Te x a s A s s o c i a t i o n o f P u b l i c E m p l o y e e R e t i r e m e n t S y s t e m s
TEXPERS
May 2015
1225 North Loop West, Ste. 909
Houston, Texas 77008
Phone: (713) 622-8018
Fax: (713) 622-7022
texpers@texpers.org
www.texpers.org
BOARD OF DIRECTORS
President
PAUL R. BROWN
Big Spring Firemen’s Relief
& Retirement Fund
First Vice President
SHERRY MOSE
Houston Municipal Employees
Pension System
Second Vice President
TYLER C. GROSSMAN
El Paso Fire & Police
Pension Fund
Secretary
JOHN D. JENKINS
Dallas Employees’
Retirement Fund
Treasurer
EYNA CANALES-ZARATE
City of Austin Employees’
Retirement System
Board Member
ANDY BARBOZA
Corpus Christi Firefighters’
Retirement System
Board Member
JOSE CAVAZOS
Dallas Area Rapid Transit
Retirement Plan and Trust
Board Member
DENISE CRANDON
Dallas Area Rapid Transit
Retirement Plan and Trust
Board Member
PETE MORIN
Austin Police Retirement System
Board Member
LARRY A. REED
San Antonio Fire & Police
Pension Fund
Board Member
JIM SMITH
San Antonio Fire & Police
Pension Fund
ASSOCIATE ADVISORS
LEON RICHARDSON
AllianceBernstein
NICHOLAS STANOJEV
BNY Mellon
DELIA M. ROGES
Invesco
LINDA J. JORDAN
Mesirow Financial
ED GRANT
MFS Institutional Advisors
JASON WIDENER
OFI Institutional Asset Management
DAVID M. SCHILLER
State Street Global Advisors
KEVIN FETZER
William Blair & Company
RICHARD C. BADGER
Wunderlich Securities
STAFF
Executive Director
MAX PATTERSON
Contributing Editor
MATT AUKOFER
OUTLOOK
Issues Impacting Public Pension Funds
TEXPERS Contests Legislation Seeking
to Shift Pension Fund Control from State to Cities
TEXPERS is opposing proposed legislation by State Rep. Jim Murphy (R-Houston)
that aims to shift the control of roughly 100 public pension funds away from the state and to
local municipalities.
The legislation (House Bill 2608) aims to return public funds’ expenses and taxes to
local control, Murphy said. The bill would give control of municipal and fire pension funds
across the state back to local government, with management by municipal ordinance rather
than state statute.
It would eliminate the Legislature’s review of retirement benefits changes that cities
and their pension funds work out for their local police, firefighters and municipal employees.
It also would give cities the option of striking pensions altogether, shifting away from
traditional defined benefit (DB) plans that provide a guaranteed income to 401(k)-style
defined contribution (DC) plans that have undefined outcomes.
“Why should state legislators tell local communities what to pay their employees or
what to pay in taxes?” Murphy asked in introducing the bill.
Sen. Paul Bettencourt (R-Houston) is carrying the companion bill in the Senate.
Bettencourt has not made it a secret that he wants to steer public funds away from DB plans
and toward DC plans.
Continued on page 2
In this issue:
TEXPERS Contests Legislation Seeking to Shift Pension Fund Control ... p. 1, 2
Texas Supreme Court Rules in Favor of Houston Pension Fund ... p. 2
Moody’s Again Comes Under Fire ... p. 3
Arnold Foundation Seeks to Bankroll ... p. 3
Average Retirement Age Has Leveled Off over Past Decade ... p. 4
Longer Lifespans Affect Public Pension Liabilities and Contribution Rates ... p. 4
Texas House Approves Bill to Shore Up State Employee System ... p. 5
Research Analyzes States’ Decision-Making ... p. 5
SEC Names Acting Director of Office of Compliance Inspections ... p. 5
Research Focuses on More Equal Distribution ... p. 6
Fed Studies Characteristics of DC Pension Plans ... p. 6
Private Equity Firm Settles New Mexico Pay-to-Play Scheme ... p. 7
Nearly Two Dozen Broker-Dealers Charged ... p. 7
S&P: Public Pensions to Remain a Public Policy and Funding Challenge ... p. 8
Assets of Largest U.S. Pension Plans Increased 4.3% ... p. 9
BlackRock Agrees to Pay $12 Million Penalty to Settle ... p. 9
Public Pension Plan Participants May Start Suing ... p. 10
Labor Statistician Analyzes Public Pension Equity Plans ... p. 10
Utah’s Move Away from Traditional DB Pension Plans ... p. 11
Page 2
TEXPERS Outlook
Legislation continued from p. 1
Supporters of the bill include business
leaders, Tea Party supporters, the Texas Public
Policy Foundation and Bill Hammond of the
Texas Association of Business. Proponents say the
Legislature interferes in city affairs and that HB
2608 gives the people paying local taxes “a clear
voice” in how their pension system operates.
