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Our Mission: Securing the Financial Future and Sustaining the Trust of California’s Educators
Pension Issue News Clippings
April 15, 2015 – June 4, 2015
Audience: Client Advisory Committee – June 12, 2015
Media Source Title of Article/Date Page
Manhattan Institute California Crowd-Out
How Rising Retirement Benefit Costs Threaten Municipal
Services
April 15, 2015
1-2
Orange County Register Politicizing Investments Hurts Pensioners, Taxpayers
April 15, 2015
3-4
Wall Street Journal
Debate on Fossil-Fuel Investing Continues
April 20, 2015
5-6
Salon Wall Street Owns Our Cities: The Secret Pension Travesty
Threatening American Workers
April 26, 2015
7-8
Commission on Teacher
Credentialing
REPORT: Teacher Supply in California, 2013-2014 A Report
to The Legislature
April 2015
9-10
Marin Independent
Journal
Hundreds of Retired School Administrators and Teachers
Receive Hefty Pensions
May 4, 2015
11-12
Yahoo! Finance S&P Raises CalSTRS Outlook, Cities Potential Funded Ratio
Improvements
May 5, 2015
13
Fortune For American Women, It’s Been A Very Slow, Tough Road to
the Boardroom
May 14, 2015
14-15
Inside Climate News California Democrats Approve Sweeping Fossil Fuel
Divestment Resolution
May 22, 2015
16-18
Reuters, U.S. News Pension Fund Leaders Challenge McDonald’s and Others on
Buybacks
May 20, 2015
19-20
Financial Times CalPERS and CalSTRS Urge G7 to Back Emissions Goal
May 26, 2015
21-22
Media Source Title of Article/Date Page
Our Mission: Securing the Financial Future and Sustaining the Trust of California’s Educators
The Orange County
Register
Arts Program, Retirement Payments Contribute to More
Expenses for School District’s Budget
May 26, 2015
23-24
California Political Review
Blog
CalSTRS to Take $170 Billion From Classrooms Over 30
Years to Keep Checks Flowing
May 28, 2015
25-26
Chief Investment Officer The Backtesting Crisis
June 1, 2015
27
The Sacramento Bee California Lawmakers Boost Climate Change Bills
June 3, 2015
28-29
Forbes The Immortality of Pushing Pension Debt Onto Millennials
June 3, 2015
30-31
The Sacramento Bee California Pension Initiative Requires Public Vote On
Retirement Benefits
June 4, 2015
32-34
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CALIFORNIA CROWD-OUT How Rising Retirement Benefit Costs Threaten Municipal Services (Manhattan Institute, Civic Report) 04-15-15 BY: Stephen D. Eide, Senior Fellow, Manhattan Institute Executive Summary In recent years, California municipalities have seen retirement benefit costs grow at a rate above that of taxes, fees, and charges. “Crowd-out” is the term given to this condition by some public officials forced to deal with the resulting fiscal strain. Balanced budget requirements mandate that when costs grow more rapidly than revenues, something must give. All too often, this has meant reductions in core government services, most of which—police, fire, libraries, parks, and street and sidewalk maintenance—are delivered at the local level in California. Retirement benefit costs have caused California localities to underfund basic infrastructure maintenance needs, even in affluent areas such as Sonoma County. Teachers in Los Angeles are threatening to strike over stalemated contract negotiations, as the school district has found itself unable to satisfy union demands for increased personnel and salaries, as well as its long-term benefit commitments. This paper takes a broad look at California crowd-out, documenting the phenomenon across the local government sector. It will compare rates of growth between revenues and retirement costs and examine workforce levels, salary trends, infrastructure spending, and other service indicators. Major findings include: Cause
Crowd-out is a structural problem that asserts itself mainly during economic downturns and recoveries. In each of the last three recessions since the early 1990s, California local governments have seen annual pension contributions grow at a rate above tax revenues.
A survey of cost trends in own-source revenues and retirement benefits across 25 municipalities, including San Diego, San Jose, and San Francisco, found that all experienced crowd-out over the last decade.
Examples of crowd-out may be found in every variety of California municipality: city, county, transit agency, school district, high income, low income, and throughout all regions.
The portions of local pension costs that have risen most rapidly have been those associated with systems’ unfunded liabilities.
Active employee health care benefit costs have also grown rapidly over the last decade, though in more recent years, the pressure has weakened. A survey of 14 localities’ active employee health care spending found that the median increase during FY05–09 was 40 percent, but only 20 percent during FY09–14.
Crowd-out will continue because of pressure to increase payments on retiree health care and mandated pension expense increases by CalPERS and CalSTRS, the state retirement systems in which many local governments participate.
Effect
READ FULL REPORT
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Census Bureau data show that, between 2004 and 2012, growth in pension costs for California local governments outpaced spending on core services, such as police and fire, and quality-of-life services, such as parks and libraries.
Crowd-out’s most tangible effect has been on personnel. In December 2014, local government staffing levels in California remained eight percent below where they were in December 2007. Private-sector job levels in California, by contrast, were 2.4 percent higher.
Job cuts have not been across the board. Local staffing data suggest that reductions in public-safety personnel have been less steep in recent years than for non-public-safety personnel. Bureau of Labor Statistics data show that local government education jobs have been reduced more than noneducation jobs.
In California over the last 15 years, local government salaries have increased 5 percentage points more slowly than private-sector salaries, and 3.4 points over the last five years.
Whether governments should increase their workforces must be evaluated on a case-by-case basis. But by restricting municipalities’ staffing possibilities, crowd-out also restricts municipalities’ policy possibilities.
Crowd-out has had a more significant effect on the ability to perform basic maintenance than on major capital investments. Were localities to devote what they currently spend on pension debt service to basic maintenance instead, some could reduce all or most of their infrastructure backlog within a few years.
California’s fiscal position has improved since 2010. No longer does it have the lowest credit rating among American states; its unemployment rate is down; and it has not faced a multibillion-dollar budget deficit since the FY12 budget cycle. But local services are not improving at a rate proportionate to economic growth. When the next recession hits, more municipal bankruptcies will come. For the moment, the greatest threat is mediocrity, not insolvency. Recommendations 1. Local governments should focus on scaling back retiree health care benefit commitments instead of, or as part of, funding arrangements 2. Pension reform will require state action, likely through a ballot initiative. The success of pension reform at the state level will, however, depend on local leadership. About the Author Stephen D. Eide is a senior fellow at the Manhattan Institute’s Center for State and Local Leadership. His work focuses on public administration, public finance, political theory, and urban policy. His writings have been published in Politico, Bloomberg View, New York Post, New York Daily News, Academic Questions, and City Journal. He was previously a senior research associate at the Worcester Regional Research Bureau, and holds a bachelor’s degree from St. John’s College in Santa Fe, N.M., and a Ph.D. in political philosophy from Boston College. Acknowledgment Support for this project was provided, in part, by the Arthur N. Rupe Foundation.
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Politicizing investments hurts pensioners, taxpayers (Orange County Register, Opinion Column) 04-15-15 BY: Adam B. Summers / Staff Columnist
Politicians love to spend other people’s money. This axiom is no less true when it comes to
investing other people’s money. California’s pension funds have a long history of political
activism – to the detriment of the employees and retirees whose benefits are paid, in large part,
from pension investment returns, and the taxpayers who are forced to pick up the slack when
the politically motivated investments underperform.
