The Age of Fracture

By Thomas J. Mackell, Jr., Ed.D.

Special Advisor to the International President International Longshoremen's Association, AFL-CIO

  

This is an age of fractured jobs, a fractured economy, fractured families, a fractured political system, a terribly fractured American Dream and where the political protagonists, our elected leaders, are in need of spinal transplants.

The soon-to-retire greying generation is experiencing no pensions. Those pensions are promises that will not be kept, leaving thousands of employees in dire straits when they are most vulnerable. Roller-coaster retirement accounts subject to the whims of the market. Longer life spans and higher health care costs. Children in college. Young adults with staggering student-loan debt who are financially incapable of purchasing a home. Aging and ailing parents. A will to work but fewer jobs to be had.

America is dying for a champion who makes preserving the middle class a top priority. They want somebody who can level the playing field so that Main Street doesn't always come second to Wall Street. Someone who is not running networks of oligarchs who take advantage of our weakened campaign finance laws to manipulate the democratic process in pursuit of their self-interests.

This is the scenario as we head into the 2014 Congressional elections with predictions that Republicans will hold the House of Representatives and ,perhaps, gain control of the Senate.

If that happens, forget a Congress that looks out for the little guy.

In conjunction with a non-caring Congress, today, unfortunately, the concept of freedom has come to mean the freedom of the wealthy to do whatever they want, without regard to the consequences for the rest of us. In reality, the 1 percent has undertaken a serious effort to buy elections.

At any kind of gathering whether it be at work or at home, Americans are expressing disappointment about the way things run in Washington. They don't see them dealing with the multitude of problems facing our nation.

Their approval rating is at an all-time low. Many citizens say they see no value in bothering to vote.

Clearly, the constant bickering between the Republicans and Democrats is wearing thin on Main Street and leads to a notion of false equivalency.

The Pew Research Center says that Republicans and Democrats are more divided along ideological lines than at any point in the last two decades.

The GOP has done all it can to undercut the Obama presidency. Democrats had to fight back. The line is drawn in the sand which has resulted in blind allegiance or blind hatred.

But let's put the blame where it belongs: on the Republican side of the aisle. The Republicans must end their internal civil war between the moderates and the Tea Party aficionados.

Recently, a number of the members of Congress who have announced their plans to retire have expressed their frustration with the cantankerous environment in Washington and their inability to get things done.

When even the pols start complaining, you know that things are really bad. If they can't find solutions then we are, truly, in deep trouble.

Despite this horrendous dilemma, failing to vote surely will make things worse. We have a solemn obligation to go to the polls. Neglecting the most fundamental responsibility of citizenship invites complacency and encourages political abuse. Showing up on Election Day proves we are in the game, that we care and that we want to see change.

There are areas of this country where people have been removed from the ranks of eligible voters and GOP operatives are doing all they can to suppress participation by traditional Democratic constituencies.

Today, the American workplace is plagued with wage theft, disrespect of culture, pressure, unsafe environments, unbridled automation and more.

Everything solid is melting into air. This should not be tolerated in modern America. We must vote our pocketbook to protect our livelihoods and our well-being.

We must encourage our union memberships, thoughtful young folks and retirees to go out on Election Day and exercise their right to vote.

They must be engaged in their communities and serve as an example to those who might stay away. Staying home is not an option. It will only continue and calcify this dangerous divisiveness.

TEXPERS Testimony to the Texas House Pensions Committee

On July 9, TEXPERS Executive Director Max Patterson was invited to testify before the Texas House Pension Committee regarding the implications of GASB rule changes on local pension funds. The following remarks were submitted by Patterson to the Honorable Bill Callegari (R-Katy), Chairman of the House Pension Committee.

Max Patterson is seated in the middle of three men facing the Texas House Pensions Committee on July 9. His testimony can be heard at the 56:24 mark in this tape of the meeting hosted by the Texas Legislature. http://tlchouse.granicus.com/MediaPlayer.php?view_id=28&clip_id=8814

Honorable Chairman Callegari, thank you for this opportunity to provide testimony on the Implications of GASB on local pension funds.

I am Max Patterson, Executive Director, Texas Association of Public Employee Retirement Systems (TEXPERS). 

