Wall Street Journal: CalPERS considers reducing its investment return assumption

Calpers Confronts Cuts to Return Rate

Trimming 7.75% Could Add to California's Woes; BlackRock to Board—'You'll Be Lucky to Get 6%'

  Gina Chon  Wall Street Journal March 1, 2010

Calpers is considering whether to reduce the projected rate of return used by the giant pension fund to make investment decisions. A cut could force cash-strapped governments in California to pay millions more each year to cover their employee pension obligations.

Since 2003, the California Public Employees' Retirement System has assumed that the value of its stocks, bonds and other holdings would increase by 7.75% a year. But the likelihood of an extended period of modest economic growth world-wide is fueling doubts inside Calpers that the pension fund can continue aiming so high.

No specific alternate targets have been discussed by Calpers officials, but the board has been encouraged to shrink its projected rate of return to as low as 6%.

"It's bruising...but it has to be done," said David Crane, a pension adviser to California Gov. Arnold Schwarzenegger. Facing a projected budget deficit of nearly $20 billion, the Republican favors a lower target at Calpers, according to Mr. Crane. Calpers manages about $200 billion, making it the U.S.'s largest public pension fund.

The percentage is an important factor in calculations by Calpers officials of future contributions needed from employees and local governments to cover payouts promised to retirees and other beneficiaries. If the return assumption declines, contributors likely would have to make up the difference.

Paying more into Calpers could deepen the financial misery facing many California governments. Some likely would increase taxes or cut services.

For the pension fund, lower investment-return expectations could reduce the temptation to seek outsize profits through real-estate, private-equity and other nontraditional investments that wound up burning Calpers with big losses.

In its fiscal year ended June 30, Calpers was down 23%, or $58 billion, the worst performance in the pension fund's 78-year history. It was up 12% for the year ended Dec. 31. Calpers's annualized return over the past 20 fiscal years is slightly higher than the 7.75% target.

At a meeting of the pension fund's investment committee last month, some Calpers board members pressed to review whether the current 7.75% projected rate of return still is realistic.

"We intend to open that question," responded Joseph Dear, the pension fund's chief investment officer, according to a transcript of the meeting. "Should we be considering other possible outcomes?"

Patricia Macht, a Calpers spokeswoman, said Mr. Dear still feels comfortable that 7.75% "could be the right number, but he's not making that prediction." The pension fund wants to hear varying opinions so that it has the information it needs to make a decision, she added.

The decision isn't expected until early 2011. Calpers officials also are examining the pension fund's asset allocation, risk management and other areas as part of a routine review done every three years.

Pressure to lower the target has been building for months. "You'll be lucky to get 6% on your portfolios, maybe 5%," BlackRock Inc. Chairman and Chief Executive Laurence Fink told Calpers board members last July.

Calpers is a client of the New York company. Mr. Fink declined to comment Friday.

Calpers last reduced its rate-of-return assumption in 2003 amid economic turbulence. The previous target was 8.25%.

The most common projected rate of return among public pensions in the U.S. is 8%, according to Pew Center on the States, a research unit of Pew Charitable Trusts. But that figure looks daunting following double-digit percentage losses at many pension funds amid the financial crisis.

Even though many pension funds topped their assumed returns over the long term, "whether or not that should be the rate going forward is another question," says Kil Huh, Pew research director.

William Atwood, executive director of the Illinois State Board of Investment, says he is comfortable with the pension fund's assumed 8.5%-a-year return, noting that Illinois has earned about 8.6% a year since 1970.

Still, public pension systems are watching Calpers closely because "they are the big kid on the block," Mr. Atwood says. The Illinois investment board manages three pension funds with $8.7 billion in assets.

At Calpers, about 75% of payouts come from the pension fund's investments, with the remaining 25% tied to contributions from California governments and employees.

According to Pew, a hypothetical $100 billion pension fund that achieved a 7.75% return rate for 10 years would have about $211 billion. With a 6% rate, the same fund would grow to $179 billion—a difference of $32 billion.

Mr. Schwarzenegger has proposed as part of the budget being debated in Sacramento that state employees contribute an additional 5% for their retirement costs. While forcing outsiders to pump more into Calpers would be painful, there is no alternative given the huge liabilities facing the pension fund, said Mr. Crane, the governor's pension adviser.

Mr. Schwarzenegger had proposed that the state's contribution to Calpers increase to at least $4.5 billion in the next fiscal year. The pension fund, which can change the employer-contribution rate without legislative approval, agreed to a $3.5 billion payment. That would defer some of the cash payments needed to make up for investment losses and reduce the impact on local governments.

Another potential loser if Calpers decides to ratchet back its ambitions: private-equity firms. The pension fund was a private-equity pioneer, starting with a $1 billion allocation in 1990 that has since grown to about $25 billion.

A lower assumed rate of return could cause Calpers to reduce its exposure to private equity and other aggressive holdings. The pension fund already is looking to prune the number of private-equity firms with which it invests and reduce its fees by making direct investments in deals.

West Virginia retirement board switch from market value of assets to smoothing may help employers avoid layoffs

Public retirement recalculation could help avoid layoffs

  Charleston Gazette  March 3, 2010

CHARLESTON, W.Va. -- Cities and counties around the state might avoid laying off some employees after members of the state Consolidated Public Retirement Board voted Wednesday to change the way the board calculates employer contributions into the Public Employees Retirement System.

Employers were supposed to increase their contributions from 11 percent to 17 percent as on July 1. But retirement board members cut the increase down to 12.5 percent.

"I would have had to let go two or three attorneys," Kanawha County Prosecutor Mark Plants said of what he calculated would have been a $200,000 increase in employer contribution in the prosecuting attorney's office. "I would have had to make a decision: Which ones do I let go?"

Charleston City Manager David Molgaard said the proposed increase to 17 percent would have cost the city an additional $950,000 this year.

"This really couldn't have come at a worse possible time for municipalities," he said. "We're very restricted in the methods and abilities we have to raise revenues."

The rate increases are prompted by the 2009 stock market downturn, which dropped the value of PERS investments by 17 percent -- which actually amounted to a 24.5 percent plunge, since the state's 40-year plan to keep the pension fund solvent requires 7.5 percent growth in investments each year, board actuary Harry Mandel explained. "What happened last year is our assets had substantial losses -- the worst we've had in 20 years," he said.

From its inception, PERS has functioned on an actual valuation method -- meaning that fund losses in one year have to be made up with higher employer contributions the next year.

On Wednesday, the board voted to change to the smoothing method, an actuarial calculation that spreads out fund losses and gains over four-year periods.

"It's basically phasing in the losses in kind of an installment plan," noted board chairman David Wyant.

Assuming the market stays steady for the next four years, the employer contributions will have to slowly increase from 12.5 percent this year, to 14.25 percent in 2011, 16 percent in 2012, and 18 percent in 2013, to pay down the 2009 downturn, Mandel said. If the market sees another downturn during the four years, those rates could go substantially higher, he warned.

"Asset smoothing is a short-term solution only," Wyant said. "It doesn't make the 17 percent rate go away. In fact, it eventually goes to 18 percent."

Vivian Parsons, executive director of the state County Commissioners Association, said the proposed 64 percent increase would have amounted to an unaffordable increase of more than $9 million for counties statewide this year.

Kanawha County Commission President Kent Carper added that amount of increase would have been unbearable for cities and counties, particularly with only a few months' advance notice before it would take effect July 1. "We were in the process of laying people off," he told the board. "I guarantee that was not a threat, that was the reality."

The increase to 12.5 percent of employee wages will work out to a more manageable 13 percent hike, or about $175,000 for county offices, he said.

Carper also blamed the Legislature for allowing the burden for public employee pensions to be shifted to taxpayers, by capping employee contributions at 4.5 percent of their income.

"The Legislature has a responsibility to make sure the employees pay their fair share," he said, adding, "With all due respect, if the taxpayers have to pay this, shouldn't employees have to increase their contributions as well?"

While the vote Wednesday will ease the burden for PERS employers in the 2010-11 -- including the state, which had already set aside an additional $19.9 million.