Writing in the Houston Chronicle April 20,
TEXPERS Executive Director Max Patterson said
the bill “would radically – and detrimentally – alter
the structure of pensions in other cities around the
state.”
Decades ago, many local pensions, with the
help of their city governments, sought to establish
and protect in state law contribution rates, retirement
age benefit formulas and cost-of-living adjustments,
Patterson wrote. This was to combat the possibility
of short-term pension-raiding by local politicians
who might seek easy money for their pet fiscal
projects. “Mayors and city councils have fleeting
political and budget goals in the long life of a city,”
Patterson wrote.
The Legislature today plays no role in the
affairs of local pensions, other than to approve any
changes to the pensions’ governing documents after
a consensus has been reached among members of a
city council, the pension itself, its retirees, unions
and city staff, Patterson wrote.
In fact, local pensions that currently have
been granted “local control” are often those whose
city budgets are under fiscal pressure, Patterson
noted.
“Nothing is more tempting to mayors and
councils than promising unsustainable benefits to
large, motivated city employee groups – the ones
who vote,” Patterson wrote. “While the proponents
of HB 2608 suggest that city governments will
manage their finances responsibly through
‘local control,’ experience doesn’t support their
contention.”
On the Web at: http://www.chron.
com/opinion/outlook/article/Patterson-Ignorelocal-control-allure-for-6212219.php, http://
www.bizjournals.com/austin/blog/abj-at-thecapitol/2015/04/bills-could-shift-pension-fundcontrol-from-state.html, http://www.bizjournals.
com/austin/blog/abj-at-the-capitol/2015/04/
murphy-amends-municipalpension-bill-to-address.
html and http://www.house.state.tx.us/news/pressreleases/?id=5388.
May 2015
Texas Supreme Court Rules in Favor
of Houston Pension Fund in Dispute
with City over Status of Employees
In a unanimous ruling, the Texas Supreme
Court on March 20 affirmed a decision by the board
of the Houston Municipal Employees Pension
System (HMEPS) that city of Houston convention
and hotel workers who were transferred by the city
to a “quasi-governmental entity” controlled by the
city remain city employees covered by the city
pension plan.
The decision is significant for all public
pension plans because it means that the city of
Houston’s efforts to remove city workers from the
statutory defined benefit (DB) plan by reassigning
them to city-controlled entities cannot be allowed.
The city and a small group of employees
sued the board and HMEPS contending that
the reassigned employees were no longer city
employees, and thus they had a separation of
service for purposes of the city pension plan. As a
result, pension distributions should be made to the
employees from the plan and going forward these
employees would no longer be eligible for the city
pension plan.
But the high court’s ruling denies the city’s
claim and leaves intact the HMEPS board’s decision
to classify workers transferred out of the city’s
system as municipal employees.
The decision affirmed a trial court’s ruling
that former Houston city employees who were
transferred out of the city’s system cannot challenge
the HMEPS board’s decision, because Texas law
doesn’t explicitly allow courts to review boardenacted decisions.
The high court said in its opinion that
Houston created “quasi-governmental entities” to
perform the governmental functions, and noted that
the board had the authority to review the employees’
status.
The opinion also said the board was
authorized to protect the fund from a group of
employees who wanted early distribution of their
pension, while moving to the nonprofit Houston
First Foundation, where the board argued they would
be paid for the same job while also collecting a new
401(K) benefit.
The case is Klumb, et al. v. Houston
Municipal Employees Pension System, et al. (No.
13-0515).
On the Web at: http://www.chron.com/news/
houston-texas/article/Man-sues-pension-systemfor-right-to-retire-3465179.php, http://law.justia.
com/cases/texas/supreme-court/2015/13-0515.
html, http://files.bakerbotts.com/file_upload/
Update201503Tax-TexasSupremeCourtAffirmsSi
gnificantHoustonWorkersPensionRuling2.htm and
http://www.law360.com/articles/633967/texas-highcourt-affirms-houston-workers-pension-ruling.
May 2015
TEXPERS Outlook
Moody’s Again Comes Under Fire for
Its Presentation of Public Pension
Accounting Information
The National Association of State Retirement
Administrators (NASRA) has written to Moody’s
Investor Service to express its concern about how
Moody’s is presenting public pension accounting
information, and the conclusions it is drawing as a
result of that information.
