California Mega-Funds Voice Support For Pension Overhaul Discussion

The California Public Employees’ Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) have issued statements on the governor's pension reform proposal.

(October 31, 2011) — Following the California Governor’s pension reform proposal issued last week, two of the largest public pension funds in the United States have applauded the greater dialogue, while awaiting further details of the plan.

The CEO at the California Public Employees’ Retirement System (CalPERS) has encouraged “discussion between all parties to ensure that public employee retirement plans are sustainable, secure and cost-effective.”

“CalPERS is closely involved in the pension policy dialogue that will affect our employers and members in the State, schools and local government,” CalPERS CEO Anne Stausboll stated. “At CalPERS, we believe that defined benefit plans are an important cornerstone to adequate and secure retirement. Pension change dialogue should focus on the critical policy issue of how to provide adequate and secure retirement income for public workers in a cost-effective way, while honoring vested rights for existing employees. We are committed to serving as an honest broker of information and an expert in pension administration as all parties work together on pension solutions. As the pension policy discussion progresses through the Legislative process, CalPERS can assist with information on costs and potential savings over time to facilitate lawmakers in a fully informed discussion.”

Additionally, the California State Teachers’ Retirement System (CalSTRS) has asserted that it needs a plan of action to address its long-term funding shortfall, which only the Legislature and Governor have the authority to implement. “We will continue to work with the Governor, Legislature and our stakeholders to develop a plan that includes contribution increases that are gradual, predictable and fair to all parties,” the fund stated.

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Last week, California Gov. Jerry Brown revealed that he is seeking massive pension cuts, which the administration estimates would save about $900 million annually. Some of the changes the Governor proposed include raising the retirement age to 67 for new employees who are not public safety workers and requiring state and local employees to pay more toward their retirement and health care.

“It’s time to fix our pension systems so that they are fair and sustainable over a long time horizon,” Brown said in a statement. “My plan raises the retirement age and bans abusive practices…while mandating that public employees pay an equal share of pension costs.” The governor also revealed aims to end so-called pension “spiking,” while also ending the practice of buying service credits.

Similarly, New York City is also facing a structural overhaul of its schemes. New York City Mayor Michael Bloomberg voiced aims last week to merge the investment management of the city’s five pension funds — representing the first major reform of pension investment structure in the city in roughly 70 years. “The current structure — with five separate boards and five separate pension investment structures — was put in place in 1941. This is an historic, game-changing move for the city, since the overhaul would allow us to be more nimble in today’s markets,” Mike Loughran, Senior Press Officer at the Office of NYC Comptroller John C. Liu, told aiCIO, noting that the move is based on efforts to lower costs, improve decision-making, and enhance returns.

The agreement was announced by Bloomberg, City Comptroller John Liu, and labor leaders at a press conference at City Hall. The proposal delegates investment authority for all five pension funds to one newly created body authorized to hire an independent professional manager. According to a release by the Office of the Mayor, the plan — which needs the approval of the state Legislature in Albany — would form an independent investment board along with a chief investment officer position.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Bill Gross, who manages the world’s largest fixed-income fund -- the PIMCO Total Return Bond fund -- has asserted that you cannot solve a debt crisis by creating more debt.

(October 31, 2011) — Bill Gross, who manages the world’s largest bond fund at Pacific Investment Management Co. (PIMCO), has said in his monthly note that the investment question of the day should be “can you solve a debt crisis with more debt?”

He writes: “Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique ‘EFSF’ which requires 17 separate votes each and every time an amendment is required. What a way to run a railroad. Still, investors hold to the premise that once a grand plan is in place in Euroland and for as long as the US, UK, and Japan can play scrabble with the 10-point ‘Q’ letter, then the markets are their oyster. Not being one to cast pearls before swine or little Euroland PIGS for that matter, I would tentatively agree with one huge qualifier: As long as these policies generate growth.”

The bond fund manager asserted that you cannot solve the debt crisis by creating additional debt. Instead, the answer should be a policy of creating growth, Gross said. However, attempts to create an increasingly attractive environment via rate cuts and discounted future cash flows can only achieve so much, Gross explained. “Growth is the elixir that seems to make every ache, pain or serious ailment go away. Sovereign debt too high? Just grow your way out of it. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn’t cure.”

The problem: growth is currently “the commodity that the world is short of at the moment.” He concluded: “In sum, with both earnings and bond yields near historic lows as a result of a lack of real growth in developed economies, investors will need to find lots of pennies to produce asset returns much above 5% in bonds or equities.”

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Read Gross’ investment outlook report in full here.

Gross’ negative view that monetary policymakers can jumpstart the economy through a series of policies that promote zero percent interest rates, and quantitative easing, along with large-scale debt plans in the European Union follow a similarly dismal view regarding a potential QE3. A research paper published earlier this month asserted that cries for a third round of quantitative easing will grow steadily louder during the rest of the year, yet are unwarranted.

“The central banks aren’t’ responding to economic forces but to the securities market,” Michael Litt, founder and chief investment officer at Arrowhawk Capital Partners, told aiCIO, noting that monetary policy is thus becoming less associated with the actual economy. “In fact, the economy of the United States is doing moderately well.”

According to Litt, QE3 would be incrementally less effective in stimulating US economic activity, creating a global arbitrage where investors borrow in US dollars, sell those US dollars, and then buy bonds from other countries with higher-yield currency units. Consequently, with QE3, Litt perceives an environment where little money flows into the US economy, with the Federal Reserve’s policy supporting only certain currencies while doing nothing to stimulate growth in the US.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742