Utah House approves bill creating choice of DC plan or hybrid for new hires

The Utah House of Representatives Friday approved a bill that provides new hires as of July 1, 2011 a choice between a defined contribution plan and a new hybrid plan. Both plan options would be non-contributory, as is the existing DB plan for most public workers participating in the URS.

The DC plan for civilian workers provides an employer contribution of 10 percent of pay to an employee-directed account. The DC plan for public safety officers provides an employer contribution of 12 percent.

The hybrid plan for both civilian workers and public safety officers includes a retirement multiplier of 1.5 percent and an auto-COLA of 2.5 percent. The hybrid for public safety officers permits retirement with 25 years of service, compared to 35 for civilian workers. (Civilian and public safety workers also qualify for retirement at 65/4, 62/10, 60/20.)

The Utah Senate approved the changes made by the House, and the bill has been sent to the governor, who is expected to sign it.

Read a news story on the bill here:

 http://www.sltrib.com/ci_14492252?IADID=Search-www.sltrib.com-www.sltrib.com

kb

Unions support benefit cuts and higher employee contributions to Minnesota pension plans

State's pensions need a boost

Proposals tweak retiree benefits

St. Paul Pioneer Press 02/28/2010

In the late 1990s and early 2000s, retired Minnesota public employees lived like the rest of us with a stake in the stock market: high on the hog.

In some years, retirees saw their pension benefits grow by double digits, and the state sprinkled around profits from multibillion-dollar retirement funds like fairy dust.

But those profits evaporated with the recession, and state retirees are now looking at a potentially long period of austerity in order to put the retirement funds back in the black.

"Speaking for the police, they're realists and they understand the environment we're in," said Dennis Flaherty, executive director of the Minnesota Police and Peace Officers Association, which has 8,000 members. "We're going to do what's necessary and responsible to keep the fund in good condition."

Hurt by a flagging stock market, retirement fund assets have slipped below their projected liabilities. And while the troubled funds are a multibillion-dollar issue affecting hundreds of thousands of current and future retirees, it is an issue flying largely below the radar.

Legislation moving through the Capitol would tweak how much goes into the funds and what level of benefits go out, and the bottom line of the new economic reality is this: Some employees would pay more and almost all would receive less.

The state's unions have conceded to changes, but it was only Thursday that Minnesota's largest public employee union, AFSCME Council 5, offered its support.

"The employee groups may not like the solutions this year, but the solutions may be worse next year," said Sen. Don Betzold, DFL-Fridley, who co-chairs a joint legislative pensions committee.

The funds have all proposed bending down annual benefit increases to well below the normal rate of inflation. And projections show those lower benefits may have to stay in place for a while, if not decades.

One fund, the $14 billion Public Employees Retirement Association of Minnesota, would need an unheard-of 19 percent return on investments just to maintain its current funding level, plan administrator Mary Vanek said.

And so the fund, which has 231,000 current and retired members, has proposed a mere 1 percent cost-of-living increase in retiree benefits until the plan is in better shape. That figure is far below the 2.5 percent increases of recent years, and dramatically below the 11 percent increase in 2000.

And employees may have to get used to that. "It's going to take 20 years, unless some really good things happen over that period of time," Vanek said.

Other funds, including the $7.5 billion, 70,000-member Minnesota State Retirement System, have proposed a cost-of-living cut to 2 percent. The $14 billion Teachers Retirement Association would freeze retirement increases for two years, then cut them to 2 percent. The funds are also proposing slashing other benefits.

Betzold said the stock market is not going to take care of the problem. "They can't invest their way out of this thing," he said.

How did we get here? In the 1980s, the state cut contributions to the plans in order to save money. In the 1990s, it created a separate fund to share stock market gains with employees, and in some years increases were in the double digits.

But coupled with the benefit cuts, some funds will need more in contributions from both current employees and their government employers to make up shortfalls.

Contributions are split 50-50 between employees and the government, though the mix is different for public safety funds. That not only means more taxpayer dollars going into the funds, but for employees who haven't seen wage increases, it actually means a cut in take-home pay.

AFSCME Executive Director Eliot Seide said that the average AFSCME pension is $13,000 a year and pointed out that workers have taken furloughs and cuts to their hours, yet continue to support the fund — reluctantly this year. "Every time there's been an ask to step up and make these funds fiduciarily sound, we've done that," Seide said.

AFSCME's support came as good news to Minnesota's cities and counties. Already facing steep cuts in state aid, paying more into the fund without cutting benefits was not a prospect they were looking forward to.

Keith Carlson, executive director of the Minnesota Inter-County Association, said local government would still be contributing $12 million to $15 million into pension funds. "That's taxpayer's money," Carlson said.

Gary Carlson, a lobbyist for the League of Minnesota Cities, said he was pleased to see union support for the bills. "I think they now more fully appreciate the challenge that the funds face. It is bitter medicine," he said.

But for Seide, the issue remains emotional. Public employees have seen their contributions go up in recent years, and now they are seeing benefits cut. And they still are a frequent target for politicians. "This is one of the greatest work forces in the country. They are responsible. They are high quality. They are productive. They deserve to be praised, rather than demonized by the governor and some of these other right-wing extremists," he said.

New Mexico sheriff says ban on double-dipping will impair his ability to attract and retain

Double-dipping legislation: Sheriff: Law may sap court security

If retired officers quit courthouse posts over 'return-to-work tax,' Solano says, 'court will go lacking'

 The New Mexican  March 03, 2010 -

A new law meant to curb so-called "double-dipping" could seriously compromise security at state District Court downtown and at Santa Fe County Magistrate Court, Santa Fe County Sheriff Greg Solano said Wednesday.

The law, signed by Gov. Bill Richardson on Tuesday, aims to stop public employees from returning to work in government jobs and collect both a salary and a pension. Now a retiree in the Public Employees Retirement Association system will have to wait a year and give up their pension if they take another government job.

And while the approximately 1,500 state and municipal employees who already collect a salary and a pension won't have to quit, they will have to start paying into the PERA system again. The new payments will not increase the employee's pension after they quit.

"I call it a return-to-work tax," Solano said. "It's a direct pay cut."

Currently, five deputies and a sergeant work at District Court, and one deputy is posted at Magistrate Court. Four of those seven employees, who are all retired police or corrections officers, will have to begin contributing between 7 percent and 16 percent of the $18 to $23 an hour they currently make, he said. The county is figuring out exactly how much it will be, Solano said.

If all four of those deputies decide to quit rather than begin PERA contributions again, Solano said he can't afford to pull deputies off the street to work at the courthouse. Instead, he said he will operate the courts without much, if any, security. "The court will go lacking," Solano said.

If a deputy does quit, Solano explained, he could use their salary to hire another deputy. However, his policy is to hire only certified law enforcement officers, which have become harder and harder to come by and require a year of training. In addition, he said, it's hard to get young deputies to work at the courthouse as opposed to working the streets.

The first position to go will be the deputy assigned to Magistrate Court, he said, which isn't legally required. At state District Court on Catron Street downtown, the two remaining deputies and one sergeant will be ordered to concentrate on transporting and guarding prisoners, Solano said.

"I'll be honest with you," Solano said, "they will be doing transports. There will be no security. If I lose half (the deputies), there's no way I can do transports and security."

Solano said that might mean having no one available to man the security checkpoint at the courthouse's front door.

"It could pose serious problems at that courthouse," he said. Solano pointed out that deputies got into a shootout with a suspect in front of the courthouse in the mid-1980s, and a lawyer was shot dead on a sidewalk near the courthouse in 1999.

District Judge Michael Vigil, who is chief of security at the courthouse, called the possible lack of security "frightening."

"The number of prisoners brought to this courthouse could not be safely done with three deputies," he said. "We're stretching it now with the people we have. Reducing it to three is a recipe for disaster." Vigil also said the double-dipping bill could affect bailiffs at the courthouse, many of whom are retired law enforcement officers.

Sgt. Vanessa Pacheco, security supervisor at the courthouse, said deputies transport between 300 and 600 prisoners a month to the courthouse. In October, deputies transported 306 inmates to the courthouse from Santa Fe County and 29 others from outside the county, according to statistics furnished by Pacheco. During the same month, deputies arrested 113 people at the courthouse for warrants and other reasons, the statistics say.