The latest “socially responsible investing” fads are divesting pension fund assets in two
industries despised by the liberals in power: gun manufacturers and fossil fuels. State
Treasurer John Chiang, a Democrat, and the California Federation of Teachers are lobbying
for the California State Teachers’ Retirement System to divest its $375 million investment in a
long-term private equity fund with Cerberus Capital Management, which has investment
holdings in Freedom Group, an American firearms manufacturer holding company.
Among Freedom Group’s brands is Bushmaster, which makes the AR-15-style rifle that Adam
Lanza used to kill 20 children and seven adults at Sandy Hook Elementary School in
Connecticut. CalSTRS expressed concern over the Cerberus investment shortly after the 2012
shooting, yet, as it noted in a statement this month, “contractual obligations and legal
constraints severely limit our options to exit this investment.”
In a letter to CalSTRS, Chiang acknowledged the need for the pension fund to make sound
investments, but said “it must consider how those investments may be used to finance
business interests that run counter to the beliefs of CalSTRS and its members.”
Senate President Pro Tem Kevin de León, D-Los Angeles, echoed this sentiment in a
statement about his bill to divest from coal companies. With a nod to the liability risk of
explicitly putting politics before investment decisions, his Senate Bill 185 contains a provision
that would ensure that pension board members and officers are “held harmless and eligible for
indemnification” for implementing such divestments.
Not everyone is on board with the divestment idea. “I’ve been involved in five divestments for
our fund,” CalSTRS chief investment officer Chris Ailman told the CalSTRS board recently.
“[On] all five of them we’ve lost money, and all five of them have not brought about social
change.”
CalSTRS lost $1 billion, for example, by divesting from tobacco companies in 2000, and a
1987 state law mandating the divestment of companies doing business with apartheid South
Africa cost the pension fund another $600 million to $750 million.
Politicians and pension board members may sing the praises of their “socially responsible
investing” and view it as “a noble way to lose money,” as former California Public Employees’
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Retirement System chief investment officer Joseph Dear described the pension fund’s 9.7
percent loss on “clean” energy and technology investments from 2007-13.
While some CalPERS and CalSTRS members may agree with such politically driven
investment strategies, many others will not – and taxpayers certainly will not be eager to make
up the difference if these decisions cause pension fund returns to come up short.
Replacing the fiduciary duty to retirement system members to make sound decisions with the
ideological whims of politicians is recipe for disaster. The state’s pension investment funds
exist to pay for the benefits retirees have accrued, not to provide politicians with another
avenue to enact public policy.
This is all the more reason to remove investment decisions from the political realm altogether.
Switching from the current defined-benefit pension system to a 401(k)-style defined-
contribution system would put investment decision in the hands of employees. Treasurer
Chiang, Sen. de León and others would then be free to invest all their retirement funds in
“green energy” companies and shun higher-performing investments in politically incorrect
companies and industries – but I doubt many would do so with their own money on the line.
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DEBATE ON FOSSIL-FUEL INVESTING CONTINUES TO BURN (Wall Street Journal, Money Beat blog) 04-20-15 BY: Timothy W. Martin Arguments over fossil-fuel investing are gushing to the surface ahead of an energy conference this week. Activists have been pressuring university endowments, pensions and other institutional investors to shed their coal, oil and gas investments. Those efforts have drawn the attention of the Independent Petroleum Association of America, a trade group for oil and energy companies that commissioned a survey of big investors ahead of IPAA’s investing conference starting Monday in New York. Just 2% of the 324 investors surveyed expressed “some interest” in divesting, while nearly nine of 10 respondents, or around 88%, said they “have not and do not intend” backing off of fossil-fuel investments. The surveyed group includes BlackRock Inc., California Public Employees’ Retirement System, or Calpers, and J.P. Morgan Chase & Co. “Are activists having an impact on the investing community? The answer is no,” said Jeff Eshelman, IPAA’s senior vice president of operations and public affairs. The IPAA report shows fossil-fuel companies are “starting to get desperate,” said Karthik Ganapathy, a spokesman for 350.org, the Brooklyn-based activist group that’s spearheaded much of the divestiture movement. “No one’s surprised that Big Oil thinks it’s a bad idea to pull investments out of Big Oil,” Mr. Ganapathy said. Pensions and endowments are balancing pressures to generate investing returns against social and environment causes championed by activists. In recent months, the World Bank, Syracuse University and the city of Minneapolis have joined a group of more than 200 institutions opting to divest fossil-fuel investments, 350.org says. That includes more than 20 U.S. universities and more than 30 U.S. cities with pension plans. Campus events are continuing to sprout up. Harvard University’s “Heat Week,” which included a six-day blockade of a campus building, wrapped up Friday. More investors are exploring the issue or weighing in, even if they don’t explicitly want a sell-off of fossil-fuel investments. Last weel, a group of more than 60 institutional investors, including Calpers, sent a letter to Mary Jo White, chair of the Securities and Exchange Commission, asking that regulators require oil and gas firms provide better disclosures over how climate regulations and price volatility may hurt business. “For investors, it’s not a matter of advocacy, it’s a matter of risk,” said Shanna Cleveland, a senior manager at Ceres, a nonprofit that advocates for sustainability, which helped organize the SEC letter. The California State Teachers Retirement System, or Calstrs, decided earlier this month to have its staff and consultants study the divestment of coal companies. The IPAA survey was conducted by FTI Consulting Inc. from March 17 to March 25. Buyside investors have around $4.2 trillion in equity assets under management. Of the 342 investors
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polled, only a couple dozen have direct investing ties with endowments or pensions—the core groups targeted by activists. But more than eight of 10 polled respondents said they had heard of the divestiture movement. The IPAA investing conference is expected to draw more than 1,000 attendees and more than 70 CEOs of oil and gas firms are expected to give presentations. “The cause of the moment appears to be ‘divestment,’ ” said Mike Watford, IPAA chairman and CEO of Ultra Petroleum, in prepared remarks for Monday’s lunch. “We all know…that divestment is faulty thinking and only hurts educational institutions and students—without saving the planet,” according to Mr. Watford’s prepared remarks. Update: A group of institutional investors sent a letter to SEC Chair Mary Jo White last week. An earlier version of this post incorrectly said it was sent last month.
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Wall Street owns our cities: The secret pension travesty threatening American workers Private equity firms are raking in cash from municipal governments, and SEC officials are finally taking notice (Salon, Politics) 04-26-15 BY: David Sirota California’s report said $440 million. New Jersey’s said $600 million. In Pennsylvania, the tally is $700 million. Those Wall Street fees paid by public workers’ pension systems have kicked off an intensifying debate over whether such expenses are necessary. Now, a report from an industry-friendly source says those huge levies represent only a fraction of the true amounts being raked in by Wall Street firms from state and local governments.
