Forbes Column by Chris Burnham: States Should Re-Evaluate Their Assumed Rates Of Return

The assumed rate of return is one of the major actuarial assumptions underlying pension fund valuations. It influences the calculation of a plan’s total liabilities and drives the required annual contributions to the plan. A high assumed rate will result in lower levels of estimated liabilities and allow politicians to appropriate lower annual contribution to the pension systems. This portends disaster when the assumed rates of return are higher than actual returns. Even small differences in these two numbers can cause a plan’s unfunded liability to balloon.

Read the full story here. 

Chris Burnham in New York Daily News: Stop politicizing pensions: The sole duty of politicians should be to deliver maximum return to retirees

A secure retirement built on a strong pension has always been the ultimate reward and “thank you” for a lifetime of service by our public servants. Unfortunately, massive unfunded liabilities in pension systems across the country threaten that security. This is not only because of chronic underfunding, but also because of politically driven calculations.

Now, if we let them, Mayor de Blasio and City Controller Scott Stringer will inject a whole new level of politics into the management of New York City’s public pension funds by making arbitrary and political decisions regarding what the funds should or should not invest in.

In the latest movement to force political agendas into the management of public pension funds, de Blasio and Stringer proposed in January 2018 to divest $5 billion in energy stocks from the city’s pension funds. Notwithstanding that natural gas, gasoline and diesel keep the city running and the economy moving, the elected officials want their personal political agendas to replace “the highest standard of care” that their fiduciary duty requires them to provide to the pension beneficiaries.

Using the optimistic, and politically advantageous, 7% protected rate of return, New York City faces at least $60 billion in unfunded pension liabilities. If the rate of return is reduced by just 1%, the unfunded liability jumps to over $90 billion, which would increase contribution requirements for the city.

For context, $10 billion of NYC’s annual budget now goes towards pension costs, which is more than seven times the average total budget of America’s 100 largest cities. This leaves the city with the difficult choice of deciding how to sustain this funding, and the pension board with the duty of deciding how to manage the unfunded liabilities.

It’s against this backdrop that de Blasio and Stringer now propose putting politics over fiduciary duty.

In order to advance their costly energy divestment plan, de Blasio and Stringer issued a “request for information” to inform their plans, even at a time when not all five pension funds support the divestment scheme. In response to the request, the Institute for Pension Fund Integrity, which I lead, highlighted that New York City stands to lose $25 million immediately in frictional costs, and up to $1.5 billion over the next 50 years if it goes ahead with this plan.

The energy divestment scheme continues a long history of divestment campaigns, which experts have assessed have never resulted in increased value for pension plans. Divestment movements have included everything from tobacco (like when I was Connecticut treasurer) to divesting from companies that boycott Israel (like in Illinois). These divestment movements are actually contrary to IRS guidelines that require diverse plan investments.

Read the full article here.

Chicago and Cook County Fact Sheet

This document provides a high-level, side-by-side comparison of the four pension funds paid into by the City of Chicago and the two pension funds paid into by Cook County, Illinois. Data is chiefly drawn from the actuarial valuation reports issued for each fund as of December 31, 2016.

Across the country, public pensions have been continually politicized. This is done through three primary methods:
• Making investment decisions based on political factors
• Using high assumed rates of return to calculate unfunded liabilities
• Using outdated actuarial tables to calculate pension funding requirements

A link to the full report can be found here. 

Big Apple Mistake – IPFI Responds to New York City Divestment RFI

Arlington, VA – The Institute for Pension Fund Integrity (IPFI), a non-profit organization which seeks to ensure that state and local leaders are held responsible for their choices in public pension investment, responded today to the New York City Comptroller’s request for information (RFI) regarding how to divest city pensions from energy company holdings. IPFI’s fundamental goal is to keep politics out of the management of pension funds and the RFI response details the detrimental cost that divestment would have on NYC’s already underfunded pensions.

By calling for divestment from energy holdings, NYC Comptroller Scott Stringer and Mayor Bill de Blasio are clearly pushing a political agenda which contradicts their fiduciary duty to maximize returns with a reasonable risk. The divestment of about $5 billion in assets invested in over 190 energy companies would reduce plan diversity and is estimated to negatively affect plan returns.

New York City’s pension funds are already in serious financial peril and introducing divestment will worsen the current pension crisis in the Big Apple. NYC’s five pension funds are less than 70% funded, with almost $142 billion in unfunded liabilities. Comptroller Stringer must also consider the following:

  • Experts have assessed that divestment campaigns have never resulted in increased value for pension plans.
  • Reports detail that energy holding divestment would result in an immediate frictional cost of about $25 million for New York City
  • Over the next 50 years, New York stands to lose $1.515 billion from their pension funds if they divest from energy holdings.

“Our goal at IPFI is to ensure that public pension fund managers are adhering to their fiduciary responsibility so that pension funds are properly funded for the retirees who rely on them,” said Christopher Burnham, IPFI’s President and former Connecticut State Treasurer. He continued, saying that “divestment to further a political agenda, which de Blasio and Stringer are seeking to do, is directly contrary to their fiduciary duty. Their plan threatens the already underfunded city pensions and places an unnecessary burden on the taxpayers and current city employees.”