Deputies also must pick up prisoners arrested around the state on local warrants, keep peace in the courthouse and transport defendants newly sentenced to prison, she said. "There is no possible safe way to effectively operate and do what we're assigned to do," Pacheco said.

Deputy Dan Nava, 57, worked nearly 23 years for the Santa Fe Police Department and has worked at the courthouse for nine years. He said he is weighing his options and might stay on because he is guardian for his 14-year-old grandson and needs the benefits. Still, if he has to pay 16 percent of his salary, he said he might look for other solutions.  "I don't get anything for that money," he said. "I'd be paying it out and it's just gone."

Nava said he'd be worried if security went lacking. "People who come to this courthouse are not here to have a good time," he said. "They're here because they have a problem."

The new law will apply to government employees who retire after July 1.

Backers of California pension ballot initiative abandon effort to gather signatures

Measure to roll back public pensions is abandoned

February 24, 2010 LA Times (blog)  Shane Goldmacher

Short on cash, backers of a proposed ballot measure to scale back government worker pensions in California are suspending their efforts to qualify for November election.

Supporters of the initiative had to gather 694,354 signatures of registered California voters by June 14 -- a task that was expected to cost $2 million. But the money never materialized. Marcia Fritz of the California Foundation for Fiscal Responsibility told the Sacramento Bee that hopes have disappeared that Gov. Arnold Schwarzenegger or GOP gubernatorial candidate Meg Whitman would help raise money.

"The governor felt he'd be a hindrance to us," Fritz said. "Meg is not supporting us. That's pretty much it."

Atty. Gen. Jerry Brown, a Democrat expected to run for governor, last month gave the measure a title and summary that GOP consultants believed would hinder the measure’s chances to succeed.

Fritz said in a statement that if the Legislature does nothing to rein in pension costs this year, her group would be back with a new pension measure.

San Francisco Board of Supervisors places measure on ballot to reduce pensions and raise employee contributions

S.F. ballot measure would save pension costs

San Francisco Chronicle   March 3, 2010

San Francisco voters will consider a June ballot measure that would save the city $400 million over the next 25 years in pension costs. The plan, approved Tuesday on a 9-1 vote and backed by Mayor Gavin Newsom, would force the city to set aside more money to help fund the pension system in future years, leaving less money to spend in the short term on services and raises.

It also would require San Francisco's newly hired public safety workers to increase their pension contribution to 9 percent from 7.5 percent.

The provision that drew the most attention, however, was a change to the way that pension costs are calculated. Currently, pensions are based on the pay earned in the last year of work. Under the ballot measure, pensions - for future employees, not those already on the payroll - would be based on the average from the last two years of employment.

That could mean smaller retirement checks for some employees if they are given a promotion or raise on their way out the door, a practice known as "spiking."

Supervisor Sean Elsbernd, who introduced the pension-reform package with Newsom, had pushed for a worker's pension to be based on the final three years of employment. But that idea was opposed by city employees' unions, which argued that the lowest-wage workers would be hit the hardest.

In the end, the board majority, including Elsbernd, backed the two-year alternative plan put forth by Supervisors David Campos and Eric Mar.

Supervisor Chris Daly, who favored placing a pension measure on the November ballot, voted against the plan.

Elsbernd said his proposal would have reduced pension costs by more than $600 million and done more to help the city tackle the escalating pension costs that will "be somewhere well north of $10 billion" over the next 2 1/2 decades.  "Is it a baby step forward? Yes. But is it as good as we could have done?" Elsbernd asked. "Nowhere near."

But backers of the compromise plan said they were able to secure the backing of labor - albeit reluctant - which will be helpful to win passage at the ballot. "I don't think that labor can come to this chamber today and say that they're happy they have to be here. ... It's something that recognizes that we need to face this issue head on," Campos said.

Tim Paulson, executive director of the San Francisco Labor Council, agreed with that assessment.  "It is not something the unions wanted to do very heartily," Paulson said. "But we really feel that right now is the time to put this money in the bank and get pension reform put together ... in order to balance the budget."

Even if voters approve the package, the two-year averaging plan would not be a done deal for about 2,000 city employees now covered by the state pension system, known as CalPERS. Among them are sheriff's deputies, probation officers, institutional police officers and some members of the district attorney's staff.

CalPERS allows pensions to be based either on the last year of employment or the average of the final three years. Changing the calculation to two years for San Francisco would require approval by the Legislature, the governor and the CalPERS governing board.

No other jurisdiction in California uses the two-year formula.

Alaska legislators urge governor to use proceeds from expected actuarial lawsuit settlement to re-establish DB plan

Governor Urged to Use Mercer Proceeds to Fund Pensions for Public Employees

March 02, 2010 Sitnews  Ketchikan

(SitNews) - Senator Hollis French, D-Anchorage, and Senator Dennis Egan, D-Juneau, wrote Governor Sean Parnell, asking him to help re-establish the "defined benefits" system of retirement for public employees.

"Alaska is the only state in the union that doesn't offer our public employees defined retirement benefits," said Senator French. "Our recently-enacted 'defined contributions' system is not fair to our workers, and is bad for the economy."

Previously, public employees who contributed to the Public Employee Retirement System (PERS) or the Teacher Retirement System (TRS) were provided a pension in their retirement years from those systems. This ended when legislation passed to eliminate that benefit for all new public employees. Under the new plan, workers now pay into retirement accounts, and take on all the risks of managing investments.

"Retirees contribute more than $1.5 billion a year to Alaska's economy," said Senator Egan. "The defined benefits system encouraged employees to stay in Alaska and retire here. That's not the case with the new program."

Senator French said that one of the reasons given by supporters of changes to the system was that the state was facing a large liability in the future. He said a big piece of that liability was created by the flawed work of Mercer, the state's former actuarial adviser. The state filed suit against the company.

French and Egan said the potential settlement presents an opportunity for Alaska to restore the prior defined benefits system and bring the state in line with the rest of the nation. "It appears there will be a large settlement in the not too distant future," French and Egan told the Governor in their letter. "We urge you to use the proceeds from the Mercer lawsuit as a down payment on a return to a secure retirement for public employees."

 Source of News: Senate Bipartisan Working Group legis.state.ak.us

Press release: Washington Governor announces appointment of new chief operating officer to state investment board

For Release: Immediate Media Contact: Governor's Communications Office

Date: March 2, 2010 Phone: 360-902-4136

OLYMPIA - Gov. Chris Gregoire today announced that Victor Moore, the director of the Office of Financial Management, has accepted an appointment as chief operating officer with the Washington State Investment Board. Moore has been the head of the state budget office since Gregoire began her first term in January 2005.

"Victor has served me and the people of the state of Washington with uncommon dedication, keen intelligence and quiet strength," Gregoire said. "His steady hand and calm head have prevailed over a number of rough patches. I will truly miss his counsel and good humor as he embarks on the next phase of his career, and wish him every success."

"The WSIB and the beneficiaries of the funds we manage are extremely fortunate to have someone with Victor's deep knowledge, credibility and experience to help us manage the functions that are critical to maintaining the transparency, accountability and integrity of this organization," said WSIB Executive Director Theresa Whitmarsh.

The State Investment Board is responsible for managing investments of more than $70 billion in public assets for Washington's pension plans for public employees, teachers, school employees, law enforcement officers, firefighters and judges. The WSIB also manages investments for several other public funds that support or benefit the state's industrial insurance programs, colleges and universities, developmental disabilities and wildlife protection.

As the WSIB's chief operating officer, Moore will oversee investment accounting, risk management, compliance, trade settlement and cash management. In addition, the COO supervises human resources, information technology, budget, finance and other administrative services.

"It's been my privilege and honor to work for Governor Gregoire for the past five years," Moore said. "Together with other members of her administration, we are building a record that we can be proud of. I am grateful for her support and that of the outstanding employees at the Office of Financial Management. I look forward to new challenges at the State Investment Board and to joining another top-notch organization."