In a recent report, “New Pension Accounting
Increases Clarity of Plan Funding Trajectories,”
Moody’s used “unconventional metrics to conclude
that most state and local governments’ pension
contributions were insufficient to stem unfunded
liability growth, even for those that are making their
full actuarially determined contribution,” according
to the letter’s author, NASRA Research Director
Keith Brainard.
The letter marked the second time NASRA
has asked Moody’s to change the way it presents
public pension accounting information. The
previous time, after Moody’s had released a report,
NASRA noted its concern that Moody’s used
proprietary calculations of pension data to measure
public pension funding levels, then failed properly
to clarify both this fact and the effect on public
pensions of declining interest rates and inflation.
As a result of these reports, Moody’s paints
“a picture of public pensions that is misleading to
many readers,” Brainard wrote.
In its most recent report, Moody’s failure to
factor inflation or wage growth into the assessment
leads to a finding that increasing required
contributions are back-loading the funding schedule.
But the contribution rate is constant and remains
a level percent of payroll in real inflation-adjusted
dollars, which are important outcomes that Moody’s
ignores, the letter said.
“Moody’s approach to valuing pension
conditions may serve your firm’s own purposes
for stress-testing the financial condition and
creditworthiness of state and local governments,”
Brainard wrote. “However, publishing the outcome
of your approach outside of this context and without
proper qualification produces misunderstanding
and misuse among many readers and pension plan
stakeholders.”
On the Web at: http://www.nasra.org/files/
Letters/NASRAtoMoodys150402.pdf.
Page 3
Arnold Foundation Seeks to Bankroll
National PR Campaign to Alter Public
Pensions
Reuters is reporting an exclusive story that
former Enron trader and hedge fund billionaire John
Arnold is considering launching a national publicity
campaign to convince U.S. voters of the need to
“reform” public pensions.
Reuters obtained documents, including a
Request for Proposals document dated September
19, 2014, showing that Arnold’s $1.3 billion
philanthropic organization, the Houston-based Laura
and John Arnold Foundation, solicited bids for a
national pension reform public relations campaign
with an April launch date.
Arnold has given tens of millions of dollars
to politicians and groups backing public pension
“reforms” in more than a dozen states since 2008.
Most of these reforms attempt to replace traditional
defined benefit (DB) pension plans with riskier
401(k)-style defined contribution plans.
Arnold is viewed by some labor unions as
an enemy out to destroy their members’ promised
retirement benefits, something he denies. He claims
he wants to find long-term structural solutions,
fair to all parties, to bring fiscal certainty to public
pensions.
According to the documents obtained by
Reuters, the year-long publicity campaign would
involve market research, polling and focus groups to
test views about public pensions, the development
of a bipartisan coalition of groups and individuals
seeking pension reform, and the execution of a
multi-faceted national communications campaign.
It gave no indication of how much money Arnold
planned to spend on the campaign.
Arnold has bankrolled pension reform efforts
in many individual states in recent years, with
mixed success. He has repeatedly said he views
the underfunding of many public pension systems
as a major fiscal and public policy crisis that needs
addressing.
On the Web at: http://www.reuters.com/
article/2015/04/10/us-usa-pensions-arnoldexclusive-idUSKBN0N10ZP20150410?irpc=932.
Is your fund ready for the mandated Minimum Education and Training rules?
The Rules, developed by the Pension Review Board, were effective January 1.
Ensure your plan is in compliance. Visit http://www.prb.state.tx.us/resource-center/trustees-administrators/educationaltraining-program/ to learn more. Contact TEXPERS at texpers@texpers.org.
Sign up for Basic Trustee Training held prior to the Annual and Summer conferences. Login at www.texpers.org.
Page 4
TEXPERS Outlook
May 2015
Average Retirement Age Has Leveled Off over Past Decade
The average retirement age in the U.S. has leveled-off over the last 10 years, suggesting that previous
pressures that induced some people to work longer are no longer having a significant impact.
At the same time, more workers might be retiring before becoming eligible for full Social Security
retirement benefits, which may potentially lead to lower retirement income.
According to a report by the Center for Retirement Research at Boston College (CRR), the average
retirement age for males was slightly over age 65 in 1962 and fell to about age 62 in 1996. This was due
partly to the introduction of Medicare in 1965 and increases in Social Security benefits in 1972.
However, since 1996, the average retirement age for males has increased and, for the last 10 years,
has been about age 64. Factors associated with the increase in the retirement age include: 1) Social Security’s
delayed retirement credit, which increases benefits for each year payment is delayed between the “full
retirement age” and age 70; 2) the shift from defined benefit (DB) pension plans to 401(k) plans; 3) education
levels, health and longevity improvements; and 4) workers delaying retirement to maintain their employer’s
health coverage until Medicare eligibility at age 65.