“Less than one‐half of the very substantial [private equity] costs incurred by U.S. pension funds are currently being disclosed,” says the report from CEM, whose website says the financial analysis firm “serve(s) over 350 blue-chip corporate and government clients worldwide.” Currently, about 9 percent — or $270 billion — of America’s $3 trillion public pension fund assets are invested in private equity firms. With the financial industry’s standard 2 percent 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. If CEM’s calculations are applied uniformly, it could mean taxpayers and retirees may actually be paying double — more than $10 billion a year. Public officials are overseeing this massive payout to Wall Street at the very moment many of those same officials are demanding big cuts to retirees’ promised pension benefits. “With billions of public worker and taxpayer dollars put at risk in the highest-cost, most opaque investment schemes ever devised by Wall Street for a decade now, investigations that hold Wall Street profiteers accountable are long, long overdue,” said former Securities and Exchange Commission attorney Ted Siedle. Private equity firms have argued that their fees are worth the expense, because they supposedly deliver returns for investors that beat low-fee index funds which track the broader stock market. But those private equity returns are typically self-reported by the firms over the life of those longer-term investments, meaning there are few ways to verify whether the returns are real. Indeed, a recent study from George Washington University argued that private equity firms are using their self-reporting authority to mislead investors into believing their returns are smoother and more consistent than they actually are. In a 2014 speech, the SEC’s top examiner, Andrew Bowden, sounded the alarm about undisclosed fees in the private equity industry, saying the agency had discovered “violations of law or material weaknesses in controls over 50 percent of the time” at firms it had evaluated. To date, however, the SEC has taken few actions to crack down on the practices, but some states are starting to step up their oversight. In New Jersey, for instance, pension trustees announced a formal investigation of Gov. Chris Christie’s administration after evidence surfaced suggesting that the Republican administration has not been disclosing all state pension fees paid to financial firms.
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In Rhode Island, the new state treasurer, Seth Magaziner, a Democrat, recently published a review of all the fees that state’s beleaguered pension fund has paid. The analysis revealed that the former financial firm of Democratic Gov. Gina Raimondo is charging the state’s pension fund the highest fee rate of any firm in its asset class. In Pennsylvania, the new Democratic Gov. Tom Wolf used his first budget address to call for the state “to stop excessive fees to Wall Street managers.” These moves are shining a spotlight on one of the most lucrative yet little-noticed Wall Street schemes. With so much money at issue – and with pensioners retirement income on the line — that scrutiny is long overdue.
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REPORT: Teacher Supply in California, 2013‐2014 A Report to the Legislature (Commission on Teacher Credentialing) April 2015 4D Action Educator Preparation Committee Teacher Supply in California, 2013‐2014 A Report to the Legislature Executive Summary: This agenda item is in response to Assembly Bill 471 (Chap. 381, Stats. 1999) which requires the Commission to report to the Governor and the Legislature each year on the number of teachers who received credentials, certificates, permits and waivers to teach in California public schools. Policy Question: Does the Commission approve transmitting this report to the Governor and the Legislature? Recommended Action: That the Commission approve the Teacher Supply in California, 2013‐14, report for transmittal to the Governor and the Legislature. Presenters: Roxann Purdue and
Marjorie Suckow, Consultants, Professional Services Division EPC 4D‐1 April 2015 Executive Summary Determining teacher supply in California is essential for policymakers as they analyze how current statutes and policies impact teacher recruitment, teaching incentives and teacher preparation. This report provides data collected by the Commission on Teacher Credentialing (Commission) and addresses several questions regarding the supply of teachers newly available to teach in California classrooms. Assembly Bill 471 (Chap. 381, Stats. 1999; Education Code §44225.6) requires the Commission to report to the Governor and the Legislature each year on the number of teachers who received credentials, authorizations, permits and waivers. The report includes the type and number of documents initially issued authorizing service to teach in California public schools or schools under public contract for fiscal year 2013‐14. The report responds to the requirements specified in statute and provides a tool for policymakers and others interested in teacher supply. This report is organized with the following headings:
Teacher Supply Data: New Teaching Credentials Issued in California
New Teaching Credentials Issued by Type
Distribution of Credentials Issued by Preparation Pathway and Type of Program Sponsor
Teachers Prepared Through Alternative Certification Pathways (Intern Programs)
Future Teacher Supply Indicator: Teacher Preparation Program Enrollment Data
Other Teaching Credentials (Career Technical Education and Designated Subjects Special Subjects) Issued
Number of English Learner Authorizations Issued
Number of Teaching Permits and Waivers Issued
Comparison of Fully Credentialed Teachers Serving in California Public Schools versus New Intern Credentials, Permits, and Waivers Issued
Demographic Data: Age Distribution for Holders of New Teaching Credentials
Demographic Data: Gender and Ethnicity Distribution of Current Teaching Workforce Selected findings are provided below that summarize the information contained in the
full report for California during fiscal year 2013‐14:
There was a decrease of 3 percent in the number of newly issued credentials across all three types of preliminary teaching credentials (i.e., Multiple Subject, Single Subject, and Education Specialist).
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2013‐14 is the tenth consecutive year in which the total number of initial teaching credentials issued has decreased. There was a decrease of 26 percent over the past five years in the number of new teaching credentials initially issued.
There was an increase in the number of permits issued and therefore a decrease of 0.5
percent in number of fully‐credentialed teachers serving in California public schools. The percentage was down from 98.5 percent to 98.0 percent in 2013‐14. EPC 4D‐2 April 2015
The average age for new intern credential holders differed by type – ranging from 29.4 years for Single Subject intern credentials to 36.1 years for Education Specialist (special education) district intern credentials.
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Hundreds of retired school administrators and teachers receive hefty pensions (Marin Independent Journal, News) 05-04-15 BY: Theresa Harrington More than 400 retired Bay Area teachers and administrators with teaching credentials received pension payments of $100,000 or more in 2014, according to the nonprofit California Policy Center think tank. Mark Bucher, president of the center, said many taxpayers don't realize that a large chunk of the money they think is funding classroom instruction actually pays educators who are no longer working. Together with the Nevada Policy Research Institute, his organization compiled retirement compensation data from the California State Teachers' Retirement System, known as CalSTRS, on aTransparentCalifornia.com website. "This isn't how we think our education dollars are being spent," Bucher said. "We're told the money is going into the classrooms and, increasingly, it's not." With the statewide future unfunded CalSTRS liability projected at $75 billion, Bucher said it's time for local school boards and state lawmakers to consider lowering the percentages of working salaries teachers receive after retirement or switching to defined contribution programs that are fully funded each year. But CalSTRS spokesman Michael Sicilia said in an email that the Public Employee Pension Reform Act of 2013 places caps on pensionable income. Employees are paying about 8 percent of their pension contributions this year, while their employers are paying nearly 9 percent and the state is paying nearly 6 percent of members' annual earnings. In the East Bay, average pensions in eight of the largest districts ranged from $60,151 in the Mt. Diablo district to $74,745 in the Fremont district. But about 215 teachers and administrators with teaching credentials in these districts received more than $100,000 in pension payments in 2014, according to the report. Top earners by district were: former Livermore Valley Superintendent Brenda Miller with $237,455; former Fremont Superintendent Douglas Gephart with $212,834; former Hayward Assistant Superintendent Cheryl Petermann with $187,927; former San Ramon Valley Superintendent Robert Kessler with $186,211; retired Mt. Diablo district music teacher Steven Accatino with $184,091; Cynthia LeBlanc, former interim Superintendent of the West Contra Costa district, with $171,074; retired Oakland teacher Richard Sanmames, with $170,600; and former Antioch district Superintendent Dennis Goettsch, with $145,132. The state has begun demanding higher CalSTRS contributions from employees and districts. While teachers' contributions will increase slightly, districts will be required to pay 19.1 percent of the cost in six years. Staff writer Sharon Noguchi contributed to this report. SAMPLING OF 2014 EAST BAY CalSTRS PENSIONS: DISTRICT AVERAGE PENSION $100,000 OR MORE TOTAL PENSION PAYOUTS RETIREES Antioch Unified $64,821 11 $24.2 million 535 Fremont Unified $74,745 89 $69 million 1,311 Hayward Unified $68,449 28 $45 million 980 Livermore Valley Unified $65,683 11 $24.8 million 556
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Mt. Diablo Unified $60,151 14 $72.4 million 1,770 Oakland Unified $61,305 29 $91.9 million 2,299 San Ramon Valley Unified $69,326 24 $34.2 million 738 West Contra Costa Unified $61,465 23 $61.2 million 1,495 To see a complete list of CalSTRS retiree payouts by district for 2014, visittransparentcalifornia.com/pensions/2014/calstrs.