GASB is intended to show all of the cities debt obligations and in this effort this rule change requires the disclosure of cities pension obligations to be “moved” from the footnote section in its annual financial disclosures (CAFR) to its balance sheet. It should be pointed out that any pension obligations by the city have “always” been disclosed. The primary reason for debt disclosures are to insure that all obligations are disclosed when a city attempts to raise money by the selling of bonds. Pension obligations have always been disclosed but GASB is attempting to highlight any pension obligations because of the growing obligations by cities. It is important to note here that those cities who have been deferring pension payments have increased their debt obligations significantly as compared to the cities that have consistently made their pension payments. 

Unfortunately, because of the GASB 68 change people have directed there attention towards the pension plans rather than to the cities and ask why are you deferring payments when you have previously agreed to these obligations.

When people look at municipal debt it is important to look at all debt not just the pension debt. In most cases, if not all, pension debt is a much smaller debt obligation than other debt the city has accrued. In the Texas Comptroller’s report for August 31, 2013 the City of San Antonio had tax supported debt amounting to $1,406,185,000 and revenue supported debt of $8,426,715,000. As of December 2013 the San Antonio Fire & Police Fund had a $214,876,634 unfunded liability.

If you look at Houston as of August 31, 2013 they have a tax supported debt of $3,383,060,000 and revenue supported debt of $9,293,693,288. The three city pension plans have a combined unfunded liability of $3,051,388,000 as of December 2013.

It is also important to note that these numbers reflect only what is true on that one day and do not reflect a total picture. They don’t reflect on whether a city can make its obligations in the future or if there may be a trend.

When trying to determine if a pension fund is able to meet its obligations we also look at numbers on a specific date and often do not look at other factors to answer the same question.

When trying to determine if a pension fund is able to meet future obligations one has to consider at a minimum three factors; returns, amortization and its unfunded liability. You must look at all three and in conjunction with past numbers to determine if there is a trend. This analysis is a function of the actuary and pension boards depend heavily on the analysis and reporting performed by its actuary and usually on a yearly basis.
In summary GASB focuses primarily on the city and all its debt obligations, but unfortunately some people are seizing the opportunity to transfer the focus toward the pension funds. This discussion could very easily be an issue around a city’s infrastructure, neglected roads and bridges and a failure to set aside sufficient funds to keep up with daily maintenance. Consequently at the end of the day the repair cost is much higher than what it would have been if the repairs were made earlier.

I can’t speak for the rating agencies but in the course of rating a city the bonding agencies look at more than just the numbers on the financial statement. They look at the city’s history of paying its obligations and the ability of the city to meet its obligations going forward. And, they look at all obligations, not just the pension obligation.

As we have always said local pensions in Texas, for the most part, are in good shape. Those cities who are meeting their commitments by making their pension payments are in good shape. Looking at the projected future pension obligation of a pension system can be misleading if that is all you look at. Look at the whole picture before passing judgement.

TEXPERS Objects to Americans for Prosperity Interference in Detroit

New press release out today. Read it here, or below:

HOUSTON (May 23, 2014) – The Texas Association of Public Employee Retirement Systems registered its contempt for the decision by Americans for Prosperity earlier this week to interfere in pension politics in Detroit and pledged vigilance of future similar activities in Texas.
Among other actions, the AFP is encouraging state lawmakers to pressure Detroit into dumping its art collection and switching to defined contribution plans for public employees without fully evaluating the effects of either.

“While we certainly respect the right of special interest groups to assert their views on public policy issues, it seems to us that the AFP’s 11th hour threats of statewide officials is more an effort to grandstand than to really play a part in developing reasonable solutions,” said Max Patterson, the executive director for TEXPERS, an organization with more than 75 pension plans and representing nearly 2 million individuals in Texas.

“Unfortunately, we have been witness to similar gratuitous interventions by other groups in other states and the odds are that they may try such political stunts here in Texas despite the strength of our state and local pensions,” Patterson said.

“Instead of engaging local police, fire and municipal employee pensions in discussions about issues, they prefer the radical’s course with threats and the pursuit of one-size-fits-all hierarchical legislation from the state house. These tactics are foreign to the hard-working men and women who formed and operated their pensions precisely so they would require minimal contributions from local taxpayers for their retirements.
“We would hope that political discussion about pensions in Texas will not revert to ‘might makes right’ by those pursuing singular objectives without consideration of tradition or the financially healthy status of most state and local pensions.”

"Alternative Investments" Need Another Name

A couple of weeks ago we released the TEXPERS annual Asset Allocation report, a survey of our members’ investments for the prior year. We noted in our press release that so-called ‘alternative investments’ increased among our members’ investments when compared to last year’s ratios. It got us to thinking: when did ‘Main Street’ investments become ‘alternative’ investments?

