Kentucky Passes Surprise Pension Reform that Was Inserted into a Sewage Services Bill

In a surprise move, the Kentucky Senate passed a pension reform bill that was inserted into a sewage services bill without allowing any public comment or testimony, drawing a strong rebuke from the state’s attorney general and teachers’ associations.

The bill now heads to the desk of Gov. Matt Bevin, who is expected to sign it into law.

“49 members of the Kentucky House and 22 members of the Kentucky Senate voted not to keep kicking the pension problem down the road,” said Bevin in a Twitter post. “Anyone who will receive a retirement check in the years ahead owes a deep debt of gratitude to these 71 men and women who did the right thing.”

However, Kentucky Attorney General Andy Beshear disagreed, and said he plans to sue to stop the bill, which he said breaks Kentucky state law.

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“I am outraged,” said Beshear in a Twitter video. “We saw government at its worst when the leadership of the House and Senate, in the dark of night, amended what was supposed to be a sewage bill into what they claim is pension reform.”

He said the bill violates the inviolable contract, a state law that guarantees that pension participants will receive the benefits they were promised when they were hired.

“The House and Senate violated that law and broke their word,” said Beshear, adding that “if and when the governor signs that bill into law” that he’ll “file suit seeking to overturn as much, if not all, of this terrible bill as we can.”

The bill left out some of the provisions in previous drafts of the proposed pension reform that teachers had objected to. For example, it does not include any reduction in annual cost-of-living increases for retired teachers, and it does not change how long current teachers must work before being eligible for full retirement benefits.

However, it still includes moving new hires from a traditional defined benefit pension, where the benefits are guaranteed, to a hybrid plan that includes elements of a defined contribution plan that does not provide guaranteed benefits.

The bill’s passage drew the ire of the state’s teachers, many of whom had been demonstrating outside the state Capitol.

The passage of the bill “showed blatant disrespect for the law and for democracy,” Stephanie Winkler, president of the Kentucky Education Association, said in a release. “Based on the reaction of educators and the public today, no matter what the language of the bill says that they have created an overall environment of deception and mistrust. The angst, anxiety, and anger among educators is strong.”

The teachers’ association held a statewide rally in Frankfort on Monday.

“We will be here watching every move legislators make,” said Winkler. “We will not be silent.”

Tags: Beshear, Kentucky, Pension Reform, Senate

The California State Teachers’ Retirement System (CalSTRS) is having trouble with its plan to let new outside investment managers run a chunk of its global equity investments. Returns are not great, and the fees are too high, according to Chief Investment Officer Chris Ailman.

So Ailman is seeking to revamp the retirement system’s global equity developing manager program, as it’s known. Outside managers who are young, female, or minority were signed up to run these funds. Global equity funds can make stock investments in any country.

For this program, several dozen such investment managers manage money for CalSTRS under the banner of six fund of funds.

The emerging managers program consists of newer asset managers and firms owned by women and minorities. That has broadened the program’s diversity, but these funds have drastically underperformed other equity managers and CalPERS internal equity portfolio in most periods between 2004 and 2016, Ailman told CIO.

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One problem is that its lower returns have dragged down the performance of the system’s other funds. As a result, Ailman recommended to the CalSTRS board at a retreat meeting in Riverside, California, last week that the $ 1.8 billion developing managers program be moved out of the global equities asset class. That way, the developing managers segment won’t dampen bonuses for investment staffers in the asset group.

The results of the program would still be part of the overall returns for CalSTRS’s $224.3 billion portfolio. The pension system’s global equities portfolio is a little more than half that, at $123.2 billion.

The board is expected to decide on moving the fund of funds out of the global equity asset class in the next several months.

Exact statistics of the several dozen money managers in the fund of funds were not released. But Ailman said that on a combined basis, individual firms in the fund of funds in the last several years had underperformed CalSTRS’s custom global equity benchmark by as much as 10 percentage points.

He said he wanted to keep morale of investment staffers involved in the management of the emerging managers program up in terms of their bonus compensation. “It’s all about how do you properly motivate people,” he said.

Also contributing to the problem with underperformance was the fund of funds structure itself, he said. Namely, CalSTRS ends up paying extra fees, for the fund of funds manager and then for those running all the subsidiary funds it gathers together.

A CalSTRS report presented at the meeting said fund of funds fees ranged from 0.40% to 0.80%, compared to fees of other global equity managers that were in the 0.20% to 0.25% range.

Ailman told CIO that the uninspiring performance of the emerging managers also had to do with the recent stock market run-up, which made it hard for active managers to beat the soaring indexes that were their benchmarks.

“The last five years, active management in the US has been tough for everyone,” he said.

This isn’t the first bid to revamp the emerging managers’ effort. Ailman said the fund of funds were restructured in 2016 with new managers and strategies. He said the idea was to focus on more inefficient markets, where skilled money managers might have a better chance of succeeding and beating the benchmark.

But so far, the verdict is out, said a report presented at the meeting: “The new non-US developing manager mandate has just a year of performance, so it is too early to judge.” During that initial year, the portfolio added only a small amount of value net of fees.

The report goes on to say: “If the program was created to generate positive excess return, then it was not successful for the first 12 years, and it remains to be seen if it will add alpha going forward.”

The fund of funds program is a key effort by CalSTRS to build diversification in its external money manager line-up, and the reports suggests CalSTRS consider hiring mangers directly to avoid the double fees of the fund of funds structure.

But Ailman told the board that this approach would be time consuming and might require additional CalSTRS investment staff.

In the CIO interview, Ailman said in the past he had worked with other unspecified out-of-state public plans to buy a fund of funds to save fees, but efforts were unsuccessful. For one thing, the 2008 financial crisis happened. “Everyone got crushed and a lot of those people ended up just going out of business,” he said.

Tags: CalSTRS, Global Equity, managers