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S&P raises CalSTRS outlook, cites potential funded ratio improvements (Yahoo! Finance, News) 05-05-15 BY: Robin Respaut May 5 (Reuters) - Standard & Poor's Ratings Services on Tuesday revised its credit outlook for the California State Teachers' Retirement System to positive, citing a potential improvement to the pension fund's funded ratio. State legislation passed last year would substantially boost employer and employee retirement contributions to the pension fund, S&P reported. S&P, which previously had an outlook of stable, affirmed the credit rating at AA-minus. "We base the outlook revision on recent legislation that we believe should improve CalSTRS' funded ratio over the next two years, assuming CalSTRS meets its actuarially projected investment returns," S&P credit analyst David Hitchcock said in a statement. CalSTRS is the second largest pension fund in the United States with a portfolio valued at $191.2 billion as of March 31. The largest educator-only pension fund in the world, CalSTRS serves 879,000 California public school educators and their families. S&P warned that if there are poor investment returns, or other changes in actuarial assumptions, "we could revise the outlook back to stable." (Reporting by Robin Respaut; Editing by Leslie Adler)
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For American women, it's been a very slow, tough road to the boardroom (Fortune, Leadership) 05-14-15 BY: Paul Hodgson Compared to the progress at European companies, American businesses are slow pokes. While there has been progress appointing women directors to U.S. corporate boardrooms, the pace of change is incredibly slow, especially compared to other developed Western economies. The European Commission has mandated that 40% of independent board seats must be held by women by 2020. Companies based in many European countries have already made significant progress towards this goal, including France, Germany, Norway, and Spain. Individual companies in the U.S. have also made progress. According to data from Equilar, an executive compensation and corporate governance firm, the following Fortune 500 companies have female board representation of at least 40%.
Avon Products Estee Lauder Interpublic Group Procter & Gamble Kellogg Macy’s Xerox
The following companies have no women on the board.
Cimarex Energy Fidelity National Information Services Garmin Monster Beverage Nabors Industries
The United States’ lagging performance compared to Europe suggests that quotas may actually be worth considering. Without such requirements, it’s possible that boards will simply drag their feet on making much change to their board makeup. Such foot-dragging comes with consequences. Companies without any women on their boards are likely to be the target of shareholder protest, as diversity is an important issue for many major shareholders. On March 31, public pension funds with over $1.12 trillion in assets sent a letter to the SEC calling on it to require disclosures about directors’ gender, race, and ethnicity. The funds who signed the letter include a list of heavyweights: CALPERs, CALSTRs, and the New York City Retirement System, as well as public funds in North Carolina, Connecticut, Illinois, New York State, Ohio, and Washington State. The SEC began to require companies to disclose the skills, experience, and attributes (SEC-speak for job qualifications) of directors starting in 2010, but the funds want diversity added to this list of disclosures. The funds claim that diverse boards can better manage risk. They cite International Monetary Fund research that identified a “high degree of groupthink” as contributing to that organization’s failure to correctly identify the risks leading up to the worldwide financial crisis. Interpublic, one of the four largest advertising companies in the world, has made a commitment to diversity and inclusion, in the boardroom and beyond. According to Michael Roth,
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Interpublic’s CEO, it was clear to him when took the reins at the company 10 years ago that female customers ought to be represented on the company’s board and throughout the company’s workforce. “There was a conscious decision to increase diversity,” Roth told Fortune. In response to a question about quotas – a requirement that a certain percentage of board seats be filled by women, a common requirement for some of Interpublic’s European peers – Roth said: “We didn’t need quotas to do what was right. On the other hand, units of the company are held accountable by senior management for high priority objectives that include diversity and inclusion.” Nvidia did not have any women on its board, until Dawn Hudson, now chief marketing officer of the National Football League, joined in 2013. In March, the company added another female director, Persis Drell, the Dean of the School of Engineering at Stanford University. In an interview with Fortune, David Shannon, Nvidia’s Chief Administrative Officer and Company Secretary, outlined the company’s approach to board recruitment. “I believe diversity of background brings in diversity of thought to the board,” said Shannon. “For example, Dawn’s marketing expertise was invaluable as the company moves into more consumer-oriented products.” Shannon believes that a more diverse board will help Nvidia increase its overall workforce diversity, but noted that the two goals were pursued separately. Commenting on the pension funds’ request for additional disclosures about director backgrounds, Shannon fully agreed with their usefulness and added that the company’s proxy, released on April 9 this year, included enhanced disclosures about director background and experience. None of the companies that have zero female board directors offered a comment for this story.
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California Democrats Approve Sweeping Fossil Fuel Divestment Resolution (Inside Climate News, News) 05-22-15 BY: Zahra Jirji The California Democratic Party approved a sweeping resolution on Sunday to drop fossil fuel stocks from the state's two major public pension funds, valued at about $500 billion. The party also wants the state's 33 public universities to purge such investments from their $12 billion in total endowments. The resolution will not likely result in new legislative action soon. However, it could generate enough support among the Democratic majority to pass a less aggressive divestment bill, Senate Bill 185, working its way through the state legislature. Beyond California, this resolution adds to the fast-growing momentum of the fossil fuel divestment movement, which kicked off on college campuses in 2011 and has spread to cities and major corporations worldwide. Over the weekend, hundreds of delegates at the California Democratic Party's annual convention decided on the party's top causes. Of 73 proposed resolutions, fossil fuel divestment made the top 11. The resolutions winning the most support often get worked into the party platform, which will be updated next February. Before the final vote, RL Miller, chair of the California Democratic Party's environmental caucus and author of the resolution, delivered a one-minute speech. In an interview with InsideClimate News she recounted her message: "The world is watching...We need to send a moral message that California will not invest in those businesses that burn our planet in the name of profit and this resolution is that message. "Divestment from South Africa helped bring down the system of apartheid and [divestment] will likewise bring down our dependence on fossil fuels. And further, [the] passage of this resolution will help pass Senate Bill 185." Miller first tried in 2013 —and failed—to get the party to adopt this resolution. Setting her sights on this opportunity, she worked with other activists, to approach party officials in all 58 counties. When State Senate President pro Tempore Kevin de Leon, a Democrat from Los Angeles, introduced a divestment bill in February, the activists turned up the pressure to promote their resolution campaign. Coming into the conference, the resolution had about 20 county parties as sponsors. The divestment legislation orders the state's two major public retirement funds not to make new investments or renew existing investments in coal companies, as well as to divest from such companies in their portfolios by July 2017. Before divesting, the groups can first encourage the companies to transition to clean energy generation. Moreover, the groups can ultimately choose not to divest if it proved to be financially detrimental to the pension funds. Targeted in this bill is the California Public Employees' Retirement System(CalPERS), with its $308 billion pension fund—the largest public fund in the country. Roughly $167 million, or less than 1 percent, is invested in coal extraction companies. The bill requires the California State Teachers' Retirement System (CalSTRS) to do the same with its $191 billion fund, of which about $132 million is in coal assets. Together, the two systems represent more than 2.4 million retirees.
