11-26-2014 PLEASE SHARE NCTR FYI New Arnold Foundation Grants Look to Higher Ed for Potential Support of Public Pension Agenda A review of recent grants from the Laura and John Arnold Foundation suggests that a new focus on colleges and universities as sources of support for their public pension agenda may be underway. While the Arnold Foundation has made numerous grants in the past to institutions of higher education related to the Arnolds’ interests in criminal justice and K-12 education, grants in the area of public pensions have previously been made primarily to state and national organizations with pension reform agendas similar to that of the Arnold Foundation―namely to replace the defined benefit (DB) model with a defined contribution or cash balance approach. Notable exceptions have been a previous grant of $693,600 to the George Mason University Foundation (VA) to support two 2014 judicial symposia on public pension reform; $997,979 to the Center for State and Local Government Excellence (SLGE) in 2013 to expand accessibility to the database of public-sector retirement research produced by the Center for Retirement Research at Boston College and sponsored by SLGE; and $160,080 in 2013 to the Board of Trustees of Stanford University (CA) to support the work of the Stanford Institute for Economic Policy Research related to California’s municipal public sector pensions. However, based on the Arnold Foundation website’s listing of grant agreements executed from January 1, 2011, through September 30, 2014, several new awards have been made to universities and colleges across the country in connection with public pension work. These include: Up to $1 million to the Research Foundation of the State University of New York “to expand access to information about public sector retirement systems”; $16,000 to the trustees of Boston College (MA) “to support the collection of data related to public retirement plans”; $25,000 to the University of Colorado Foundation to “research back-loaded retirement benefit designs and the implications of pension reform on teacher quality”; $21,780 to the University of Houston (TX) to “expand access to information about public sector retirement systems”; and $508,824 to the University of Missouri to “expand access to information about public sector retirement systems.” “While the total may not be a staggering amount, the rifle-shot nature of some of the grants, as suggested by their modest amounts, indicates a very precise targeting of academia, similar to that used by the Arnold Foundation with major national organizations such as the Pew Charitable Trusts,” said Meredith Williams, the Executive Director of the National Council on Teacher Retirement (NCTR). “Their purpose may sound benign, but we know in fact that these grants, which the Arnold’s call ‘strategic investments,’ are just one more effort to purchase support for their anti-DB campaign,” he continued. “Accepting funding from an organization with such a clearly stated, aggressively pursued political agenda can easily be misinterpreted, particularly when the Arnold’s make it very clear that their goal is not to cast new light on complex problems such as retirement security, but to instead advance their pre-determined solutions,” Williams noted. “I hope that those eager to accept the Arnold Foundation’s money keep this in mind.” Coming soon to a college or university near you? Arnold Foundation listing of grant agreements executed between January 1, 2011, and September 30, 2014 Should Public Pension Trustees Weigh the Impact of Investments on Jobs? Writing in the November 21, 2014, issue of the Washington Post, David Webster, a professor at the Boston University School of Law, suggests that public pension funds’ investments are often undermining the financial futures of the very employees whose savings they manage. Webster argues that the retirement savings of teachers, firefighters, prison guards, and others are often invested in private public-school-service companies, private firefighting companies, and private prisons. While these investments may “offer the promise of high investment returns,” they may also “achieve those returns at the expense of the public employees themselves,” Webster warns. In an article entitled “Protecting Public Pension Investments,” Professor Webster also says that this activity is often “still largely hidden from public view” because many of these kinds of investments “are funneled through private-equity companies.” The Webster article notes that even though trustees are required by their duty of loyalty to invest solely in the economic interest of employees, when attempts are made to “assess whether investments in companies that compete for jobs with a fund’s beneficiaries are actually in the economic interest of their members,” these efforts are thwarted by what Webster calls a “a subtle legalistic maneuver.” Specifically, he blames an “interpretive bulletin” issued by the U.S. Department of Labor on October 17, 2008. Although it “does not technically apply to state and local pension funds,” Webster notes that it is nevertheless often “widely relied upon to guide the interpretation” of public pension