The report, “The Average Retirement Age – An Update,” defines “average retirement age” as “the age
at which the labor force participation rate drops below 50 percent.”
The average retirement age for women also increased between 1996 and 2013, from age 60 to age
62. However, the report notes that determining trends in the average retirement age for women is complex.
In 1962, the average retirement age for women was age 55. While this suggests a rapid change in women’s
retirement ages between 1962 and 2013, the author indicates that the low retirement ages in the 1960s “simply
reflect the fact that few women had spent much time in the workforce.”
Working longer is the key to a secure retirement, the report concludes. Monthly Social Security
benefits claimed at age 70 are 76% higher than those claimed at 62.
“The fact that people are always amazed when presented with this information suggests that a major
educational initiative may be warranted,” the report concludes.
On the Web at: http://crr.bc.edu/wp-content/uploads/2015/03/IB_15-4.pdf.
Longer Lifespans Affect Public Pension Liabilities and Contribution Rates
Longer lifespans can affect state and local public pension funding because living longer likely will
result in higher liabilities and contribution rates.
A new report, “How Will Longer Lifespans Affect State and Local Pension Funding?” by the Center
for Retirement Research at Boston College (CRR), analyzes the effects of
a recently revised mortality table and a mortality improvement scale by the
Society of Actuaries (SOA). The updated tables reflect significant longevity
improvements.
The report studies the effects of the new mortality table and
improvement scale using two different scenarios:
The first scenario assumes that that public plans would use the
mortality table, but not the mortality improvement scale. Under this
scenario, overall life expectancy for public plans would increase by half a
year. As a result, the plans’ liabilities would increase by 1.75% and reduce
the funded ratio from 73% to 72%.
The second scenario assumes that public plans would use both the
mortality table and the mortality improvement scale. Under this scenario, fully incorporating the anticipated
mortality improvements would add 2.3 years to life expectancy. This would imply an 8% increase in liabilities
and a decrease in the average funded ratio from 73% to 67%, according to the authors’ calculations.
The report also finds that public-sector plans, particularly large plans, appear to be making a serious
effort to keep their life expectancy assumptions up to date. It also finds that the biggest decline in funded ratios
would occur among the smallest plans.
On the Web at: http://crr.bc.edu/wp-content/uploads/2015/04/slp_43.pdf and https://www.soa.org/
Research/Research-Opps/Proposal-Request/data-clensing-validation-public-pension-plans.aspx.
May 2015
TEXPERS Outlook
Page 5
Texas House Approves Bill to Shore Up State Employee System
The Texas House gave preliminary approval April 13 to a bill designed to shore up the Employees
Retirement System of Texas (ERS).
House Bill 9 would put the ERS, the state’s second largest pension plan, on the path to actuarial
soundness by increasing contributions from both the state and active employees later this year.
The bill, filed by Rep. Dan Flynn (R-Canton), and backed by several House leaders, would increase
contribution rates for employees from 6.9% to 9.5% after Sept. 1. This increase would be offset by a
2.5-percent across-the-board pay raise included in the House budget. The state’s contribution would increase
from 7.5% to 9.5%, and state agencies would pitch in half a percent.
Lawmakers passed the bill on a voice vote and without debate. At press time, it still had to pass on
third reading before heading to the Senate.
The fund is about $7.2 billion short – a deficit that is expected to grow by about half a billion dollars
every year if left unaddressed.
State employee groups praised the bill at a hearing in March.
On the Web at: http://www.statesman.com/news/news/state-regional-govt-politics/texas-house-okspension-fix/nksgq/ and https://legiscan.com/TX/text/HB9/id/1160481.
Research Analyzes States’ Decision-Making Pertaining
to Public Pension Contributions
A new study seeks to identify the factors that come into play when states make decisions impacting
their public pension contributions.
Inadequate contributions are one factor behind the gap between pension assets and benefit liabilities.
Each year, many states fail to meet their required pension contribution while others consistently meet
or exceed their required amount, according to the study, “Underfunding Annual Pension Contributions:
Examining the Factors Behind an Ongoing Fiscal Phenomenon,” by Michael Thom and Anthony Randazzo.
The results suggest that states with smaller long-term funding gaps are more likely to fund required
contributions. At the same time, revenue changes and balanced budget requirements had no significant effect
on pension contributions.
The authors note that the results suggest a number of reform avenues, including constitutional,
institutional and programmatic changes of varying political feasibility.
On the Web at: http://slg.sagepub.com/content/early/2015/01/20/0160323X14568025.abstract.