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The 39-member Senate will likely vote on the bill in the next few weeks and it is expected to pass. The bill’s fate in the state Assembly, which has 80 members, is less clear; there are more moderate Democrats in that chamber. "It's not going to be a slam dunk getting SB 185 through the legislature," said Janet Cox, an activist with Fossil Free California. "Passing this resolution by the party is going to help." Specifically, this move will make it easier for moderate Democrats who have so far remained silent on the issue support the bill, she said. The Senate bill also requires the two retirement groups to study the feasibility of divesting holdings from holdings in oil and gas by 2017. This piece of the proposal has triggered sharp opposition from an industry trade group, the Western States Petroleum Association. "Coal is hands down the dirtiest form of energy on our planet. So why continue to invest our public employees’ retirement funds into this fading industry, especially given the multitude of health and environmental concerns it creates?" said Sen. de Leon in a statement. He introduced the divestment bill as part of a package, along with three other pieces of climate legislation. Compared to the Senate bill, the California Democratic Party resolution goes a step further: It seeks fossil fuel divestment, not simply from coal, by the major pension funds and the endowments of the two state university systems. According to Dianne Klein, a spokeswoman for the University of California system, the network employs a sustainable investment strategy, but is "not considering a blanket divestment from fossil fuels." A CalPERS spokeswoman declined to comment on the recent resolution or the Senate bill. Last spring, the group approved a policy that discourages divestment "for the purpose of achieving certain goals that do not appear to be primarily investment-related, such as promoting social justice." Although CalSTRS hasn’t taken a public position, it has made strides to address the issue. Last month, the Teacher’s Retirement Board voted to explore the financial implications of divesting its pension funds from coal stocks. Ricardo Duran, a spokesman for CalSTRS, said to InsideClimate News in an email: "When considering divestment, CalSTRS believes that, where appropriate, active engagement is the best way to resolve issues. Divestment is the most serious step an investor can take, as it severs ties with a company and, therefore, severs our influence as well. Divestment at any level is taken very seriously and is given careful analysis and consideration." 'Party Speaks With One Voice' The debate cements California's status as a leader on climate change action and could give other states a model to follow, Miller said. "It was just amazing," said Andy Kelley of the Alameda Democratic Party. "When a party speaks with one voice, it’s not something that happens every day." The state's top elected Democrats are "in lockstep on the need to aggressively confront climate change and use every tool that we have available," said Michael Soller, a spokesman for the California Democratic Party.
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Ten other resolutions were passed at the same time, including one calling upon the Republican Party to address climate change and another opposing oil drilling in the Arctic. California, which boasts the eighth-largest economy in the world, is part of a regional carbon trading system with four Canadian provinces. The state has repeatedly expanded its carbon reduction strategy in recent years. Last month, Gov. Jerry Brown issued an executive order to reduce the state’s greenhouse gas emissions 40 percent below 1990 levels by 2030. Two schools in the California State University system—Humboldt State University and San Francisco State University—have committed to fossil fuel divestment, joining seven other colleges in the state. Stanford University, a private institution, pledged to divest from coal assets last summer. At least 22 other universities outside of California have already divested or committed to do so. Last month, Syracuse University became the largest university to take that step, promising to clear its $1.18 billion endowment portfolio of fossil fuel holdings.
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Pension fund leaders challenge McDonald's and others on buybacks (Reuters, U.S. News) 05-20-15 BY: Boston/Los Angeles | By Ross Kerber and Lisa Baertlein Four U.S. public pension fund officials on Wednesday warned that McDonald's Corp and other companies may be jeopardizing their own futures by returning excessive amounts of cash to investors via share buybacks. The statement by the fund officials marks the first time in which some of the nation's biggest institutional investors have joined up to urge companies to rethink their focus on immediate returns and aim for long-term growth. The four officials - New York City Comptroller Scott Stringer, New York state Comptroller Thomas DiNapoli, Chicago Treasurer Kurt Summers and California Controller Betty Yee - are fiduciaries to pension funds with $860 billion in assets. Yee is on the boards of both the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. The statement singled out McDonald's and comes a day ahead of the fast-food chain's annual shareholders meeting. It said McDonald's is continuing an "aggressive" share buyback program even as it begins an overhaul of its operations. The drive by the four officials runs counter to calls for more payouts from high-profile activist investors, including some that recently disclosed stakes in McDonald's, which could set up a clash over how the country's largest restaurant chain allocates capital. The pension leaders, in the statement, said that companies' productivity and wage growth had once matched and helped drive prosperity. "Today, however, 95 percent of corporate earnings are being distributed to shareowners, prompting us to question whether companies are adequately reinvesting for sustainable returns over the long-term," they said. "If the pendulum swings too far in favor of returning capital to shareowners, the future viability of the companies in which we invest may be placed at risk." The statement referred to "serious performance challenges" at McDonald's. McDonald's Chief Executive Steve Easterbrook, who took over the top spot on March 1, earlier this month announced a turnaround strategy that included returning up to $9 billion to investors through dividends and share repurchases. Representatives for McDonald's were not immediately available to comment on the statement from the pension fund officials. Recent filings showed new shareholders in McDonald's include activist investors Jana Partners LLC and Corvex Management LP, which have pushed for share buybacks elsewhere. Neither would comment about the restaurant chain. DON'T OVERDO IT
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McDonald's annual meeting on Thursday, at its headquarters in Oak Brook, Illinois, is to include a shareholder vote on a measure known as "proxy access" that would make it easier for small groups of shareholders to run director candidates. McDonald's board opposes proxy access and said it could open the door to what it called "special-interest" candidates. In their statement the four pension fund officials said proxy access would help "hold boards accountable when they place short-term interests ahead of long-term value creation." Share buybacks have come under increasing scrutiny as academics and politicians criticize them as potentially short-sighted and argue that more profits should be used to shore up companies' long-term growth and improve wages for employees. Last year Laurence Fink, CEO of BlackRock Inc, the world's largest asset manager, warned companies against overdoing dividends and buybacks at the expense of future growth. In April, U.S. Senator Tammy Baldwin, a Democrat of Wisconsin, asked securities regulators to review buyback rules. From 2003 to 2012 S&P 500 companies used 54 percent of their earnings to buy back stock, or $2.4 trillion, with dividends absorbing another 37 percent of earnings, according to a paper by University of Massachusetts Lowell Professor William Lazonick published in the Harvard Business Review late last year. "That left very little for investments in productive capabilities or higher incomes for employees," Lazonick wrote. On the other side of the debate, a generation of activist investors have had success pressing companies to step up buybacks and to increase dividends, both meant to boost returns amid a soft economic recovery. Under pressure from billionaire activist investor Carl Icahn, for example, Apple boosted its repurchase program in April to $140 billion from $90 billion last year. Icahn this week said he is again pressing to increase that amount.