trustees’ fiduciary duties. According to this bulletin, Webster states, the “command that trustees act ‘solely in the interests of participants and beneficiaries’ really means that they should act solely in the interest of ‘the plan.’” Thus, he says, under what he refers to as a “plan-centric view of loyalty,” trustees can invest in companies “that seek to privatize their own members’ jobs, focusing exclusively on the investment return to the plan.” This has “stark consequences for public employees,” Webster warns. “It transforms an investment’s impact on jobs―which is of vital interest to workers and beneficiaries―into an ‘extraneous’ consideration,” he argues, and could subject trustees to a potential violation of their duty of loyalty to the plan if they ask whether an investment that harms participant jobs is really in the interests of the plan’s participants and beneficiaries. “This perverts the duty’s original purpose,” Webster stresses. Furthermore, Webster fears that, given “the rise of politicians who are committed to undercutting public employees and their unions,” this creates a “toxic combination” that provides “a potent weapon to use against workers.” “Governors, state treasurers and mayors can encourage, or at least tolerate, the use of these (collectively enormous) retirement funds against the employees and pensioners themselves,” Webster believes. However, Webster reasons that the “[p]roper understanding of the duty of loyalty should empower trustees to weigh the impact of investments on jobs.” “That doesn’t mean abandoning a core focus on investment returns, and it doesn’t mean blindly boycotting privatizing investments,” he argues, but rather permitting an examination of “the jobs impact” on the economic interest of plan participants. Webster concludes that what he calls the “proper understanding of a trustee’s role” should be restored. He says that “a few well-placed lawsuits” or some “[f]avorable pronouncements from state attorneys general or legislatures” could help. However, given what he says is the Labor Department’s “powerful, if informal, influence over state and local pensions,” Webster believes that the best result would be a new interpretive bulletin that clarifies that “when the duty of loyalty says that trustees should invest ‘solely in the interests of participants and beneficiaries’ it means just that―not in the interests of ‘the plan,’ or anyone else.” Comments on the story have been very interesting. One suggests that the author is “being a bit disingenuous.” “One can certainly agree that a defined contribution plan could be designed to invest based on the wishes of the employee,” it notes, so If they “want to put their money in a plan that doesn’t invest in companies that engage in privatization and earn a possibly lower return, that is up to them.” But this commenter says that defined benefit plans “are another story all together.” Since they “arent financed by employees but rather taxpayers (although employees might make a small contribution),” taxpayers are therefore “on the hook for a potentially limitless stream of future pension payments.” DB plans “should be invested where they obtain the highest return regardless of what the invested companies do,” this commenter insists, and “[t]axpayer funds should not be used to shield public employees from competition.” Another comment notes that the article “neglects to mention that the pension funds are massively underfunded and in their efforts to generate higher returns on pension assets, they have increased allocations to ‘alternative investments’ which include real estate, hedge funds, private equity (including leveraged buyout funds) and venture capital.” Pension funds “have tied themselves into a Gordion [sic] Knot,” the commenter continues, “by promising unrealistic benefits” and this has in turn forced them “to chase higher returns.” “Those returns come with added risk,” this comment notes, and “in order to generate attractive returns,” public pension funds “invest via professional investors in above average return businesses, companies that make tough decisions that drive efficiency (decisions that the faint of heart, politically motivated bureaucrats want to distance themselves from and profit from at the same time).” This commenter concludes with: “Bottom line: reduce pension benefits and you can forego investing in alternative assets. Otherwise accept that the best returns available and a balanced portfolio includes [sic] investments of this nature.” David Webster: “Protecting Public Pension Investments” SBS Claims Public Pension Unfunded Liability Approaching $5 Trillion State Budget Solutions (SBS), a conservative think tank whose president, Bob Williams, is also currently the private sector chair of the American Legislative Exchange Council (ALEC) Tax and Fiscal Policy Task Force, claims that the combined unfunded liability for over 250 “state-level defined benefit pension plans” is approaching $5 trillion. In the most recent version of its report entitled “Promises Made, Promises Broken,” issued on November 12, 2014, SBS asserts that its “research” has determined that the total shortfall is $4.7 trillion, $600 billion more