SEC Names Acting Director of Office of Compliance Inspections and Examinations
The Securities and Exchange Commission (SEC) announced that Marc Wyatt will serve as acting
director of the agency’s Office of Compliance Inspections and Examinations (OCIE).
OCIE conducts the SEC’s National Exam Program through examinations of SEC-registered
investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies,
and transfer agents. It uses a risk-based approach to examinations to fulfill its mission to promote compliance
with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.
Wyatt, who has served as the deputy director of OCIE since October 2014, succeeds Andrew Bowden,
who left the SEC to rejoin the private sector at the end of April.
On the Web at: http://www.sec.gov/news/pressrelease/2015-64.html.
Connect with TEXPERS Online
Be a part of the conversation!
http://texpers.blogspot.com/
Page 6
TEXPERS Outlook
May 2015
Research Focuses on More Equal
Distribution of Public-Sector
Retirement Benefits
Fed Studies Characteristics of DC
Pension Plans for State and Local
Government Workers
The Urban Institute has identified what it
says are five promising reform options that could
more fairly distribute retirement benefits across
the public-sector workforce and help governments
recruit and retain productive employees.
Recent public pension reforms have focused
on cutting benefits and raising required employee
contributions to close plan funding gaps. This
approach usually makes government employment
less attractive to younger employees who expect to
spend less than a full career in public service, the
Urban Institute said in a report.
Alternative approaches could distribute
benefits more equally across the workforce,
which would appeal to both younger, shorter-term
employees and older, longer-term employees.
The report identifies five such options,
including revising the plan benefit formula, offering
alternative plan designs, and extending Social
Security coverage to all state and local government
employees.
On the Web at: http://www.urban.org/
UploadedPDF/2000171-Reforming-GovernmentPensions-to-Better-Distribute-Benefits.pdf and
http://www.urban.org/UploadedPDF/2000169-FiveWays-to-Improve-the-Distribution-of-GovernmentPension-Benefits.pdf.
The Board of Governors of the Federal
Reserve has released a short report looking at the
characteristics
of defined
contribution (DC)
pension plans
for state and
local government
employees.
The
report provides
background
information on the
DC pension plans
available to state
and local government workers, briefly discusses
the methodology used to construct the estimates
of assets held by state and local DC pension plans,
and presents the estimates currently reported in the
Financial Accounts of the United States report.
Finally, it discusses the impact of the
introduction of state and local DC pension assets
on the balance sheet of the household sector.
On the Web at: http://www.federalreserve.
gov/econresdata/notes/feds-notes/2015/definedcontribution-pension-plans-for-state-and-localgovernment-employees-20150420.html.
Mark your Calendar and Make Your Plans
Summer Educational Forum
Grand Hyatt
San Antonio, TX
Registration Opens June 1
August 16 - 18, 2015
Basic Trustee Training - Saturday, August 15, 2015 (all day)
Advanced Trustee Training (topic TBD) - Saturday, August 15 (afternoon only)
Golf - Moved to Monday at 4 pm
Special pre-conference workshop - Sunday, August 16 - 1 - 4 pm
Crystal Washington - Social Media Marketing Strategist
Crystal is known for her ability to take complex social media topics and make
them easy to understand and accessible. She has worked with Google, Microsoft
and many others and been inteviewed by all the major television networks for her
comprehensive knowledge on social media.
Don’t miss this practical, hands-on
social media workshop!
May 2015
TEXPERS Outlook
Page 7
Private Equity Firm Settles New
Mexico Pay-to-Play Scheme
for $4.9 Million
Nearly Two Dozen BrokerDealers Charged with Failing to
Register with the SEC
The New Mexico State Investment Council
(SIC) on April 6 settled a dispute with private equity
manager Spyder Management over a $9.4 million
investment it made in 2005 to Silver Creek Ventures
II, managed by Spyder Management.
As part of the settlement, Spyder agreed to
pay $3 million to settle the disputed claims as well
as $1.9 million to cover what remained of the $9.4
million investment.
The SIC alleged that Silver Creek investors
paid a placement fee to third-party marketer
Marc Correra, whose father Anthony was an
unofficial advisor to former New Mexico Gov. Bill
Richardson.
The settlement was part of a larger initiative
by the SIC to recover money from investment
managers and individuals who allegedly manipulated
the state’s investment process for personal gain.
The SIC has sued more than a dozen
entities and individuals, including both Marc and
Anthony Correra, in relation to the alleged improper
payments. A trial is expected in 2016.
So far, the SIC has settled for more than $32
million with investment managers and individuals
based on contentions that those cited used thirdparty firms, subverting the council’s investment
process for their own benefit.