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CALPERS AND CALSTRS URGE G7 TO BACK EMISSIONS GOAL (Financial Times, Financial Services) 05-26-15 BY: Pilita Clark in London The chief executives of US public pension giants, Calpers and Calstrs, have taken the unusual step of urging G7 finance ministers to back a firm goal for cutting greenhouse gas emissions in the global climate change deal due to be sealed in Paris this year. Anne Stausboll of Calpers, which has a portfolio of investments worth nearly $300bn, and Calstrs’ Jack Ehnes, are among more than 100 institutional investor heads who have signed a joint letter to the finance ministers ahead of a G7 preparatory meeting in Germany this week, saying climate change is “one of the biggest systemic risks” investors face. “We therefore urge you to support a long-term global emissions reduction goal in the Paris agreement,” says the group, which together manages more than $12tn.It is the first time a global coalition of investors has called for such action, according to representatives of the group, which also includes the Ontario Teachers’ Pension Plan in Canada and ERAFP, the pension fund for French civil servants. The letter is the latest in a burst of activity among big investors and businesses in the lead-up to a December UN climate meeting in Paris, where nearly 200 countries are due to finalise a global pact to cut emissions. In an eye-catching move, France’s Axa, one of the world’s largest insurers, said last week it would sell €500m of coal investments before the end of this year because burning the fuel was “clearly one of the biggest obstacles” to reaching emission reduction targets. Axa also said it would put €3bn into green investments between now and 2020. Dozens of companies have meanwhile called on governments to introduce a meaningful price on the carbon dioxide emissions produced by burning fossil fuels. But the idea of setting a firm target for curbing those emissions in the Paris agreement is dividing countries in the lead-up to the December meeting. Angela Merkel, the German chancellor and host of this year’s G7 summit, has backed the phasing out of fossil fuel pollution this century. She is expected to push other countries to support such a move at the G7 summit in June. But some countries want to stick to the more vague target agreed in earlier UN climate negotiations of limiting global temperature rises to no more than 2 degrees Celsius from pre-industrial times. Ms Stausboll said that a long-term, emissions-cutting goal and a price on carbon dioxide pollution were “critical” for sending the market signals needed to encourage greener investments. “A global agreement in Paris will provide clarity for investors and advance the shift to a low carbon economy,” she said in a statement. Philippe Desfossés, chief executive of ERAFP, said the world needed $53tn of energy investment by 2035 to avoid dangerous climate change and the Paris agreement could help deliver the certainty investors require to help deliver it.
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“Knowing international policy is united on a clear path towards ever-lower emissions generates confidence that our low carbon investments will be supported, not harmed, by future policies,” he said.
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Arts program, retirement payments contribute to more expenses for school district's budget (The Orange County Register, News) 05-26-15 BY: Rebecca Kheel / Staff Writer The Orange Unified School District is projected to end next fiscal year with a $53.4 million surplus, but if certain assumptions about future years hold true the district would have a $1.9 million deficit in fiscal year 2017-18. The budget was presented as a part of a study session last week to educate the public, as well as board members, on the process district staffers go through to prepare the budget. “If we’re going to have potentially a couple hundred million dollars worth of bond money that we’re spending, I think our community is going to want to know that we are tight with our budget, so we’re going to be tight with that bond money," said board member Rick Ledesma. He requested the study session and asked for future board meetings to include some of the same detailed budget information. In fiscal year 2015-16, the district is projected to have $252.64 million in revenue and $266.96 million in expenditures. With a General Fund balance beginning at $77.02 million, spending outpacing revenue by $14.32 million and needing to put away $9.28 million for specific reserves, the district would end the year with $53.42 million unused. New revenue for the fiscal year includes a one-time payment of $4 million from the state for what’s called mandated reimbursement, said Joe Sorrera, the district’s assistant superintendent of business services. For certain state-mandated programs, the state is supposed to reimburse the district the cost of providing those programs. After the $4 million reimbursement, the state will still owe the district $16 million in reimbursements. “You will see for ‘15-’16 our revenue will go up, and then for the following year it will go down again and that’s one of the reasons why – because of one-time revenues,“ Sorrera said. One major new expenditure for the fiscal year is re-establishing music and arts programs for fifth- and sixth-graders at the district’s elementary schools, which the board approved in March. The program is expected to cost $2.48 million for salaries, employee benefits, books, supplies and other costs. Another major cost increase is the district’s contributions to the California State Teachers’ Retirement System and the California Public Employees’ Retirement System. By 2021, the district will be required to contribute 19 percent to CalSTRS and so is increasing its contribution by 1.85 percent each year until then, Sorrera said. For fiscal year 2015-16, the district will have to pay $2.24 million to CalSTRS and CalPERS. “This is a heavy lift,“ said board member Kathy Moffat. “This goes back to the fact that these retirement systems are in trouble. They’re underfunded.” The budget also includes projections for fiscal years 2016-17 and 2017-18.
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The projections are based on assumptions, including the quarter-cent sales tax approved in 2012 with Proposition 30 expiring in 2016 as it is supposed to. If those assumptions hold true, in fiscal year 2017-18 the district would have $245 million in revenue and $277.59 million in expenditures. With the beginning balance and the required reserves, the district would end that fiscal year with a deficit of $1.9 million. The board is expected to vote on the budget at its June 4 meeting.
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CalSTRS to Take $170 BILLION From CLASSROOMS Over 30 Years to Keep Checks Flowing (California Political Review, Blog) 05-28-15 BY: Stephen Frank The Guv is about to add $6 billion to government education—failing to mention that at the end of the day, $3.7 billion of that will go to CalSTRS. This is an unsustainable system—it will collapse without the $170 billion (not a typo) the CalSTRS will drain from the classroom over the next thirty years. “As the stock market reaches record levels, little is heard anymore from public officials who used to blame market declines for rising pension costs. A few years ago, the CEO of the California State Teachers Retirement System (CalSTRS) attributed his pension fund’s deficit to the 2008-09 market decline. Yet despite a stock market that now stands 2.5 times above its 2009 low, CalSTRS’s shortfall is so large that to help address the deficit, California recently enacted legislation that will divert at least $170 billion from classrooms over the next 30 years. That means current and future schoolchildren are paying off past pension promises.” Those bonds you vote for are so General Fund money can be used for pensions—the bonds are needed because no one wants CalSTRS to collapse. Stock market soars — and so do public pension costs by DAVID CRANE, Capitol Weekly, 5/26/15 The way our government accounts for public employee pension promises is nothing short of fraud, yet no public official has gone to jail or paid a price for what surely ranks among the largest muggings of citizens in US history. Let me explain. As the stock market reaches record levels, little is heard anymore from public officials who used to blame market declines for rising pension costs. A few years ago, the CEO of the California State Teachers Retirement System (CalSTRS) attributed his pension fund’s deficit to the 2008-09 market decline. Yet despite a stock market that now stands 2.5 times above its 2009 low, CalSTRS’s shortfall is so large that to help address the deficit, California recently enacted legislation that will divert at least $170 billion from classrooms over the next 30 years. That means current and future schoolchildren are paying off past pension promises. Why do pension costs climb even when markets rise? The answer is captured by an aphorism: “Live by the sword, die by the sword.” Despite the bull market, the state’s other big pension fund, the California Public Employee Retirement System (CalPERS), recently imposed a 50% increase in pension costs on local and state governments, and there will be more. The diversion of government revenues to pension costs explains in part why, despite record revenues higher than before the Great Recession, state spending on social services, courts, parks, universities and other programs is lower. Why do pension costs climb even when markets rise? The answer is captured by an aphorism: “Live by the sword, die by the sword.” The sword in this case is financial accounting for public pension plans. Believe it or not, US public pension fund officials get to choose how to account for public pension promises. They could choose an honest path but not surprisingly, California officials select an approach that – initially – artificially suppresses the reported size of liabilities created by pension promises. That allows them to claim that the future costs created by the promises will be smaller than they really will be. But eventually that choice cuts the other way. In fact, the more that liabilities were suppressed by aggressive accounting in the past, the
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greater the rebound effect in the future. The truth can no longer be hidden and public pension liabilities gallop at a fast pace. At that point not even a bull market can keep up. One of the most expensive examples of that behavior took place in 1999 when California’s leaders gave a massive pension boost to government employees. Though that act amounted to the single greatest issuance of debt in state history, public officials chose an accounting method that supported a claim that the retroactive increases wouldn’t “cost a dime.” They were right. Instead, the boost cost 800 billion dimes, and counting. Worse, those dimes are being extracted from schoolchildren, college students, young teachers, welfare recipients, park users, fee-payers, taxpayers and other Californians who are paying more but getting less. To add insult to injury, citizens weren’t even given the choice of approving the pension boost. That’s because, unlike general obligation bonds that require voter approval, under current law politicians can make retirement promises without voter consent. Obscured by shady accounting, protected from voter review, and fueled by political contributions from interested parties, that’s how hundreds of billions of dollars of pension costs get loaded on to innocent citizens without their knowledge or consent. Only now are the full costs starting to show up. When that happens, citizens get angry with the public employees who receive the pensions. But those recipients did nothing wrong. They are not responsible for accounting choices by pension fund board members and officials. The dollars diverted from services and the taxes raised on taxpayers to pay off the 1999 pension boost will never be recovered. At least AIG paid back its 2008 bailout. But there’ll be no payback from this theft. Worse, California officials are still choosing accounting methods that hide the true cost of new pension promises. That means more theft is taking place every day. Our public officials have a choice. They don’t have to obscure financial truths. They should choose to protect innocent citizens. If they don’t, they should pay a price. — Ed’s Note: David Crane is a lecturer and research scholar at Stanford University and president of Govern For California.