Moore began his public service career with the budget office at The Evergreen State College in 1980. In 1983, he began work for the Legislature as a budget analyst for the Senate Ways & Means Committee. He then worked at the Commission for Vocational Education in 1984 and OFM in 1986, when he served as the senior budget assistant to the governor in the areas of transportation and capital construction. In 1991, Moore was named staff coordinator for the House Appropriations Committee. He served in this position through the end of 2004, except for a brief period when he served as director of administration and government relations for the Administrative Office of the Courts.

Moore's appointment is effective mid-April, when his work associated with the legislative session, including the review of bills for the governor's action, is expected to be concluded. His annual salary will be $198,500.

Gregoire also announced today that Moore will be replaced at OFM by her legislative director, Marty Brown. Prior to joining the Governor's office, Brown served as OFM director from 1999-05. He was legislative director and deputy chief of staff for Gov. Gary Locke, and legal counsel, leadership counsel, staff director and secretary of the Washington State Senate.

"Since I took office, Marty has been one of my most trusted advisers," Gregoire said. "With his experience running the agency, and his deep understanding of the Legislature, we will continue the tradition of excellence at OFM."

"I'm excited to serve the governor and the state in this role," Brown said. "We have a great team, and I know together we can address the many budget challenges we face."

Press release: North Carolina State Treasurer announces members of new Investment Advisory Committee

FOR IMMEDIATE RELEASE

Contact: Heather Franco (919) 807-3132   February 24, 2010

TREASURER COWELL ANNOUNCES INVESTMENT ADVISORY COMMITTEE

Expert Group will Advise on Pension Fund Investments and Policies

WINSTON SALEM – State Treasurer Janet Cowell announced the members of the newly formulated Investment Advisory Committee (IAC) for the North Carolina Pension Fund today.  Standing beside the Committee’s new Vice-Chair, John Medlin, Cowell welcomed the members and outlined the importance of their new roles.

The General Assembly established the Investment Advisory Committee in 2001 to advise the State Treasurer on managing investments for the Retirement Systems. In 2009, the legislature passed the Treasurer’s Governance and Transparency Act allowing for the expansion of the IAC from five to seven members, increasing the financial expertise available to the Treasurer for investment decisions.

The Committee members include: Steve Jones, former Dean of UNC Kenan-Flagler Business School; Dr. Harold Lee Martin, twelfth Chancellor of NC A&T State University; Donald Lee Tarkenton, Manager for Raymond James Financial Services; Neal F. Triplett, President of Duke Management Company; and Courtney A. Tuttle, Managing Director of Investment Banking at Jefferies & Company.

Medlin worked with the Wachovia Corporation for 41 years and served as Chief Executive Officer for 17 years. He has won numerous awards, such as American Banker’s award as the most admired CEO in banking for 1991 and 1992, and its Lifetime Achievement Award in 2002. Additionally, he received the Distinguished Citizenship Award of North Carolina from the Winston Salem Chamber of Commerce.

“North Carolina is fortunate to have John Medlin and this expert group working to protect our pension fund,” stated Cowell. “The collective experience and integrity that this Committee represents will be invaluable in maintaining the long term stability of the fund for North Carolina’s public servants.”

In addition to announcing the Committee, Cowell referenced the IAC Charter and Code of Ethics that preserve integrity and maintain high ethical standards in conducting business. These guidelines were created to ensure that the Committee is dedicated to protecting the interests of the Retirement Systems.

“I appreciate the Treasurer’s dedication to increasing transparency and strengthening investment oversight of the Pension Fund that supports our public employees,” stated Medlin. “I am honored to serve as Vice-Chair for the IAC.”

###

The North Carolina Retirement Systems, the formal name for the pension fund, is now the tenth largest public pension fund in the country. It provides retirement benefits and savings for more than 820,000 North Carolinians, including teachers, state employees, firefighters, police officers, and other public workers. For more information visit www.nctreasurer.com

Member Biographies, Investment Committee Charter, and Code of Ethics are posted on the website. http://www.nctreasurer.com/dsthome/OfficeOfTheTreasurer/Transparency/BoardsAndPublicMeetings

Maryland legislator criticizes pension staff travel

'Bureaucracy gone wild,' Della calls pension staff trips abroad

Baltimore Sun February 26, 2010

A Baltimore state senator criticized the state's retirement agency Thursday for spending $173,000 on travel in the past year, calling it a "bureaucracy gone wild" because it sent staff members on 61 trips last year to such far-flung destinations as Hong Kong, Paris, Tokyo, Zurich, Athens, Frankfurt and Toronto.

"Here we are in this terrible situation with the state's budget," said Sen. George Della, a Democrat. "In my mind, it is indicative of the mind-set that some people just don't get it."

Della showed colleagues a copy of a report of trips taken by the State Retirement and Pension System staff members that reveals they spent 137 days on the road in fiscal 2009. "This has been eating away at me," Della said. "You read something like this, and you are outraged." A hearing on the agency's travel is set for 9 a.m. today before the Senate's budget and tax panel.

Della's concern comes on the heels of a report by the Pew Center on the States ranking Maryland as having one of the nation's worst-funded pension systems.

Michael Golden, a spokesman for the retirement system, denied that the travel is lavish, saying it is critical for members of the 11-person investment office to check on funds in which the state has money.

The state's $30 billion pension system invests with 180 managers, he said. "We would be irresponsible not to be sure those large investments are being looked over very carefully by our investments staff," Golden said.  The trips included 29 meetings with prospective money managers, 27 meetings with current managers and 24 conferences, according to legislative analysts.

Pension experts said the trips are not unusual, and serve a critical role. "You can not just sit in your office. You need to confirm that the [money] manager is who and what they say they are," said Keith Brainard, the research director for the National Association of State Retirement Administrators. "The fact that somebody is making an overseas trip does not by itself suggest imprudent activity."

Golden said that each trip is approved by R. Dean Kenderline, the executive director of the state's system. The six foreign trips, he said, were taken primarily so investment staff could attend advisory board meetings held by investment firms in which the pension holds a large stake.

Employees traveled to Hong Kong for six days in October 2008 to attend an advisory board meeting hosted by the private equity firm MGPA. Six months later MGPA held another board meeting in Zurich that state employees also attended. The retirement system invests $100 million with MGPA, Golden said. Staff then traveled to Athens and Frankfurt to meet potential new managers.

Other trips included a six-day stay in Tokyo and a four-day stint in Paris. Both trips, Golden said, were for meetings with companies in which the state has hundreds of millions of dollars invested.

Editorial: Pew report shows benefit of Arizona’s constitutional requirement to make required contributions

Another View: State deserves gold for planning

The Arizona Republic, Phoenix, Feb. 18, 2010

 If finances were an Olympic event, Arizona would be showing off a medal. Yup, the state that can't balance its own budget is a national champion in one major event: financial planning for its state retirement system.

In a report released today, the non-profit Pew Center on the States identifies Arizona as "a national leader," one of the few states that is putting aside enough money for future retirees' pensions and benefits.

Other states are so far behind that the report is called "The Trillion Dollar Gap," which Pew calculates is the difference between funding and future obligations.

Twenty states have saved nothing at all for retiree benefits.

The secret to our foresight and discipline is the Arizona Constitution. It requires the state to contribute to the retirement funds every year. The amount is calculated to adjust for investment losses or gains over a period of years, keeping the funding balanced over the long term.

"Arizona stands out," says Pew research director Kil Huh. "It's ahead of the curve."

Arizona has shown it can be a contender. Next event: the state budget.

Opinion: Texas pension funds are in good condition

Texas pension funds in good shape

By MAX PATTERSON  HOUSTON CHRONICLE  Feb. 28, 2010

Recent headlines from New Jersey and California indicate problems for some state public pension funds that manage the retirement investments and benefits of public school teachers, police, firefighters, municipal and other employees. But headlines tend to paint with a broad brush: There's a much brighter picture in Texas.

The condition of Texas public pension funds is much better than most, due to the effects of the overall structure of Texas' public pension systems, one that is governed by local control of investment decisions and benefit levels. Texas is different from California and New Jersey, as well as many other states.