In the RFI response, IPFI emphasizes that divestment is an irresponsible course of action that will politicize pension funds, undermine the financial health of the pension fund, and violate the fiduciary responsibility of fund management. Divestment will not “protect the long-term interests of the Systems’ beneficiaries, “as the RFI claims, but will simply expose police officers, teachers, firefighters, other pensioners and the taxpayers to unnecessary financial risk.

For more information about IPFI’s position and to read the RFI response, please click here. For a recent presentation on IPFI’s mission, click here.

The Institute for Pension Fund Integrity seeks to ensure that local, state and federal leaders are held responsible for their choices in investment, led not by political ideation and opinion but instead by fiduciary responsibility. IPFI is a non-partisan, non-profit organization based out of Arlington, Virginia, and spearheaded by former Connecticut State Treasurer Christopher B. Burnham.

IPFI: Our Mission

Advocating to take politics out of pensions, IPFI fights for the security of retirement accounts across the United States. Want more information on what politics in pensions means for your retirement? Click on this link to see exactly what we stand for at the Institute for Pension Fund Integrity.  

New York City RFI Response

The Institute for Pension Fund Integrity (IPFI), a non-profit organization which seeks to ensure that state and local leaders are held responsible for their choices in public pension investment, responded today to the New York City Comptroller’s request for information (RFI) regarding how to divest city pensions from energy company holdings. See IPFI’s response to the New York City Request for Information.

 

 

Connecticut Post: An old pension warrior’s new mission

Don’t say the words “socially responsible investing” to Christopher Burnham. He’s a man on a mission — to take politics out of public pension fund investing.

 

Anything that smacks of a city or state directing its pension money for the purpose of advancing an agenda — like, say, Connecticut divesting from gun companies — is toxic to Burnham, a name many people in Connecticut, especially Fairfield county, should remember from the ’80s and ’90s.

 

“I am evangelizing this position to keep a personal political agenda out of the management of other people’s money,” Burnham said Wednesday, after a breakfast meeting in midtown Manhattan that he organized to push the cause, a new nonprofit organization and website that will name names.

 

Sounds OK on the surface: At a time when pension funds are far behind where they need to be — nowhere more than in Connecticut, which is at least $20 billion in the hole and probably much more than that — it makes no sense to sacrifice annual returns to make the world cleaner, nicer, safer, more inclusive. Those are all political agendas in the end, right?

 

Not so fast. Burnham — a prominent national figure in public finance who was Connecticut state treasurer from 1995 to 1997, and before that, a state representative from Stamford — has waded into waters both murky and stormy. Many pension funds, including Connecticut’s, routinely consider environmental, social and corporate governance issues when it invests in companies.

 

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New York City Pensions- What Happened?

New York City has an underlying fiscal crisis that city officials are failing to address. There is a pension debt of $64.836 billion across the city’s five different pension accounts as of January 2018. This calculation is under a 7% assumed rate of return; this rate is charitable to the fund, as a one-percent decrease in assumed rate would add more than $21 billion dollars of pension debt. If the pension system was to assume the market rate of 3.61%, the pension liabilities soar to a whopping $142.195 billion. The New York City government already contributes more than $10 billion per year to the pension system- more than three times the average operating budget of the 100 largest cities in the United States. So what happened, New York City?

The answer to this question is a simple one: politics. Pension investments have been plagued by poor management and officials seeking political recognition since the 1980’s. Since then New York has weathered tireless social campaigns, including gun retailer and private prison divestment. The result of these noble crusades? Retirees missing billions of dollars in market value and lost investment gains.

More recently, New York City Mayor Bill de Blasio and City Controller Scott Stringer called for divesting $5 billion in fossil fuel stocks from the city’s pension fund. The City Controller has gone as far as releasing a request for information to the public, seeking input for full fossil fuel divestment. Even after the release of multiple academic studies showing the extreme and prolonged losses catalyzed by divestment, Mayor de Blasio still campaigns on the crux of progressive politics. At the rate of current pension spending, the people of New York City will face higher taxes, cuts to services and even possible municipal bankruptcy if these pension issues go unaddressed. New York City must de-politicize pension accounts and start cutting away the financial rot at the core of the Big Apple.

Bloomberg Law: ‘Do Good’ Investing by Retirement Plans to Be Part of New Report

The Labor Department’s shifting guidance also doesn’t appear to have an impact on ESG investing, Gotbaum said. Whether or not the DOL encourages economically targeted investing or proxy activity, the decision “has always been and will always be up to the fiduciaries themselves.”

James Cole II, a lawyer with Groom Law Group in Washington, echoed Gotbaum, telling Bloomberg Law the impact of the changes in guidance “remains to be seen.”

The guidance is arguably more restrictive than prior guidance under the Obama administration and technically reaffirms the “all thing things being equal test” for investments introduced by the Bush administration, Cole said.

Christopher B. Burnham, former Connecticut state treasurer and former undersecretary general at the United Nations, praised the new guidance.

“It’s a commitment by the DOL to promote honesty and transparency in our pensions,” Burnham, who is now president of the Institute for Pension Fund Integrity, told Bloomberg Law.

Investors shouldn’t “play politics with other people’s money,” he said.

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