oversight of the new CIO with the CalPERS board. Meng had reported solely to Frost, but Wednesday the CalPERS board approved the new structure, and the hiring, termination and supervision of the CIO will be a shared responsibility.

Well, that’s an interesting development.

I wish them luck in finding a CIO who will fit their requirements.

Multiemployer pensions: benefit cuts

Ohio Teamsters Pension Fund Seeks Benefits Reduction

The Teamsters’ Building Material Drivers Local 436 Pension Fund of Valley View, Ohio, has applied to the Treasury Department for a reduction in benefits under the Multiemployer Pension Reform Act of 2014 (MPRA). The pension’s trustees say that without the cuts, the fund will run of money to pay benefits by 2023.

Under the board of trustees’ proposed reduction plan, the benefits of all plan participants would be reduced to 110% of the Pension Benefit Guaranty Corporation (PBGC) guarantee, which is the maximum reduction in benefits allowable by law.
For example, a member who has 32 years of credited service who will be 70 years and 5 months old as of May 31, 2021 would see their $2,148.24 monthly benefit reduced to $1,258.40 beginning on May 1, 2021, under the proposed reduction plan. However, it notes that without a reduction, the plan will run out of money and their benefit would be reduced to $1,144.00 once the PBGC took over.

Yes, that’s a huge reduction in the example; it’s over a 40% cut. But this gives you an idea of how low the minimums are for the PBGC MEP program.

Now, for the specific example, you’re asking somebody to take this over 40% cut so that they don’t take the slightly bigger cut that gets them to the minimum. The difference for this example is about $114 per month. If you’re a union member (or, especially, a retiree), you may hope for a Congressional bailout so that you don’t get a cut at all.

ESG in Pensions

I haven’t blogged about this as much, but I do follow the stories. It cuts across the investment world, not just pensions, of course. The difference is…. pension trustees are fiduciaries. One questions if the E & S (environmental & social) dimensions have much to do with the fiduciary aspects, and may even undercut it. G (governance) is extremely important for protecting one’s investment, though.

The Center Square: Pension expert says diversity measures in investing could cost Illinois taxpayers.

At the board’s Aug. 27 meeting, Teachers Retirement System of Illinois officials reported to the board about the expansion of the system’s Emerging Managers Program, which identifies minority money managers and nurtures their growth using a small portion of the fund’s $51.2 billion investment portfolio. Common in other state pension funds, the program’s goal is to grow the resumes of minority money managers.

Scharf said any evidence that superior money managers getting passed over for others who may meet diversity standards could run afoul of the pension board’s fiduciary duty to maximize returns and minimize risks for pensioners’ retirement funds.

The reason for the headline is that if there’s underperformance of the pension funds, the assumption is the Illinois taxpayers will make up for any shortfalls.

That’s a big assumption.

First, there’s Illinois’s own behavior:

Since Illinois lawmakers don’t follow actuarial guidelines when contributing tax dollars into the state’s five public pension funds, returns on investment don’t immediately mean a higher tab in the following year.

And even if (when) the cash runs out of the pension fund, the tax revenues (and bond proceeds) will not necessarily be there to do pay-as-you-go.

It’s not just a matter of public pensions where the ESG bug has bitten, as I noted in introducing this subject. There has been a shot across the bow of private pension trustees/asset managers that ESG may cause fiduciaries to be at danger under ERISA. I did note that coming out around the time they were going to allow some private equity into 401(k)s [which I don’t think is a good idea, either].

FWIW, I do think some E/S concerns are legit with respect to long-term investment goals, just not for “justice” reasons; it’s just due to the political risks some areas of investment have.

Related stories:

What about bondholders?

Joshua Rauh, The Hill: Municipal bond investors have to share the burden in state bailouts

Around 30 percent of the municipal bond market are general obligation bonds backed by the general revenue of the issuing state, county or city, as opposed to revenue bonds that are linked to specific revenue streams. The $1 trillion in outstanding general obligation bonds are unsecured, and their holders are not asked to share in the burden.

Proponents of past bailouts in both the United States and the European Union have cited worries that allowing creditors to suffer losses might unleash or worsen a financial crisis. These assertions are in many cases dubious but, even taking this argument at face value, it would be hard to apply to municipal bonds in the current situation.
By contrast, as of this spring, around 12 percent of [U.S.] municipal bonds were owned by banks. This implies only about $130 billion of total exposure to all general obligation municipal debt by the banking sector, compared to well above $1 trillion of tier one bank capital. Similar amounts of general obligation municipal debt reside on the balance sheets of the insurance companies, where municipal bonds are 7 percent of assets.

The remaining municipal bonds are directly owned by individuals, or in mutual funds and exchange traded funds largely owned by individuals. Municipal bond defaults would primarily affect individual investors, and especially individuals who buy tax exempt municipal debt because they are looking for tax free income.

By the way, it’s mainly property/casualty insurers that hold muni bonds. Life insurers don’t need the tax benefit as much, due to tax-exempt reserves.

Congress has to therefore condition any further bailout funds on shared losses by municipal bond investors. For instance, the law can mandate that state governments pass legislation that would write off a dollar of municipal bond debt for every dollar of additional grants given to a state or local government.

I will actually not comment further on this.


Pyrrhic victory: millionaire’s tax in New Jersey


I’m keeping this short: New Jersey doesn’t have a lot to offer compared to New York and Connecticut. The “Garden State” is not mere marketing (but yes, it’s marketing), but both NY and CT have far more natural beauty than NJ….and the taxes and property expenses are fairly high. Sure, NJ’s taxes and cost of living is also high compared to the rest of the U.S., but not compared to CT or near-to-NYC NY. Well, that was the concept, at least.

If you’re an actual millionaire, you may slum it in NJ to save some money. But why hang around now?

Heck, the high-income people are also pouring out of Manhattan because the city amenities currently don’t exist. But those may come back once lockdowns and pandemic is over. High taxes…. well. With New Jersey, you know they have to keep them, given how poorly their pensions are funded.

Leftover stories without comment


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