than the group estimated in its 2013 report. “Overall, the combined plans’ funded status has dipped three percentage points to 36 percent,” the report claims, and says that if this amount were “split among all Americans, the unfunded liability is over $15,000 per person.” SBS argues that this “could result in reduced government services, as larger and larger portions of the states budgets must be allocated to cover the public pension shortfall,” and claims that its report “gives ample support for reform efforts that would protect pensions and vital public services.” According to the SBS report, California has the largest unfunded liability in total dollars ($754 billion), followed by Illinois ($331.6 billion) and New York ($307.9 billion). Based on the SBS calculation of their funded ratios, Illinois tops the list at 22 percent, followed by Connecticut at 23 percent and Kentucky at 24 percent. The report’s shortfall claim is, by its own reckoning, almost five times larger than what it refers to as “the states’ own generous assumptions” of “just over $1 trillion in unfunded liabilities.” It is also perhaps the largest such “estimate,” even among other conservative organizations and public pension critics―although Congressman Devin Nunes (R-CA), author of the proposed “Public Employee Pension Transparency Act” (PEPTA), suggested in December of 2010 that public pension underfunding could be as high as $15 trillion! (For comparison’s sake, as of September 30, 2010, the entire “Total Public Debt Outstanding” of the United States was estimated at only around $13.56 trillion.) One reason the SBS figure is so large is that SBS believes that “there is near-universal agreement that discount rates based on the assumed rate of investment return are far too risky” and that the way that public pension plans currently discount liabilities “distorts how much money is needed to fund the plans today to guarantee pension benefits in the future.” The SBS approach is instead to discount liabilities based on the approximate equivalent of a 15-year U.S. Treasury bond yield. (For their 2014 claims, they derived their number from the 2013 calendar year average of the 10 and 20 year bond yields, and came up with a discount rate of 2.734 percent.) As an example of the “echo chamber” that has been created by public pension plan opponents for such claims, the Reason Foundation―a recipient of a $1 million grant from the Arnold Foundation “to expand access to information about public sector retirement systems”―was quick to release a story on the SBS report. In his same-day coverage, entitled “Annual Report: Pension Liabilities Are Getting Even Worse,” the Reason Foundation’s Scott Shackford, Associate Editor of Reason 24/7, wrote that given “lip service and some stabs at reform, lackluster as they may be,” it could be assumed that “we’d see just a little bit of improvement in the state of public employee pensions now that the alarm bells have been going off for a few years now.” However, he says that, as the SBS report demonstrates, the answer is “Nope.” This approach was also picked up by Stanford University Professor Joshua Rauh, a frequent vocal critic of public pension plans, who told a recent Penn Institute for Urban Research event, “Urban Fiscal Stability and Public Pensions: Sustainability Going Forward,” that while the S&P 500 went up by 75 percent between 2009 and 2013, his examination of 10 cities (New York City, Los Angeles, Houston, Chicago, Philadelphia, Jacksonville, San Francisco, Baltimore, Boston, and Atlanta) found that even though pensions are heavily invested in stocks, four of these cities actually saw their pension liabilities increase, and the unfunded liabilities of the other six dropped, on average, by only 16 percent. Rauh says that this is because reforms have not addressed the “root of the problem,” which he argues is the way in which the pension benefits are provided. Rauh says that structural changes need to be made to replace the defined benefit model with individual accounts, pooled defined contributions plans, or deferred annuity plans along the lines proposed by Senator Orrin Hatch (R-UT). The Penn Institute event was interesting in part for its lack of any panelists from the public pension community who could provide some balance. The academic panel on which Professor Rauh appeared, moderated by Olivia Mitchell, Professor of Business Economics and Public Policy and Executive Director of the Pension Research Council at Wharton, was a particularly disappointing example of this. At one point, Mitchell jokingly referred to one presentation as “Pensions as Ebola.” This gives you a flavor for the event. SBS: ““Promises Made, Promises Broken” Reason Foundation: “Annual Report: Pension Liabilities Are Getting Even Worse” Penn Institute for Urban Research: “Urban Fiscal Stability and Public Pensions: Sustainability Going Forward” Leigh Snell Director of Federal Relations National Council on Teacher Retirement [email protected] • (540) 333-1015 9370 Studio Court Suite 100 E | Elk Grove , CA 95758 | (916) 897-9139 [email protected] nctr.org
Posted on: Wed, 26 Nov 2014 02:46:48 +0000
Trending Topics
Recently Viewed Topics
© 2015