Last week the Pew Center on the States released a study indicating there is a $1 trillion gap between money that the states have on hand to pay for commitments to the public employees' retirement and health care benefits. (Texas local systems do not provide health care benefits.) Also last week, New Jersey Gov. Chris Christie fueled the fire of public concern when he noted that the state has some $90 billion in unfunded pension and health care benefit costs. And last month the Wall Street Journal carried a piece noting how California's state employees are due some $63.5 billion in benefits that aren't currently funded, a situation caused by a 2,000 percent increase in pension costs over the last 10 years.

The situation is different in Texas.

First, Texas doesn't have one massive pension fund that's administered at the state level. Our state has five statewide systems and dozens of local pension boards that determine benefits of their workers and then make investment decisions for them. The local system approach ensures that people in one city or town aren't on the hook for the retirement benefits promised to workers by another city or town.

Texas does have four large, statewide funds but most cities and towns have local boards of active employees, retired members and citizens (of which many are professionals in the community) making the major investment decisions and benefit determinations for their neighbors. The vast majority of local systems are managed at the local level. But benefits and contributions are embedded in state law, which is an added oversight. This structure creates a more direct relationship between public employees and the taxpayers who fund their retirement. Because benefits are more closely tied to the city's overall financial picture, benefits are less likely to go beyond the means of a local government's ability to pay them.

And rightfully, Texas lawmakers aren't keen on the idea of statewide bailouts of individual systems that promise too much or don't deliver on investment performance. Therefore, the local pensions must become very good at making sound investment decisions to make expected payments to retirees. The Texas Association of Employee Retirement Systems (TEXPERS) helps local plans educate their trustees about their investment options and the actuarial realities of their individual systems.

Local boards' decision-making seems to be going well. A recent TEXPERS survey of 55 members indicates that investment performance for the 15-year period ending in September returned 8.3 percent, just a notch above the 8.2 percent mean return that actuaries deem necessary. The average return outperformed the 8.0 percent Wilshire Median Public Fund for the same period, indicating that investment decisions are turning out favorably for many plans across Texas.

In its January report, the Texas Pension Review Board (PRB) showed that, taken as a whole, Texas' public employee pensions are “underfunded” by about $38.5 billion, meaning the plans will need to make up this amount through investment performance or contributions — probably more of the latter — over the next 10 to 40 years. This is much less than California or New Jersey, the current problem states.

The PRB report also indicates that the local pension systems' unfunded liabilities total only $6 billion, a very manageable amount, especially as the economy continues its recovery.

Yes, there may be some situations where taxpayers in some cities will need to add more money to their employees' retirements. But it's our observation that many of the cities that are falling behind were those that weren't actually paying enough into their employees' retirement funds on a schedule that could give the pensions a chance to grow their returns using prudent investments. They're playing catch-up with previous decisions not to contribute all that they should have.

Patterson is the executive director of TEXPERS.

PlanSponsor Magazine’s Plan Sponsors of the Year include Texas Municipal Retirement System and Ohio deferred comp plan

Announcing: Our Plan Sponsors of the Year

March 1, 2010 (PLANSPONSOR.com) -PLANSPONSOR today proudly announces the 2010 winners of its annual Plan Sponsor of the Year awards across four distinct workplace segments:

With demonstrable results, each of these plan sponsors has distinguished itself by making a consistent and thoughtful commitment to its workers and their retirement security, said Nevin E. Adams, Editor-in-Chief of PLANSPONSOR magazine.

This year's Plan Sponsors of the Year are:

Corporate sector: NV Energy, Inc.--Las Vegas, Nevada

Nonprofit/403(b): Legacy Health Systems Portland, Oregon

Public Sector/DB: Texas Municipal Retirement System  

Public sector/457: Ohio Public Employees Deferred Compensation Program

The Plan Sponsors of the Year will be recognized at PLANSPONSOR’s annual Awards for Excellence dinner in New York City on March 25, and also will be featured in the March issue of PLANSPONSOR magazine. In addition to recognizing best-in-class standouts in a variety of categories, on that night, PLANSPONSOR also will announce the winners of its annual Retirement Plan Adviser and Retirement Plan Adviser Team of the Year awards.

Each year, the editors of PLANSPONSOR magazine, the nation?s leading information resource on workplace retirement plans, honors those employers that demonstrate leadership in providing a more secure retirement for workers.? Strong investment performance, rigorous corporate governance, and an enduring commitment to participant education are the hallmarks of distinction of PLANSPONSOR?s Plan Sponsor of the Year awards.

Last year's winners included Nationwide Mutual Insurance Company, WellSpan Health, the West Virginia Teachers' Retirement System, and the City of Los Angeles.

Previous recipients have included M. A. Mortenson Company; the YMCA Retirement Fund; the Missouri State Employees Retirement System; the State of Hawaii; Oregon Public Employees Retirement System; American Airlines; IBM; the United Methodist Church; Gary Amelio, Executive Director of the Federal Retirement Thrift Investment Board; David Bronner, Head of the Retirement Systems of Alabama; the FDNY Pension Fund; and General Motors Asset Management’s Allen Reed.

Opinion: Public pension funds are run by “dummies”

Nation's $2.3 Trillion In Public Pensions Run By Dummies

How-to book illustrates sad state of public money management.

Ted Siedle  Forbes Magazine  2/22/10

Here's a scary financial fact: The nation's $2.3 trillion in state and local pension assets are currently a half-trillion dollars short of what they'll need to pay out promised benefits. Here's an even scarier financial fact: These funds are overseen by people who lack basic money management skills, who are frequently swayed by political pressure--and who are counting on hiking your taxes to fill the breach if they come up short.

The massive under-funding was highlighted in a report from the Pew Center on the States last week. It estimated that state governments face a $1.5 trillion gap between the pension, health care and other retirement benefits promised to public employees and the money set aside to pay for them.

The $2.3 trillion in pension assets alone is $500 billion short of what's needed, Pew figures. These estimates of funding gaps are likely on the low side, because they don't account for the massive investment losses pension funds suffered during the second half of 2008.

The Pew report also doesn't address how much is being lost to ill-informed investment choices. Just how ill-informed the nation's public pension overseers are was, oddly, highlighted by someone who set out to educate them three years ago.

"Public Fund Investing for Dummies," a book that is as timely today as ever, is the work of Jim Koetting, a money manager at Public Fund Investment Strategies in St. Charles, Mo. The 44-page work is a no-nonsense member of the well-known Dummies series that purports to educate the nation's public pension officials on the ABCs of sound financial management--a task that the author himself concedes is a chilling reflection of the state of public pension fund management.

"If you polish nails or shampoo dogs in most states you have to be licensed, but there are no licensing or educational requirements whatsoever to manage a $100 million public fund," says Koetting. "It makes no sense."

The book's introduction reminds public fund trustees and employees that they have an important job managing "other people's money."

To think this is self-evident is to misunderstand who's riding roughshod over public pensions. The average public fund trustee, it bears noting, was appointed not because of his financial acumen but because he is a political or public union heavyweight--or because nobody else wanted the job.

"Face it," writes Koetting, "finding better ways to invest your funds might not be at the top of your to-do list." His advice: Write a plan, build a strategy and find competent help in order to maximize opportunities in a public budget as well as picking investments to match that strategy." Among the factors he says prevent public pension officials from finding better ways to invest other people's money:

1. You don't have time
2. You don't have investment education or background
3. You're stuck in a rut
4. Someone else handles "that"
5. Poor habits
6. You procrastinate
7. You're making the wrong assumptions
8. Your investment policy is out of date
9. You have no written investment plan

Ouch. Are people operating on this level the ones you think should be entrusted with other people's money?

Not to worry. The next 40 pages explains some basic investments, like bonds, commercial paper and money market funds. The carnage left behind by dummy public fund investing are legion.

One example came to light last week when a state audit of the North Carolina state treasurer's office found million-dollar and billion-dollar mistakes in reporting investment results for the most recent fiscal year. The audit said the errors occurred "because new staff prepared the information, and their work was not effectively supervised and reviewed." Maybe these dummies should have read the book before going to work on a multi-billion dollar portfolio.