In 2009, the New Mexico legislature
revamped the structure of the SIC in response to
various pay-to-play scandals. The SIC currently
manages more than $20 billion, including the $14.7
billion Land Grant Permanent Fund, and $4.7 billion
Severance Tax Permanent Fund, which provides
funding to public schools, universities and the
general fund of the state.
Neither Spyder nor Silver Creek admitted
any wrongdoing or liability in agreeing to the
settlement.
On the Web at: http://www.abqjournal.
com/565739/uncategorized/equity-firm-to-pay3-million-to-sic-to-avert-legal-fight.html and
http://www.sic.state.nm.us/uploads/PressRelease/
cc77d7a1f57b41d6aeb35ea7099adeb1/NMSIC_
Settlement_Release_April_6_2015_1.pdf.
The Securities and Exchange Commission
(SEC) in late March charged nearly two dozen
companies and individuals who regularly bought
and sold securities on behalf of a suburban Chicagobased trading firm without registering with the SEC
as a broker-dealer as required under the federal
securities laws.
The broker-dealer registration provisions
of the securities
laws ensure the
protection of
customers by
requiring firms to
undergo periodic
inspections by the
SEC and maintain
books and records
for their securities
transactions.
An SEC
investigation found
that Global Fixed Income LLC, which was primarily
in the business of purchasing investment grade
corporate bonds, entered into agreements with third
parties that acted as unregistered broker-dealers on
its behalf and bought billions of dollars’ worth of
newly issued bonds causing Global Fixed Income’s
allocation in the bond offerings to increase.
Because the offerings were often
oversubscribed, Global Fixed Income was generally
able to sell or “flip” the bonds within a few days
for a small profit compared to the dollar value of
the trade, and it split profits with the third-party
participants.
Global Fixed Income and its owner, Charles
Perlitz Kempf, who arranged the deals, agreed
to settle the SEC’s charges along with 21 thirdparty participants. They must collectively pay
nearly $5 million in disgorgement of profits plus
approximately $1 million in penalties.
On the Web at: http://www.sec.gov/litigation/
admin/2015/34-74586.pdf and http://www.sec.gov/
litigation/admin/2015/34-74585.pdf.
Page 8
TEXPERS Outlook
S&P: Public Pensions to Remain a
Public Policy and Funding Challenge
for Some States
Public pension funds most likely will
continue to affect public policy, state budgets and
credit ratings in the near future because of: 1)
new pension accounting standards and actuarial
assumptions; 2) weak funding ratios in some states;
3) slowing reform efforts and accompanying legal
challenges; and 4) increased interest in pension
obligation bonds (POBs) as a financing tool for
unfunded pension liabilities.
These are the conclusions of a March
24 report by Standard & Poor’s (S&P) Ratings
Services, “Six Years into the Recovery, Pensions Are
A Big Divider of U.S. State Credit.”
The new Governmental Accounting
Standards Board (GASB) public pension fund
accounting requirements under GASB Statements
No. 67 and No. 68 are expected to only minimally
impact state credit ratings, however, funding
pressures may be increased, the report notes.
In some cases, public pension liabilities
could increase significantly under GASB Statement
No. 67, which requires pension funds to report a
“depletion date,” or the date when projected benefit
payments for current participants will exceed
projected assets (if applicable). If there is a depletion
date, benefit payments must be discounted using a
rate that combines the expected rate of investment
return with a municipal bond rate, the report states.
May 2015
see growth in unfunded liabilities due to GASB 67
and 68, the report states.
In some states there is a growing interest in
POBs as a result of higher liabilities, lower funding
ratios, poor contribution histories, and low interest
rates, the report notes. S&P cautions that issuing
POBs could increase pressure on states’ budget
requirements. Historically, POBs have “carried
risks and opportunities from a credit perspective”
depending on the overall financing plan and timing
of the bond issuance, the report states.
“It is clear that the issues surrounding
public pensions are in a period of transition based
on accounting and actuarial changes and funding
commitments,” S&P says in the report. “As a
result, we expect pensions to remain a significant
public policy and funding challenge for many state
governments, and a continuing source of expanding
liabilities for most.”
On the Web at: http://files.ctctcdn.
com/701ae45c001/d34862bb-09ac-4c16-83e6cf3026085196.pdf.
Report on the Asset Allocation
and Investment Performance
of Texas Public Employee
Retirement Systems
In addition, changes in actuarial assumptions
(such as new mortality tables or lower assumed rates
of return) are affecting liabilities and increasing
funding pressures, the report notes. The assumed
rates of return for most state pension plans range
from 7.5% to 8.0%, but there has been a trend in
lowering return assumptions. Although the changes
have been gradual, they have generally increased
liabilities, lowered funding ratios, and resulted in
increased pension contributions, the report notes.