For example, years ago it used to be that a city Treasurer, among all their other duties, might run the city’s pension fund by investing in rock solid U.S. government bills, notes and bonds. The Treasurer’s rationale was that they would never be accused of wild speculation with the retirement money of their city’s police, firefighters and municipal employees. They could rightly be viewed as tending conservatively to their fiduciary responsibility. It was an easy choice for them. But the Treasurer often had to go through Wall Street to secure those bonds.

Then, when some began to realize that keeping just slightly ahead of inflation wouldn’t properly maintain their pension obligations, the investment duties were outsourced to a pension organization responsible for making better investments and administering benefits. The investment portfolios tended to a 60% stock to 40% bond ratio, as that was the best thinking on what qualified as a diversified portfolio. Again, that money flowed through Wall Street investment houses.

Over time, another modest change occurred. Pension managers began adding foreign investments to their mix, with companies listed on foreign stock exchanges taking priority. That was considered appropriate diversification. And because the companies were on foreign exchanges, or represented in American Depository Receipts (ADRs) on U.S. exchanges, they had a sense of legitimacy in their own right. And this was yet more money flowing through Wall Street investment firms.

While those dynamics are still at work, today’s pension managers are seeking even broader diversification of their assets. Wall Street stocks and bonds aren’t the only assets that generate returns. Today’s pension boards recognize there is a much wider world of investment opportunities available out there. Oil and gas leases. Commercial buildings. Home rentals. Commodity investments. The list could go on and on.

Many of those investments used to be called “Main Street” because they lived outside Wall Street’s reach.

But it seems that, in many ways, the term Main Street seems to have been replaced by the ‘alternative.’ We talked about this phenomenon last year, when a Wall Street Journal article made it seem like the Texas Teachers Retirement System was really off the rails in its off-Wall Street, private equity investment strategy. Remember their headline, “Pensions Bet Big with Private Equity”? Wasn’t that a bit pejorative? It was in our view. The Wall Street Journal article seemed alarmed that the TRS had been so successful with its private equity investments!

Now, please realize there are a lot of people who would like all investments routed through Wall Street stocks and bonds. They tend to live in New York, or other major investing centers, like Chicago, London, etc. That’s how they make money.

By using the word ‘alternative’ they can imply ‘risky’ or ‘out of the ordinary.’ For those invested in the inner workings of the stock exchanges, those sorts of investments may seem risky and out of the ordinary, but to those beyond the Hudson River they are ordinary, and often less risky than volatile stock markets.

Our point is simply this: our Wall Street friends tend to define terms to their advantage, but the perceptive reader should always remember that Main Street, “alternative” investments are just as lucrative, or sometimes even more so, than what is available through Wall Street financiers. – Max Patterson

More Hyperbole Unsupported by Facts about the Future Health of Pensions

Ray Dalio, founder and co-chief investment officer of the Bridgewater Associates hedge fund, has produced the latest attack on public employee pensions. Falio is reportedly worth $14 billion, according to Forbes. Why are so many billionaires targeting public pension systems these days?

But we digress.

Dalio’s group is reported as estimating that public pensions will require $10 trillion for public pensions to meet their financial obligations 30 years from now, but their $3 trillion in investible assets today won’t allow them to reach that goal. Bridgewater Associates projects that pensions would need to earn 9 percent annually to cover their expenses. We’re not going to dig into their numbers, because we have better things to do with our time, but here a couple of observations:

First, pensions themselves don’t even project out 30 years. Twenty years is the more common standard by people in the business of running pensions. Thirty years is a reach from the get-go. Anything dire can be projected out 30 years. In our eyes, their projections were dubious from the beginning.

Second, 8 percent average annual returns are indeed possible over 20-year periods, despite the Bridgewater Associates forecast that pensions might more realistically achieve four percent or less.

We beg to differ with their forecast.

We have only to look at several TEXPERS member systems who proved in TEXPERS annual Asset Allocation Report that they can achieve outstanding results over 20-year periods. Here are the standout performers for the 20-year period in Texas:

Big Spring Firemen's Relief & Retirement Fund 9.87%
Dallas Police and Fire Pension System 9.04%
El Paso Firemen and Policemen's Pension Fund 8.91%
Amarillo Firemen's Relief and Retirement Fund 8.73%
Lubbock Fire Pension Fund 8.66%
Houston Municipal Employees Pension System 8.64%
Austin Police Retirement System 8.39%

The reason that Texas pensions have been successful is that they are flexible. The pensions of yesterday might have had an investment ratio of 60 percent U.S. stocks and 40% U.S. bonds. Today’s pensions are much more diversified, as our latest report also uncovered. 