Back in 2007, when Koetting put his book on sale at the Government Financial Officers Association (GFOA) national conference, his booth was inundated with thousands of requests for copies. Perhaps taxpayers should take comfort in the book's popularity. Self-awareness is, after all, a precursor to improvement.

I, for one, still cling to the belief that certain tasks require skill and training. Handling trillions in public funds is one task that, in my opinion, should not ever be left to dummies.

In Kentucky a proposal has been floated that would require two of the three members appointed by the governor to the Kentucky Retirement Systems board to possess 10 years of "investment experience." Defining what constitutes "investment experience" apparently is contentious. If passed, the new requirement would be one of the few of its kind.

If all that weren't bad enough, the neophytes overseeing public pension plans are not subject to comprehensive federal or state regulation or to the strictures that the Securities and Exchange Commission imposes on private sector money managers. Making matters worse still, Wall Street's most talented hucksters regard public pensions as possibly the dumbest institutional investors around and compete fiercely to foist on them the latest in over-priced money management services and toxic assets.

Whoever came up with the idea that trillions of dollars should be handed over to funds managed by political hacks and government employees--with taxpayers on the hook for any deficits--must have been out of their minds. It was a prescription for disaster, and a disaster is what we face.

Edward Siedle is a former SEC attorney and the president of Benchmark Financial Services.

Keith Brainard response to “Dummies” article

Forbes Magazine sponsors a forum for readers to respond to online articles, such as the one above. Below are excerpts of an exchange between Keith Brainard and Ted Siedle, author of the story. All reader responses to this article are accessible here:

http://www.forbes.com/2010/02/22/public-pension-fund-personal-finance-siedle-underfunding.html

Keith Brainard wrote on 2/23/10: Although I respect the work Mr. Siedle has done in advancing transparency and accountability among public pension funds, he is off-base on this one. According to the latest data from Callan Associates, a major investment consulting firm, public pension fund investment returns for the 10 years ended 12/31/09 EXCEED those of corporate pension funds and foundations and endowments. It is true that many public pension trustees lack investment acumen. However, public pension funds covering the vast majority of public employees operate under sound investment policies and in consultation with skilled investment consultants. There is always room for improvement, and a growing number of states are taking action to require more trustee qualifications and education. But the theme of this article--that public pension assets are incompetently invested--is unsupported by the facts.

Ted Siedle (the author) wrote on 2/25/10: Of all the associations educating public funds, none does it better than the National Association of State Retirement Administrators. I agree with comments from Keith Brainard, NASRA's research director, that skilled investment consultants can provide meaningful guidance to public fund boards lacking investment backgrounds-provided, however, these pension advisers are free of conflicts of interest and operate with integrity. Indeed, a recent GAO econometric analysis detected lower annual rates of return for pensions with conflicted consultants. Thus, it is critical that public fund boards closely scrutinize the consultants they retain. I do not know whether the data from Callan Associates (a firm that enjoys a remarkably large public fund following) Mr. Brainard cites conclusively establishes public pension fund investment returns exceed those of corporate pensions and others. I doubt it. Further, I do know that Callan was the investment consultant to the $20 billion Ohio Bureau of Workers Compensation fund that quoted stellar 10-year investment performance later found to be wholly without basis. In 2007 the SEC instituted Cease and Desist proceedings against Callan for failure to disclose conflicts of interest. A 2004 Forbes article by Neil Weinberg, "A Bribe by Any Other Name," discussed the firm's conflicts at length. These are facts a superficial due diligence would reveal. I encourage NASRA to examine whether public fund trustees, perhaps due to their lack of investment training, often rely too heavily or even exclusively upon advisers selected without adequate scrutiny.

Keith Brainard wrote on 3/4/10: I think Callan's results speak for themselves, but in case they don't, Callan's results are corroborated by the TUCS (Trust Universe Comparison Service) figures maintained by Wilshire Associates, another major investment consultant. TUCS shows for the five years (as far back as they have provided data to me) ended 12/31/09, median returns of public funds exceed the returns of corporate funds and was lower than returns of foundations & endowments by a scant 0.14%. Considering that foundations & endowments operate with fewer restrictions and invest far more in private equities and other alternative investments, I think the public fund record is solid.

Opinion: Hedge funds are going mainstream

Not Quite So Exotic

Hedge funds are hitting middle age.

By Barton Biggs | NEWSWEEK  Published Feb 26, 2010 From the magazine issue dated Mar 8, 2010

When the financial world fell apart in 2008, hedge funds started to run for cover. Huge losses were rumored, the Madoff Ponzi scandal unfolded, a thousand hedge funds closed, and a number of large and famous funds raised "gates," or rules that block investors from getting their money back, at least for a while. Others turned to "side pockets," a trick that allows funds to move money-losing bets out of their portfolios for performance reporting. All this evasion enraged investors, and the demise of the business was forecast.

Today the industry is not dead, just growing old and fat. The post--crisis demands for reform have yet to impose clear reporting requirements on hedge funds, so the performance numbers remain very nebulous. But, in general, the biggest funds have delivered the best performance over the last 15 years: funds of $4 billion and above compounded at 15 percent per year, net of all fees. The smaller survivors delivered 12 percent, but including the dead funds in the calculation reduces the returns to just 6 percent. Over the same period, the S&P 500 Index returned 7.4 percent. An obvious conclusion is that unless you're with the biggest and brightest, you might as well buy an index fund. Of course, the real shocker came in the annus horribilis of 2008 when the median net performance was a loss of about 20 percent. There again, the big funds trumped the smaller ones.

Indeed, to the extent that the industry is growing again, it's doing so in a more conservative way, which could help foster market tranquility. The group Empirical Research Partners has assembled a database of the monthly performance histories of the majority of today's largest hedge funds, concentrating on volatility. It segmented the funds into high-volatility and low-volatility groups. Over the course of the last decade, the first group produced returns of 15 percent a year, but lost money in 34 percent of all the months. The second cohort generated 11 percent, but lost money in only 11 percent of the months. Guess what? The new money is mostly going to the low-volatility, lower-return group.

It's no surprise, given the number of investors who have become disenchanted with the industry. In the first half of 2009, rich individuals (who are the biggest investors in hedge funds) pulled out 40 percent of their money. This group believed hedge funds would actually make money in a bear market, because they had in 2000–03. These investors suffered from excessive expectations, and often had used funds of funds, which added another layer of fees. By contrast, the pension funds, endowments, and foundations that used specific hedge funds as an asset class in their portfolios did better.

Then along came the rally of 2009. The Dow was up 21 percent, and the S&P 500, 26 percent. Hedge funds did well, with the mean up 23 percent. For the last two years, according to Morgan Stanley, the hedge-fund mean is up 6 percent, the S&P is down 20 percent, the UBS Commodity Index is off 25 percent, the international index EAFE is off 15 percent, and private equity and real estate are still being sorted out. In other words, hedge funds worked better than almost all other asset classes.

So what's happening now? Wealthy individuals are still licking their wounds, and little money is going into traditional long-only equity mutual funds in the U.S. and Europe. However, money is starting to selectively flow back to hedge funds, particularly from institutions around the world. Startups that were all the vogue during the glory years are getting little money, and medium-size existing funds are seeing only a trickle. Instead, the flows are to the giant, lower-volatility funds, which could make the business more concentrated and professional.

Warren Buffett has famously said that he would take a bumpy 14 percent over a smooth 9 percent to 10 percent every time, almost suggesting it was irrational not to if you were a long-term investor. However, after the last decade (in which there were two killer secular bear markets with 40 percent–plus peak-to-trough declines), fiduciaries—who, by definition, should be long-term investors—are unwilling to ski the moguls and want smooth runs at a lower speed. Since pension funds have about 3 percent of their assets in hedge funds (and endowments and foundations, maybe 6 percent), there's obviously room for further growth, but mostly in the plain-vanilla end. The hedge-fund industry ain't dead yet; it's just going mainstream.

Biggs is managing partner of Traxis Partners hedge fund in New York.