While pension reforms have been enacted
in most states, S&P found that those efforts may
have “implementation risks” which can become
budget risks “if savings are included before legal
challenges are resolved.” As of 2015, the pace of
pension reform efforts has slowed, however, reform
proposals could again increase if states and localities
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May 2015
TEXPERS Outlook
Assets of Largest U.S. Pension Plans
Increased 4.3% to $3.3 Trillion Yearover-Year
Total holdings and investments for the 100
largest state and local government retirement systems
increased 4.3% from about $3.2 trillion at the end of
the fourth quarter of 2013 to $3.3 trillion at the end
of the fourth quarter of 2014, the U.S. Census Bureau
reported.
The results are from the U.S. Census Bureau’s
Quarterly Survey of Public Pensions which surveys
the revenues, expenditures, and composition of
assets for the nation’s largest U.S. public employee
retirement systems. These systems comprise 88.4%
of the total cash and security holdings reported for
public plans in the 2012 Census of Governments.
The report also provides a table showing the
quarterly percentage changes in cash and investment
holdings by major investment category from the first
quarter of 2009 to the fourth quarter of 2014. The
Census Bureau notes that in the first quarter of 2012,
the survey was revised to implement changes in asset
classification. As a result, data comparisons of asset
amounts before and after the first quarter of 2012
should be made with caution.
The report states that in the fourth quarter of
2014:
• Earnings on investments were $46.4 billion, up
from $5.8 billion in the third quarter of 2014;
• Government contributions were $28.1 billion, up
from $25.4 billion in the third quarter of 2014;
and
• Employee contributions were $12.9 billion, up
from $10.0 billion in the third quarter of 2014.
By comparison, the report notes that during
the fourth quarter, holdings and investments in
corporate stocks increased 6.1% to $1,228 billion,
corporate bonds increased 5.9% to $400 billion,
international securities decreased 2.9% to $609
billion, and federal government securities decreased
6.1% to $285 billion.
On the Web at: http://www2.census.gov/govs/
qpr/2014/g14-qspp4.pdf and http://www.census.gov/
govs/qpr/.
Meanwhile, to the Board of Governors of
the Federal Reserve reported that state and local
government employee retirement fund assets totaled
$3.78 trillion on December 31, 2014, up from $3.66
trillion on December 31, 2013, an increase of $120
billion (or 3.3% based on the unrounded asset
values).
Page 9
The differing numbers in the two reports
reflect differences in the methodologies used to
calculate pension assets.
The Federal Reserve’s Financial Accounts
of the United States statistical report for the fourth
quarter of 2014 found that state and local retirement
funds’ holdings of corporate equities totaled $2.50
trillion (66.2% of total assets) on December 31,
2014, down slightly from $2.47 trillion (67.5% of
total assets) on December 31, 2013.
On the Web at: http://www.federalreserve.
gov/releases/z1/current/z1.pdf (see p. 98).
BlackRock Agrees to Pay $12 Million
Penalty to Settle Conflict-of-Interest
Charges
The Securities and Exchange Commission
(SEC) on April 20 charged BlackRock Advisors
LLC with breaching its fiduciary duty by failing to
disclose a conflict of interest created by the outside
business activity of a top-performing portfolio
manager.
BlackRock agreed to settle the charges
and pay a $12 million penalty. The firm also must
engage an independent compliance consultant to
conduct an internal review.
According to the SEC, Daniel J. Rice III
was managing energy-focused funds and separately
managed accounts at BlackRock when he founded
Rice Energy, a family-owned and operated oil-andnatural gas company.
Rice was the general partner of Rice Energy
and personally invested about $50 million in the
company. Rice Energy later formed a joint venture
with a publicly traded coal company that eventually
became the largest holding (almost 10%) in the $1.7
billion BlackRock Energy & Resources Portfolio,
the largest Rice-managed fund, the SEC said.
The SEC’s order found that BlackRock
knew and approved of Rice’s investment and
involvement with Rice Energy as well as the joint
venture, but failed to disclose this conflict of interest
to either the boards of the BlackRock registered
funds or its advisory clients.
On the Web at: http://www.sec.gov/
litigation/admin/2015/ia-4065.pdf.
Page 10
TEXPERS Outlook
Public Pension Plan Participants
May Start Suing over Excessive
Management Fees
Conflicts between public pension plan
participants and their sponsors (as well as their
service providers) over high investment management
fees are likely to begin bubbling to the surface
with more frequency, according to author Susan
Mangiero, who wrote April 19 on the subject for the
website Good Risk Governance Pays.
