Pension Matters
State Employees Retirement Fund
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January 2013
Aletheia Clarification
I received a call from staff at the Bureau of Investments (BOI) in Treasury who wished to provide additional information on their decision regarding Aletheia. The statement below is clarification on this previously held fund I discussed in last month’s newsletter. Thanks to staff at BOI for this clarification.
“SMRS terminated Aletheia in July of 2011, despite its excellent track record at the time, after a certain misrepresentation on the firm’s part came to light. After the fund was terminated, SMRS purchased an index fund with the money formerly managed by Aletheia, in the account formerly managed by Aletheia. As a result, the fund name mistakenly appeared in IAC material from the time of the Aletheia’s termination through September of 2012. All stocks purchased on SMRS Active Equities Division’s behalf by its external managers are held in SMRS’ name by its custodial bank, State Street.”
What does PA 347 really mean for us?
Gov. Rick Snyder has signed a bill expanding the range of investments that public employee pension funds can make. But what does it really mean for our pension fund? According to CIO, Jon Braeutigam, the legislation should have little impact on the way SMRS will invest. Some of the changes were supported by SERA and BOI such as no bond guarantees coming out of the pension fund such as happened with Raleigh Studios in Pontiac. These changes apply to all public plans and not just SMRS.
In addition, I took the opportunity to ask BOI staff to explain the“pay to play”section of PA . The following is their response. Much of this bill was supported by SERA and BOI and it appears to offer some positive changes to the operations of the retirement system.
“Signed into law as Public Act 347 of 2012, the bill made the most significant reforms seen in recent history to the Investment Act. The full text of PA 347 of 2012 is available at www.legislature.mi.gov/documents/2011-2012/publicact/pdf/2012-PA-0347.pdf.
As amended, the Investment Act now contains a section prohibiting investment fiduciaries from doing business with investment management companies or funds that have made a political contribution to government officials or entities within two years from the contribution date. Known as pay-to-play prohibitions, the intent behind this law is to eliminate the possibility of investment management companies or funds influencing the award of public contracts through political contributions. The state pay-to-play prohibition is codified at MCL 38.1133e and can be viewed at www.legislature.mi.gov/(S(uorcoeijewjrkr55ffjdxt55))/mileg.aspx?page=getObject&objectName=mcl-38-1133e-added. The state ban takes effect April 1, 2013.
Though modeled after federal U.S. Securities and Exchange regulations, Michigan’s pay-to-play law is more comprehensive in that it applies to all investment fiduciaries (the federal regulations only apply to advisors registered under the Investment Advisors Act of 1940) and extends the two-year ban to include contributions made to legal defense funds. The Bureau of Investments has adhered to the federal regulations since their enactment in 2011 requiring all new general partners and investment managers sign a certificate affirming compliance with the federal pay-to-play laws. Effective April 1, 2013, the BOI will require all investment fiduciaries comply with our state’s pay-to-play prohibitions.”
Right to Work
A briefing paper from the Economic Policy Institute looks at what“right to work”has meant in other states.
“Wages in right-to-work states are 3.2% lower than those in non-RTW states, after controlling for a full complement of individual demographic and socioeconomic variables as well as state macroeconomic indicators. Using the average wage in non-RTW states as the base ($22.11), the average full-time, full-year worker in an RTW state makes about $1,500 less annually than a similar worker in a non-RTW state.
The rate of employer-sponsored pensions is 4.8 percentage points lower in RTW states, using the full complement of control variables in our regression model. If workers in non-RTW states were to receive pensions at this lower rate, 3.8 million fewer workers nationally would have pensions.
Read the full briefing paper at www.epi.org/page/-/old/briefingpapers/BriefingPaper299.pdf
Benefit Costs
According to the Bureau of Labor Statistics,“Employer costs for state and local government workers averaged $26.91 per hour worked for wages and salaries and $14.65 for benefits in September 2012. State and local government health benefit costs averaged $4.86 per hour worked in September 2012.”
Total employer compensation costs for private industry workers averaged $28.95 per hour worked in September 2012. Wages and salaries averaged $21.32 per hour worked and accounted for 69.2 percent of these costs, while benefits averaged $9.48 and accounted for the remaining 30.8 percent. News release available at www.bls.gov/news.release/archives/ecec_12112012.pdf
Investment Advisory Committee Reappointment
Gov. Rick Snyder recently announced the reappointment of Nick Khouri of Plymouth, to the state’s Investment Advisory Committee.
Khouri is vice president and treasurer of DTE Energy. He previously served as vice president and partner at Public Sector Consultants, as chief deputy treasurer for the Michigan Department of Treasury, as chief economist for the Michigan Senate Fiscal Agency, and as an analyst for the U.S. Congressional Budget Office.
Khouri will serve a three-year term that expires Dec. 15, 2015.
Pensions: A Promise is a Promise... Unless it’s Inconvenient
“The entire public pension system is built on the understanding that pensions are legally protected promises,” said Richard Kaplan, a professor at the University of Illinois College of Law. “That idea has been foundational for at least the last half-century.”
Paul Secunda, an associate professor at Marquette University Law School, explained that “until the early 20th century, courts had treated public pensions not as contracts or promises but as “gratuities,” more akin to gifts or tips than to salaries or wages.”
“It was accepted that employees didn’t have any rights to their pensions and that the employers could change them at any time, almost on a whim,” he said. “People could work their whole lives and then, just before they were going to retire, the employer could pull the rug out from under them.”
“Since the middle of the century, however, courts have generally acknowledged that states cannot promise pension benefits to their employees as an inducement to get them to work for the state and then renege on those promises. The large majority of states have protected pensions under the theory that the promise of a pension represents a form of contract, though there is some variation. The vast majority of states — 41 — apply a contract theory to their employees’ pension rights. All of these states have constitutional provisions that — mirroring the contract clause of the federal Constitution — prohibit the passage of any law that impairs the obligation of contracts. In the constitutions of seven of these states, there is a clause explicitly preventing the state from reducing the pension benefits its employees have earned. In the remaining 34, statutes and judicial decisions have found that the promise made by the state to pay a specified amount to the employee in pension benefits constitutes a contract and is entitled to constitutional protection.”
“Additionally, there is variation from state to state as to the point at which these legal pension protections for state workers apply. Pension benefits are earned, or “accrued,” over time. In 21 states, the protections apply both to the benefits that have accrued and to future promised benefits. In 16 states, the protections apply to accrued benefits only. In 11 states, it is unclear whether the protections apply to past and future benefits or only to past benefits.”
To read the article in its entirely go to, http://truth-out.org/news/item/13498-pensions-a-promise-is-a-promise-unless-its-inconvenient#
Editor’s note: June Morse may be contacted at jmorse10@comcast.net or 517-886-9323.
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