Excerpts from Warren Buffet’s annual letter to shareholders

Warren Buffet, Chairman and CEO of Berkshire Hathaway, Saturday released his annual letter to shareholders. Below are some excerpts:

We have long invested in derivatives contracts that Charlie (Munger, Buffett’s partner) and I think are mispriced, just as we try to invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998. The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it.

It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.

* * * * * * * * * * * *

In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees –the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term. The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

…

I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its real value – had a takeover bid for the acquirer instead been the subject up for discussion.

When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”

…

At 86 and 79, Charlie and I remain lucky beyond our dreams. We were born in America; had terrific parents who saw that we got good educations; have enjoyed wonderful families and great health; and came equipped with a “business” gene that allows us to prosper in a manner hugely disproportionate to that experienced by many people who contribute as much or more to our society’s well-being. Moreover, we have long had jobs that we love, in which we are helped in countless ways by talented and cheerful associates. Indeed, over the years, our work has become ever more fascinating; no wonder we tap-dance to work. If pushed, we would gladly pay substantial sums to have our jobs (but don’t tell the Comp Committee).

Nothing, however, is more fun for us than getting together with our shareholder-partners at Berkshire’s annual meeting. So join us on May 1st at the Qwest for our annual Woodstock for Capitalists. We’ll see you there.

February 26, 2010 Warren E. Buffett

Chairman of the Board

P.S. Come by rail.

Read the full letter here: http://www.berkshirehathaway.com/letters/2009ltr.pdf

Securities class actions create incentive for law firms to wine and dine

Paying Public Pensions To Sue
  Peter Beller  Forbes Magazine  March 15, 2010 issue (posted 2/27/2010)

What with the recession and public anger over Wall Street pay, last year wasn't much for corporate partying. Still, class action law firm Bernstein Litowitz Berger & Grossmann found the money to host a few hundred existing and prospective clients at a three-day conference at New York City's Palace Hotel in October that was lavish even by bubble-era standards. During the day attendees were entertained by Colin Powell, Arianna Huffington and Ben Stein as their spouses and kids received a backstage tour of Radio City Music Hall. Evenings included a United Nations dinner and a Broadway performance of West Side Story.

Who, you might wonder, were the lucky guests? Many were teachers, cops and firefighters on their first New York visits. Such officials have their hands on the purse strings of the nation's public pension funds. That, in turn, makes them vital to Bernstein Litowitz and the other securities class action firms, which have created a multibillion-dollar business lining up public funds as plaintiffs to sue publicly traded corporations whose stocks don't do well.

Securities class actions yielded $3.1 billion in settlements in 2008, the most recent year for which data are available, says Cornerstone Research. That figure is likely to jump, given the egregious corporate behavior, imagined or otherwise, that fed the recent financial crisis. Plaintiff lawyers walk away with one-quarter to one-third of a settlement pot. Investors divvy up what's left, in proportion to shares held. Here's a typical case.

Xerox shares fell 16% in 2000 after the firm said it was being investigated by the Securities & Exchange Commission for accounting problems. Eight years later Xerox and its accounting firm, KPMG, settled the case for $750 million, with $120 million going to lawyers. The few shareholders who bothered to claim a slice received 46 cents a share. Collectively, of course, such lawsuits do not make investors better off; the corporations they own pay for them, either directly or via insurance premiums.

Because the law encourages courts to hand class action work to firms with the biggest clients, lawyers are in an arms race to line up suit-happy state, local and union pension funds. That has led to all manner of wining, dining and dishing out of cash.

In the analogous business of hiring money managers to invest pension assets, the game is called "pay to play" and has attracted some unwanted attention. The California Public Employees' Retirement System was recently ensnared in a scandal involving former directors who received millions of dollars from money managers to line up contracts with the fund. New York Attorney General Andrew Cuomo indicted a money manager and a middleman last year for allegedly paying $30 million in illegal kickbacks, gifts and campaign contributions to win business with the state pension fund, the nation's largest after Calpers.

Yet class action firms continue to engage in a similar quid pro quo that's perfectly legal with impunity. In New York the law firms' largesse has included $200,000 in campaign funds for none other than Attorney General Cuomo, who is expected to run for governor this year. Bernstein Litowitz partner Sean Coffey announced to the pension officials gathered in New York plans to replace Cuomo as state attorney general. Bernstein Litowitz's partners, including Coffey, gave tens of thousands of dollars to North Carolina pols while their firm lobbied for state pension work and to officials in Louisiana, where it happens to represent some big state funds.

In Florida reports that attorneys gave $850,000 to politicians overseeing the state pension shamed officials into capping class action legal fees at $50 million per case. Bernstein Liebhard & Lifshitz, a crosstown rival of Bernstein Litowitz, is no longer seeking state pension fund work.

Conferences, at least, bear the patina of educational merit and an opportunity to curry favor with the officials who help pick legal counsel. Coughlin Stoia Geller Rudman & Robbins hired Bill Clinton (who reportedly charges $150,000 and up) to appear at a seaside event at San Diego's Hotel del Coronado last September.

This forum on "The Future of Corporate Reform" had pension officials enjoying an oceanside clambake, closing day at Del Mar racetrack, a ride on an America's Cup-winning vessel, balloon rides and a four-course French banquet. Coughlin Stoia's conference partner: the Corporate Library, a for-profit governance watchdog. Coughlin Stoia insists clients hire it for its winning record. The Corporate Library characterizes the conference as "an intensive, engaging and informative event that combined many hours of speeches, panels and dialogue with opportunities for informal conversation."

The money for such events comes from one of two places: law firms and others seeking favor, or the public funds themselves. Sometimes it's a mix. The Global Shareholder Activism conference, cosponsored by Grant & Eisenhofer, had a 1,400-euro rack rate for two days in Paris in the spring of 2008. A meeting brochure cites discounts for public pension trustees and says "call for details" about complimentary tickets. Grant & Eisenhofer says it paid to be a sponsor and is unaware of the discounts that may have been offered to attendees.

Bernstein Litowitz and rival Barroway Topaz Kessler Meltzer & Check teamed up to sponsor last year's Guns & Hoses, a police and fire powwow, plus the Public Fund Boards Forum in San Francisco. The latter event ended outside a Monday Night Football game at Candlestick Park, where guests enjoyed a tailgate party featuring barbecue, single malt scotch and bouncers to keep out the riffraff.

Directors at the General Retirement System for the City of Detroit and the Detroit Police & Fire Pension Fund are frequent participants at litigation conferences, although the funds are the subject of a federal grand jury investigation into money losing investments linked to insiders.

Two years ago they blew through $380,000 traveling to 136 conferences. Ronald Gracia, a trustee of the general employees' fund, spent $105,000 on travel, including three trips to Singapore, according to the Detroit Free Press, which sued to get a look at the funds' expenses after staffers shredded most of them. Bernstein's New York conference was certainly popular: Detroit's pensions sent 15 people.

Firefighter and fund Chairman Jeffrey Pegg told FORBES he doesn't remember whether Bernstein Litowitz or his fund paid for the $500-a-night hotel rooms at the Palace, nor is he sure why the police and fire fund selected the firm a year ago to sue Wachovia Bank. "These law firms have been in place for years prior to me becoming a trustee," he says. "Obviously they went through some process."

At last autumn's event at least some funds paid $1,125 for their officials to attend. Bernstein Litowitz appears to have shelled out at least $300,000 on dinner and dancing in the UN Delegates Dining Room, dinner at the Sea Grill, speakers and Broadway tickets. What did the lawyers expect in return? The gratification of enlightening pension trustees, apparently. "We make it as educational as we can for our clients," says Alexander Coxe, the firm's marketing director. "Corporate America buys its way into legislation, and those same issues aren't raised."

A curious irony in all this flattery of pension officials is that the ostensible purpose of securities litigation is to keep corporate managers honest. Further ironies: Melvin Weiss and William Lerach, who created the class action racket at Coughlin Stoia's predecessor, both did jail time for illegally lining up clients. Former Bernstein Liebhard partner Menachem Lifshitz paid $4.75 million and was disbarred over allegations of tax evasion and lying about expenses and charitable donations.