Sixty survey respondents representing approximately $170.3 billion in total assets allocated their investments in much different fashion in 2013. The report showed that 32% were using alternative strategies (real estate, private equity, energy, etc.), while 25% were invested in international equities, 22% were in domestic equities, 20% were invested in fixed income, and 1% held short-term securities/cash.

We agree that billionaires must have special insights to achieve their wealth, but they should stick to what they know and leave pensions alone. They should recognize that public employee pension plans have different liabilities when compared to private, corporate and foundation pensions. These differences greatly affect how each one invests. We would suggest to Mr. Dalio that unless he sits on a public fund board or is a consultant to public funds, he should focus on his business and not speculate or draw conclusions from mathematical equations. – Max Patterson

Talent Poaching: The Price of Successful Investing at Teachers Retirement System of Texas

Last year, the Teacher Retirement System (TRS) of Texas –oddly – came under fire from the Wall Street Journal for the success of its private equity returns. This year, Harvard University has hired away one of TRS’ private equity team members to head its PE portfolio.

As the Boston Globe article says, Richard Hall will join Harvard University's endowment fund after managing $14 billion in private equity for TRS for six years. 

We mention this only to discuss a point.

Successful money managers with great track records are in high demand. The skills and techniques that Hall and others develop in the course of their work at a successful public employee pension system are desired by other organizations, like university endowment funds, large hedge funds, or mutual funds.

Whenever we see news stories about the bonuses paid to top money managers and staff at public pension systems, and then we see comparisons to average salaries of teachers or other public employees, we wince a bit like everyone else. But, we know that those bonuses are unbelievably small compared to what other money managers and staff receive at private sector money management firms. We read recently of $20 million salaries for top executives at PIMCO, for instance. (Inside the Showdown Atop Pimco, the World's Biggest Bond Firm, WSJ, Feb. 24, 2014).

But truly the market for those with skills and experience in managing money is highly competitive and there’s always an organization which needs a boost from those with fresh approaches and a winning track record. Harvard’s endowment fund is an incredibly prestigious group and it is our bet they pay handsomely, probably offering Mr. Hall (a Harvard graduate) a very sweet deal indeed.

In the world of money management, talent poaching is the name of the game. Texas is fortunate to have so many dedicated professionals at all its pensions, sometimes working with below-market compensation packages. We salute them all. – Max Patterson

Wilshire Report shows pensions continue trending in right direction

Since 2008 there have been numerous reports decrying the funded ratios of public employee pension funds around the United States.

Of course, 2008-09 were tough times for stock and bond market investors and the historic downward spirals offered the opponents of public employees’ defined benefit plans plenty of opportunity to knock them. Unfunded liabilities would break the backs of cities and states, they said (and continue to say in many cases).

The truth of the matter is that public employee pensions are long term investors and focusing on returns – and the subsequent consequences to a pensions unfunded liabilities – for a year or two or five or ten -- doesn’t make much sense to those in the industry. The time frames for most pension investments are 15-20 years and as long as the longer-term, multi-year trends for both returns and unfunded liabilities are positive, public officials should not be too concerned except in a relatively small number of cases.

Such is the situation we’re seeing with a national report by Wilshire Associates on the state of U.S. retirement systems. A few points from the survey of 111 pension plans that reported their returns to Wilshire, as reported in Asset International’s Chief Investment Officer:

1. The aggregate funding rose three percent to 75% in 2013, from 72% in 2012.
2. For 111 pension plans, assets grew 8% from $1.96 trillion to $2.12 trillion in 2013.
3. The 111 plans’ aggregate funding shortfall decreased from $863.3 billion to $779.8 billion.
4. The average assets-to-liabilities ratio was 70%.
5. Only 8 had assets worth less than 50% of their liabilities.

All said, only 7 percent of the reporting pensions were in a truly concerning situation, with their assets less than 50% of liabilities. These might warrant some review and action by the people involved to ensure their future solvency, but they are certainly salvageable. All the other findings were very positive.

The best news from our perspective was the aggregate funding trend, up 3% in one year. In investing terms, the trend is your friend, and as long as the large majority of pension funds continue in this positive direction the din and cry for ‘pension reform at all costs’ will slowly fade – until the next historic market downturn. – Max Patterson