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The Backtesting Crisis (Chief Investment Officer, Headlines) 06-01-15 Managers who cherry-pick for optimal results aren’t even the worst abusers, argues Guggenheim’s top quant. Most backtests published in finance journals are wrong, a quantitative research specialist from Guggenheim Partners has argued. The tool is as popular with finance academics as is it misused, according to Marcos López de Prado, a senior managing director, which “may invalidate a large portion of the work done over the past 70 years.” López de Prado—who holds two doctorates in the subject and a research fellowship with the Lawrence Berkeley National Laboratory—has been sounding the alarm on the “pseudo-mathematics” of backtesting for several years. In a recent presentation, he singled out a common and critical error he said undermines the majority of research based on historical simulations: multiple testing. This involves running multiple configurations of, for example, a theoretical asset allocation through a set of past market data then picking one to highlight. The practice poisons the selected results with selection bias, he said. The American Statistical Society has voiced the same concern in its ethical guidelines. “Selecting the one ‘significant’ result from a multiplicity of parallel tests poses a grave risk of an incorrect conclusion,” the guidelines stated. “Failure to disclose the full extent of tests and their results in such a case would be highly misleading.” Grave critiques of backtesting are nothing new to institutional investing. Yet asset owners have tended to focus on managers’ use of the technique in marketing products, such as trumpeting phenomenal modeled performance over bizarre time spans. “Backtesting: I hate it—it’s just optimizing over history,” California State Teachers’ Retirement System Investment Officer Josh Diedesch told CIO last year. “You never see a bad backtest. Ever. In any strategy.” And according to López de Prado, academics are just as guilty of the practice as asset managers. Read Marcos López de Prado’s presentation slides and for a more in-depth discussion, his paper “Quantitative Meta-Strategies.”
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California lawmakers boost climate change bills (Sacramento Bee, Capitol Alert) 06-03-15 BY: Alexei Koseff and Jeremy B. White Continuing the state’s efforts to reduce greenhouse gas emissions and combat climate change, California lawmakers approved expansive legislation Wednesday that will require ambitious new renewable energy and pollution standards over the coming decades. In the Senate, the effort was led by President Pro Tem Kevin de León and fellow Democrats, who touted the economic benefits of building a green economy. “This package of bills will put California on a pathway to sustainable economic growth,” de León said at a news conference following the vote, “protecting the health of our communities and the integrity of our environment, while also spreading a wave of innovation in our energy and transportation sectors.” The bills approved Wednesday are only halfway through the legislative process and must survive more hearings and votes over the summer. But with Democrats in control and several major proposals echoing the sweeping climate goals Gov. Jerry Brown announced at his inauguration in January, the outcome seems hardly in doubt. Senate Bill 350, by de Léon, would require the state to generate 50 percent of electricity from renewable sources, halve the amount of petroleum used by vehicles, and double the energy efficiency of existing buildings by 2030. Assembly Bill 645 mirrored the Senate measure in compelling California to derive half of its energy from renewable sources by 2030. Senate debate on the measure dragged on for nearly an hour, as Republican opponents charged that the Legislature was picking winners and losers in the California economy, at the expense of the inland region’s energy, agriculture and trucking industries. “SB 350, my friends, is coastal elitism at the worst,” said state Sen. Jeff Stone, R-Temecula, “an act that will cut jobs in the Central Valley communities to benefit rich urban areas.” California would also extend its greenhouse gas emissions limit to 40 percent below 1990 levels by 2030 and to 80 percent below 1990 levels by 2050 under Senate Bill 32, by state Sen. Fran Pavley, D-Agoura Hills. “It is a big number – science-based number, however,” Pavley said, “what we have to do without reaching the tipping point regarding global climate change.” Assembly Democrats also advanced a measure extending the state’s cap-and-trade program beyond a 2020 sunset date. Industrial polluters are now required to buy carbon permits, with the proceeds – projected to be in the billions this year – becoming available for more emissions-reducing programs. AB 1288 would allow that scheme to continue, which Assembly Speaker Toni Atkins, D-San Diego, said would give businesses more long-term predictability. “To continue to give certainty to the market and the business world is what this bill particularly does,” Atkins said.
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Moderate Democrats joined more liberal members in backing the measure. Assemblyman Henry Perea, D-Fresno, who last year led an effort to keep oil producers from being required to buy emissions allowances, said that rural districts like his had benefited from projects funded by the program. But Republicans excoriated the bill, saying it would deprive voters of a say by empowering bureaucrats in the California Air Resources Board. They also slammed the legislation boosting California’s renewable portfolio standard, arguing it would favor some industries over others and warning that energy producers will not have the capacity to derive half their electricity from renewable sources. “Let’s not double-down on the stupid,” said Assemblyman Don Wagner, R-Irvine. Other climate change bills the Senate passed include: ▪ SB 185, by de León, which would require California’s public employee and teacher pension systems to divest from coal companies. ▪ SB 367, by state Sen. Lois Wolk, D-Davis, to develop projects that reduce greenhouse gas emissions in agricultural practices. ▪ SB 379, by state Sen. Hannah-Beth Jackson, D-Santa Barbara, which would require cities and counties to add climate adaptation strategies to their general plans.