Opinion: Research shows that financial regulations help markets

Protecting the Public Ends Up Helping Markets

Susan Antilla

March 3 (Bloomberg) -- If you still believe that protecting consumers from lying creeps who peddle financial schlock is bad for business, you’ve been spending too much time playing video games since you lost your job in the Great American Meltdown.

Not all of the creeps who sell payday loans, or subprime mortgages, or high-interest credit cards, are lying creeps, of course. Some of them are just in creepy businesses. And the war that has erupted over proposals to regulate those businesses, so that the average person can understand their products, might make you believe that a push for higher lending standards could bring down the Republic.

I was thinking about the impassioned fight to kill or water down President Barack Obama’s proposed Consumer Financial Protection Agency over the weekend when I came across a paper written by a New York University business professor, presented in New York on Friday at the Penn/NYU Conference on Law and Finance.

Entitled “The Impact of Investor Protection Law on Corporate Policy: Evidence from the Blue Sky Laws,” the paper described the professor’s effort to determine whether new standards to protect investors helped or hurt corporate fortunes in an era when bogus mining scams, not deceptive credit-card contracts, were the rage.

Considering all the current-day flap I’ve been hearing about the devastating impact that would result if we set up a new regulator to watch out for consumers of financial products, I braced myself, expecting to discover that the companies examined by Ashwini K. Agrawal had wound up hauling their corporate carcasses into bankruptcy court after failing to cope with the onerous pro-consumer laws.

New Laws

It didn’t turn out that way. In fact, the enactment of new state laws to protect U.S. investors during the early 20th century was followed by -- don’t faint, Chicago School parishioners -- a period of greater investment in stocks, higher dividends and growing company assets.

“The results are strongly supportive of theoretical models which predict that investor protection laws have a significant impact on the financing and investment policies of firms,” Agrawal wrote. In other words, protecting the public can be good business.

He wrote that his findings are relevant to the debate on whether emerging markets in Eastern Europe and Asia should enact reforms to protect investors. Still, he isn’t comfortable applying the lessons of his study to the debate over Obama’s proposed consumer agency.

Being Cautious

“A lot of academics are OK with making extrapolations like that, but I personally don’t like that stuff,” he said in a telephone interview. Jill E. Fisch, professor of law at the University of Pennsylvania Law School and one of four organizers of the conference, said in a telephone interview that Agrawal’s paper probably provides no lessons for today’s regulatory debates, noting that the paper was an “early stage” research project that focuses narrowly on a single industry.

Agrawal says he focused on mining for a reason -- that’s where the fraud was. At the turn of the 20th century, investors were getting fleeced by oil, gas and mining scams, with promoters going door-to-door to peddle interests in phony offerings. “The problem was that a lot of those investors could not verify if the money was going into the promoter’s pockets, or into a gold mine or oil well,” Agrawal told me.

Shades of Bernie Madoff.

By 1931, every state except Nevada passed what became known as “blue sky” laws, which demanded that companies provide basic information, such as their corporate address and the names of their officers. The laws also established a legal basis for investors to sue a fraudster who’d sold them a bill of goods.

Number Crunching

Kansas was the first state to pass such a law. Its banking commissioner, Joseph Dolley, said that swindlers were selling securities that were backed up by nothing more than the blue skies.

Agrawal crunched numbers on 108 publicly traded mining firms on which he could get historical information about products, sales, and product prices for the years 1899 to 1918. He learned this: Between two and three years after investor- protection laws were passed in a company’s state, dividend payouts increased 10 percent, common stock outstanding was up at least 11 percent and corporate assets increased 17 percent.

Operating performance increased in the period too, he says in his paper, with return on assets up 6 percent on average.

Fisch has reservations about those results, noting that the good performance was achieved during “the biggest bubble of all times in the 1920s.” Agrawal, though, says his data shows that states that passed laws to protect investors had superior performance to those that hadn’t yet passed such laws.

That’s the Story

I asked him whether his basic finding was that better investor protection meant more confident investors, which meant investors who were more willing to be, well, investors. “Yes, that’s basically the story,” he said.

Agrawal’s research may not prove that regulation always helps markets, but it sure casts doubt on those who say rules inevitably stifle innovation and the entrepreneurial spirit. That isn’t the story that lawmakers trying to undermine Obama’s proposed agency a century later would like to hear.

Opinion: Social Security may be cash-flow negative this year

Social Security could be next to need a bailout

By Allan Sloan  Washington Post Tuesday, February 2, 2010; A13

Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.

No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.

Social Security hasn't been cash-negative since the early 1980s, when it came so close to running out of money that it was making plans to stop sending out benefit checks. That led to the famous Greenspan Commission report, which recommended trimming benefits and raising taxes, which Congress did. Those actions produced hefty cash surpluses, which until this year have helped finance the rest of the government.

But even then, it was clear the surpluses would be temporary. Now, years earlier than projected, Social Security is adding to the government's borrowing needs, even though the program still shows a surplus on paper.

If you go to the aforementioned pages in the CBO update and consult the tables on them, you see that the budget office projects smaller cash deficits (about $19 billion annually) for fiscal 2011 and 2012. Then the program approaches break-even for a while before the deficits resume.

Social Security currently provides more than half the income for a majority of retirees. Given the declines in stock prices and home values that have whacked millions of people, the program seems likely to become more important in the future as a source of retirement income, rather than less important.

It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.

Even though an economic recovery might produce some small, fleeting cash surpluses, Social Security's days of being flush are over.

To be sure -- three of the most dangerous words in journalism -- the current Social Security cash deficits aren't all that big, given that Social Security is a $700 billion program this year, and that the government expects to borrow about $1.5 trillion in fiscal 2010 to cover its other obligations, about the same as it borrowed in fiscal 2009.

But this year's Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it's a problem for the present.

Allan Sloan is Fortune magazine's senior editor at large.

Opinion: Why does the U.S. direct so many resources to older Americans?

Are We Overpaying Grandpa?

By CASEY B. MULLIGAN  New York Times  FEBRUARY 24, 2010

Casey B. Mulligan is an economics professor at the University of Chicago.

The elderly receive a large amount of government assistance – an amount that is not commensurate with their numbers.

The total annual income in the United States (national income, as economists call it) is about $12.5 trillion, or about $40,000 per person per year.  The egalitarian view of government is that it taxes persons with annual incomes more than $40,000, and pays benefits to persons with less than $40,000, so that those with less than average incomes could enjoy living standards closer to the average.

For reasons that I began to explain last week, our government actually does the opposite.  The vast bulk of government spending goes to the elderly, whose average living standards are significantly above $40,000 per year.

Social Security, Medicare and government employee retirement (federal, state and local) are government funds paid to people aged 62 and over (aged 65 and over, in the case of Medicare), and total about $1.5 trillion in the current fiscal year.  Annual Medicare spending is $12,000 per person aged 65 and over, and growing.  Annual Social Security and government employee retirement payments are $21,000 per person aged 62 and over.

Medicaid, hospital and other public health programs are open to persons of all ages, although those programs spend more per participant on the elderly than on the others.  I estimate that, on average, these health programs are annually spending $7,000 per American aged 65 and over.

Combined, the public pension and public health programs are spending an average of $40,000 per elderly American per year.  Thus, even if elderly Americans could rely on no other income source, on average they could have living standards of $40,000 per year.  Moreover, many of the elderly have significant private incomes and wealth in their homes, which means that elderly average living standards actually far exceed $40,000 and thereby exceed the living standards of the average American.

How is it possible that so much government spending goes to persons with above average living standards?  This is one of the great puzzles in economics and political science.  Some (including commenters on last week’s blog entry) have argued that elderly Americans vote more frequently, and with more attention to Social Security and health policies.  However, that does not explain why nondemocratic governments – where leaders were not chosen by free and competitive elections – also pay at least as much to their elderly citizens.

Another explanation is that the marketplace is far from egalitarian, and it is difficult for the government to be much different.

If a family thinks it is appropriate for grandfather to have a higher living standard than his grandchildren, then they probably would not support a government that attempted to reverse that pattern.  The question for the future of Medicare is this: Are families ready to triple their spending on the health care of their highest-income members?