Judge Rules Baltimore Violated Pension Contract

Court says 2010 pension overhaul ‘breached its contract’ with city police and firefighters.

Policeman on duty at Inner Harbor, Baltimore

A circuit judge has ruled that former Baltimore mayor Stephanie Rawlings-Blake, and the Baltimore city council, unlawfully broke their contract with police officers, firefighters and retirees with the passage of a 2010 pension overhaul plan that reduced retirees’ pension benefits. 

“The court finds that, by enacting ordinance 10-306, the city retrospectively, and therefore unlawfully, withdrew from plaintiffs Houser, Williams and Sledgeski their rights to the variable benefit feature of the plan as it stood prior to the ordinance,” wrote

Judge Julie Rubin in her judgment. “By enacting ordinance 10-306, the City breached its contract.”

The pension overhaul in 2010 was introduced by Rawlings-Blake, who said the plan would reduce the city’s costs by a minimum of $64 million annually, and prevent an impending fiscal crisis. However, the police and fire fighter unions balked at the proposal.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Under the overhaul plan, firefighters and police have had to increase their contributions to the pension fund, which is now 10% of their salaries. Many officers were informed that they would have to stay on the job for 25 years to receive their pensions, instead of 20 years. Retirees also lost a so-called “variable benefit,” which was an annual increase tied to the stock market. Under the mayor’s plan, the youngest retirees received no annual increase through the variable benefit, and older retirees earned only a 1% or 2% annual increase.

In June of 2010, Baltimore was sued in the US District Court for the District of Maryland, Northern Division, with the plaintiffs challenging the federal constitutionality of ordinance 10-306, which amended the codification of the Fire and Police Employees’ Retirement System of the City of Baltimore.

Judge Rubin did not specify any damages the city would have to pay, but city council members reportedly said the city could be forced to pay out tens of millions of dollars in pension benefits dating back to 2010. According to a report from the Baltimore Sun, an actuary has estimated the city could be held accountable for as much as $57 million in payments if the city ends up losing the case. 

According to the Sun, City Councilman Eric Costello, who chairs the budget committee, said $24.3 million has been set aside to pay out in case they lose the lawsuit.

“This has been ongoing for seven years,” Costello told the Sun. “I’d like to see it resolved as quickly as a humanly possible.”

The next court date in the ongoing litigation has not yet been announced.

Tags: , , ,

What Lured Pellegrino?

Recruiters say Pellegrino’s choice demonstrates a trend in more crossover CIO hires.

Art by Tim Bower

Brian Pellegrino / Art by Tim Bower

Brian Pellegrino had been a fixture at UPS, but he surprised the industry when he switched from his 37 year career at the company to become the CIO of the Georgia Tech Foundation recently. It begged the question, what was alluring enough to make him jump from almost four decades at his corporation to a $1.8 billion endowment?

To Pellegrino, who has had a strong track record of success with his consistent annualized 8.75% returns, it was “the right opportunity at the right time,” he told CIO.

The biggest difference in his new role, however: he will no longer be managing through a pension liability lens. His assets will be used to support the university and education system.

Pellegrino’s choice demonstrates a larger trend, say executive recruiters from the Prince Houston Group who facilitated the match. Endowments and foundations aren’t just seeking to hire chief investment officers from other endowments and foundations. Like Mark Schmid, who left Boeing to head to the University of Chicago, and Lisa Mazzocco of USC, who was recruited from Los Angeles County Employees Retirement Association.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

“There’s much more crossover today than we have seen in the last several years,” said Marylin Prince. “We, as recruiters, have gone outside of this specific universe to find that talent and we’re looking at corporate pension plans, public funds, family offices and investment management firms.”

When CIOs switch from corporate plans, they often enjoy more freedom at endowments and foundations as they’re able to trade quarterly and annual earnings pressures in publicly traded companies, for a longer term horizon, “so it allows them to explore, a wider range of investment opportunities,” said Jim Houston.

“They’re often able to invest in cutting edge opportunities,” said Prince.

Pellegrino was chosen due to his strong track record of success, leadership, investment acumen and cultural compatibility. During the job interview, there was an instant connection that went beyond the Georgia locale. 

“He inspired confidence really across all of the board members he met for having a point of view on the broader markets. He is taking over a good portfolio and showed his ability to build upon it,” said Houston.

Similar to endowments and foundations, UPS has a very low allocation to fixed income, and Pellegrino had made effective use of alternative investments. “Because we had open plans and long dated liabilities, we were not LDI investors. We also had a governance structure that gave us the autonomy to pursue unique investment structures,” he said.  His experience translated well into the endowment space, which also has a high allocation to alternatives.  

When asked, Pellegrino is quick to note that the timing was perfect, as he became retirement eligible in January 2018.  Under UPS policy, Pellegrino was eligible for full retirement benefits because he will turn 55 and have more than 25 years of service.  Although Georgia Tech was not on the radar in January of 2016, UPS was well aware of Pellegrino’s upcoming retirement eligibility.  His successor at UPS is a 17 year UPS veteran with a strong finance background. 

Pellegrino said he was swayed by Georgia Tech’s reputation as one of the leading technological research universities in the country.  Spending almost $800 million in R&D expenditures for 2016, the university works closely with both industry & government to help solve their toughest problems.  Managing a pool of assets to support this research and other initiatives at the university makes this a very exciting opportunity.

And Pellegrino is a builder. He started at UPS’ investment office in 2005 with a team of three, built it to 25, and grew the portfolio from $12 billion to $37 billion. Similarly, he’ll start at Georgia tech with $2 billion and a team of three, succeeding the former CIO, Jim Taylor, who retired in June.  Jim successfully established a strong investment foundation, creating a portfolio that achieved north of 14% returns last year.  Now, Pellegrino said, “the Georgia Tech Foundation is ready to take things to the next level”, continuing to improve their investment process, governance and compliance programs.

Tags: , , , , , , ,

«