“Although municipal plans have not yet
squared off in the courtroom against unhappy
employees who assert that they are paying too much
in fees, recent headlines portend change,” Mangiero
writes.
The author cites a study by the New York
Comptroller’s Office that found that external
managers failed to add substantial value to the five
NYC public pension funds over the 10-year period
studied.
The results in private asset classes, where
fees are higher, were much worse than in public
asset classes, relative to their respective benchmarks.
However, most of the gross value relative to
benchmark in the public market asset classes was
consumed by manager fees, the report found.
Mangiero cited other studies as well as news
accounts of the backlash against high fees among
public pension plan officials.
Meanwhile, CEM Benchmarking, a research
and consulting firm in Toronto, has released a report
concluding that America’s public pension funds are
paying billions of dollars in undisclosed fees to Wall
Street private equity firms.
“Less than one-half of the very substantial
[private equity] costs incurred by U.S. pension
funds are currently being disclosed,” the report said.
Currently, about 9% – or $270 billion – of America’s
$3 trillion public pension fund assets are invested in
private equity firms.
Assuming the industry standard 2%
management fee, that quarter-trillion dollars
generates roughly $5.4 billion in annual management
fees for the private equity industry – and that’s not
including additional “performance” fees paid on
investment returns, according to CEM. But even the
$5.4 billion number could be drastically understated.
May 2015
On the Web at: http://www.goodriskgovernancepays.
com/pension/excessive-fee-litigation-and-publicpension-plans/, https://comptroller.nyc.gov/wpcontent/uploads/documents/BAM_Report_Impact_
of_Management_Fees.pdf, http://www.benefitspro.
com/2015/04/21/pe-costs-not-fully-disclosedin-pension-funds and http://www.ibtimes.com/
cities-states-paying-massive-secret-fees-wall-streetreport-1887034.
Labor Statistician Analyzes Public
Pension Equity Plans
William J. Wiatrowski, a researcher with
the U.S. Bureau of Labor Statistics, examines the
concept behind pension equity plans and looks at
some unique features of these plans in a new report.
He notes that the decline in the number of
workers who are covered by traditional pension
plans over the past 35 years has been accompanied
by a variety of efforts to transform these plans into
vehicles that can continue to provide retirement
income to workers while stabilizing the financial
responsibility for employers.
For example, state governments have
introduced less generous pension tiers for new
employees as part of fiscal belt-tightening. Among
the changes in pension plans tracked by the BLS
since the late 1970s are different formulas for
calculating benefits.
One of those formula types is the pension
equity plan, or PEP. These plans were first identified
by BLS private industry surveys conducted in the
late 1990s.
His report covers how PEPs work and
documents how BLS data show a decline in the
number of workers covered by traditional defined
benefit (DB) plans, as well as the increase in the
share of pension participants covered by a cash
balance formula.
At the same time, BLS has identified a small
share of participants covered by PEPs and many
of them worked in health-related industries. Some
PEPs have been frozen, meaning they are closed to
new employees, part of the continuing decline in
pension coverage.
PEPs may have been introduced in part to
help employees understand how their retirement plan
builds value over time, but the incidence of these
plans remains low, Wiatrowski writes.
On the Web at: http://www.bls.gov/opub/btn/
volume-4/pdf/a-look-at-todays-pension-equity-plans.
pdf.
Page 11
TEXPERS Outlook
Utah’s Move Away from Traditional
DB Pension Plans
New research explores what happened when
the state of Utah moved away from its traditional
defined benefit (DB) pension and replaced with a
hybrid or 401(k)-style plan for new hires.
New public employee hires in Utah were
given a choice between a conventional defined
contribution (DC) plan, or a hybrid plan having both
a guaranteed benefit component like a DB plan and a
DC plan that shifted investment risk to employees.
The authors found that about 60% of new
hires failed to make any active choice and, as a
result, were automatically enrolled into the hybrid
plan, according to the report, produced by the
Pension Research Council and Wharton School of
the University of Pennsylvania.
Slightly more than half of those who made
an active choice elected the hybrid plan. Employees
May 2015
who failed to actively elect a primary retirement plan
were also far less likely to enroll in a supplemental
retirement plan, compared to new hires who made an
active plan choice.
The authors also found that employees hired
following the reforms were more likely to leave
public employment, resulting in higher turnover
rates than previously.
“This could reflect a reduction in the
desirability of public employment under the new
pension design,” the authors wrote. “Our results
imply that public pension reformers must consider
employee responses, in addition to potential cost
savings, when developing and enacting major
pension plan changes.”
On the Web at: http://www.
pensionresearchcouncil.org/publications/document.
php?file=1270.
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