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The Immorality Of Pushing Pension Debt Onto Millennials (Forbes, Commentary) 06-03-15 BY: Guest Post Written by Lawrence J. McQuillan A recent study pegged the debt of state and local government pension plans at $4.7 trillion. If politicians and voters fail to adopt reforms, younger people will be stuck paying off a massive and growing debt they did not create or approve. State and local government workers receive generous defined-benefit pensions that guarantee specific monthly payments to retirees for life. In theory, these pensions are paid for by investing contributions from government agencies and their employees, and using the proceeds to pay the promised benefits after employees retire. In reality, pension officials and politicians have increased benefit payouts and lowballed contributions. As a result, they now have inadequate funds to pay the promised benefits. This “unfunded pension liability” puts taxpayers on the hook to make up the difference between promises and assets. New York and Illinois each have unfunded pension debts north of $300 billion. Texas, Ohio and New Jersey exceed $200 billion apiece. But nowhere is the problem worse than in California, underfunded by $550 billion to $750 billion, depending on the discount rate used to calculate liabilities. Most states and localities are not doing enough to pay off this debt quickly. From 2001 through 2013, 64% of government pension plans failed to contribute enough money to pay off their debts even over a span of 30 years. The unwillingness to properly manage pension plans pushes the cost onto younger people and future generations, and forces them to pay for promises they did not make and for services they did not approve. Older generations receive public services without paying the full cost. The injustice and immorality of using millennials as piggy banks should be apparent to all but the willfully blind. Left unchanged, the pension burden will crush younger generations and deplete their future. The responsibility to fix this problem is as great as any moral imperative because it directly impacts the quality of life future generations will enjoy and their chances for upward mobility. Today’s growing pension debt exceeds $20,000 per person in California, Illinois, New Jersey, Ohio and many other states. The University of California’s Board of Regents recently voted to increase student tuition up to 25% over the next five years to bail out the mismanaged pension system that covers retired UC employees. Public pension funds should not be balanced on the backs of students or younger Americans. Fortunately, a handful of reforms would solve the pension crisis in a way that preserves pension benefits already earned, provides competitive pensions going forward, and grants needed flexibility so that future generations are not paying for deals they did not make. The changes would require financial transparency and full annual funding of each pension plan without issuing “pension obligation bonds.” Unfunded liabilities should be paid off quickly in 15 to 20 years, as recommended by the Society of Actuaries, to minimize shifting the burden onto future generations.
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State and local governments should also gain the flexibility to switch to 401(k)-type pension plans going forward for all employees. And voters should be required to pre-approve any pension-plan change that increases financial obligations. In California, former San Jose Mayor Chuck Reed, a Democrat, is now leading an effort to craft a statewide pension-reform ballot measure for 2016. One needed change is to grant state and local governments the option of adjusting pension benefits for all employees on a go-forward basis, including a switch to 401(k)-type plans, which are more affordable, always fully funded, and limit long-term costs. Traditional defined-benefit pensions made more sense under the old “hire-and-retire” model when workers stayed with the same employer for 30 to 40 years. Today, 401(k) plans make more sense for modern workers, who change jobs more frequently. These common-sense reforms can save future generations from paying for promises they did not make. It’s time for politicians and voters to step up and fix this immoral national scourge. Mr. McQuillan is also author of the new book “California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis.”
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California pension initiative requires public vote on retirement benefits (Sacramento Bee, Capitol Alert) 06-04-15 BY: Jon Ortiz For the third time in four years, advocates for altering public pensions have a plan they want to put to a statewide vote. But this time the proposal by pension-change advocates Chuck Reed and Carl DeMaio has a new twist: Pensions and other retirement benefits themselves would automatically become a matter of ballot-box politics by requiring voter approval any time government officials sought to upgrade benefits. It also would make “defined-contribution” plans the default retirement program for state and local employees hired Jan. 1, 2019 and later. Employers who wanted to add new employees to “defined-benefit” plans now common in government – but rare in the private sector – would have to get voter approval after that date. Reed said that the measure is necessary to rein soaring retiree benefit costs that are “crowding out funding for important services such as police, fire, schools and road repairs.” As news about the plan spread Thursday morning, union reaction was swift and predictable. “Chuck Reed is a hypocrite,” said Bruce Blanning, executive director of the state engineers’ union. “He’s not interested in protecting taxpayers. His real target is working men and women who dedicated themselves to public service and then retire. He wants their money to be controlled by the same Wall Street bankers who gave us the Great Recession.” The proposal would also apply to other retirement benefits, such as medical insurance, aiming to cut what the proponents say are soaring retirement costs that have driven some cities into bankruptcy. Other provisions would prohibit government employers from paying more than half the cost of employee retirement benefits without voter approval and block politicians and government agencies from suing or taking other actions to impede voter-approved ballot measures regarding employee compensation or retirement benefits. Besides Reed, the Democratic former mayor of San Jose and DeMaio, a former San Diego city councilman, the measure is backed by former San Bernardino Mayor Pat Morris and Pacific Grove Mayor Bill Kampe, both Democrats; former Vallejo Vice Mayor Stephanie Gomes and Anaheim’s Republican Mayor Tom Tait. Most state and local government employers offer pensions that require taxpayers and employees to contribute according to various factors, including anticipated investment returns and the life expectancy of members. The pension payouts are fixed by a formula, regardless of the return on the pension fund’s investments. CalPERS, for example, gave government employers a pass on their pension contributions in the early 2000s when its investment returns soared so high that its assets on paper more than covered its long-term obligations. State law has since changed to prohibit so-called “pension holidays.” But after investments collapsed during the recession, the fund’s asset values fell precipitously. Those losses and other factors forced CalPERS to raise pension contribution rates by billions of dollars over the coming years on school districts, the state and local governments.
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According to state figures, the gap between what California’s 130 public pension systems have promised and their assets to cover those promises went from $6.3 billion in 2003 to $198 billion in 2013. Pension-change advocates say the gap will only grow and meeting obligations to retirees is draining money from core services, particularly in cities were employee compensation is a hefty percentage of budgets. Reed and DeMaio convinced San Jose and San Diego to pass local ballot measures in 2012 with the message that guaranteed benefits are drowning government finances. After losing at the ballot box, unions took the fight to the courts, where the battle rages on. The long delay in fully implementing those measures proves the need for the new initiative, its proponents say, to discourage endless court fights and bureaucratic appeals. The new proposal, DeMaio said, would “give voters a seat at the table” and “cut through the Gordian Knot” of laws that entangle efforts to cut public pension costs. But unions view pensions as compensation, just like salaries. As such they must be bargained, labor leaders say, just like furloughs or other pay cuts. Any perceived attack on benefits, Blanning predicted, will be a call to arms for labor. “Retirement benefits, including pensions and retire health, are right up there with salaries when it comes to members’ priorities,” Blanning said. Conventional legal thinking says that pensions once promised to an employee are unalterable without another benefit, such as a cash payment, to offset the loss. Defined-contribution systems, such as 401(k) accounts common in the private sector, shift the risk from the employer to the retiree by aligning pension payouts with investment returns. The amount contributed by the government – and by extension, taxpayers – isn’t subject to hit-or-miss investment returns because there’s no guaranteed payment owed retirees. If the market tanks, retirees simply receive less money. Previous attempts to put a pension measure before California voters over the last decade have focused on defined contributions versus defined benefits and efforts to cut the benefit for current and future workers. Reed, for example, tried to parlay his San Jose success into a 2014 statewide measure that would have frozen employees’ accrued defined benefits under certain circumstances and switched them to defined contribution plans going forward. The effort stalled when he sued Attorney General Kamala Harris, a labor-friendly Democrat, over language she drew up for voter materials. Reed claimed she misrepresented the measure to bias voters against it. The court sided with Harris. This time, however, Reed and DeMaio aren’t going after current employees’ retirement guarantees. Instead, the measure would change retirement benefits for employees hired in 2019 and later. Those workers would come under a defined contribution plan, unless voters approved something else. And by giving voters opportunity to weigh in on future pension upgrades, Reed and DeMaio are appealing to Californians’ love of direct democracy. Polls over the years have shown time and again that a strong majority of voters support the state’s ballot initiative system.
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“It sounds like the proponents want a conversation about transparency and accountability,” said Micheal Shires, a Pepperdine University government budgeting expert. “It’s a legitimate approach, with all the pluses and minuses that go with putting things in the hands of voters.”
