The Week in Public Finance: Pensionomics, Hidden Bank Loans and Private Equity Fees

A roundup of money (and other) news governments can use.
by | September 16, 2016

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Do Pensions Help the Economy?

A new study on how pensioners spend their money will likely give a boost to those who want to keep traditional, defined benefit pension plans in the public sector.

Published this week by the nonprofit National Institute on Retirement Security (NIRS), the analysis on pension retiree spending in 2014 estimates it resulted in $1.2 trillion in total economic output. The total is based on about a half-trillion in benefits paid to public and private pensioners in 2014. State and local pension benefits account for about half ($253 billion) of those benefits.

The study also looked at bang for buck -- that is, how much does each dollar paid to a pensioner generate in eventual economic output? The answer varies by state because of retiree mobility and because of intrastate commerce. Not surprisingly, though, Florida gets the most bang for its buck. For every $1 paid out to pensioners in Florida, the state sees $1.67 in total economic activity. The District of Columbia gets the least -- only 98 cents in economic output for every $1 paid out -- because many of its public-sector retirees live outside of the district.

The Takeaway: Pensions and their costs are often portrayed as competing with schools and infrastructure for scarce government dollars. While that competition is certainly happening, it’s important to note that the money going in to pensions is also coming out in the form of retiree spending. The industries that benefit the most from pensioner spending are real estate, hospitals and restaurants, according to the report.

Defined-benefit pensions have been unpopular as of late because they put governments on the hook for a set monthly payment to retirees (as opposed to 401(k)-style plans, which don’t guarantee how much a retiree will have). But a monthly guarantee provides stability, said Diane Oakley, NIRS’ executive director, and that’s valuable to governments too.

“Retirees with reliable pensions can maintain their spending through their retirement years regardless of the ups and downs of the economy,” she said. “So we look at it as a bit of an economic stabilizer.”

Disclose Your Bank Loans! (Please.)

The board that presides over the $3.6 trillion municipal market has been nudging governments to routinely disclose loans they receive directly from banks for some time. Now it looks like that nudge is turning into a sharp poke.

The Municipal Securities Rulemaking Board (MSRB) this week said it will soon release changes to its disclosures website EMMA that will “improve this process for issuers and also enhance the ability of investors to locate available bank loan disclosures.”

In other words, the MSRB is now trying to make this process as easy as possible so there will be few plausible excuses not to voluntarily comply.

The Takeaway: The MSRB has been increasingly frustrated with the lack of transparency in this growing area of government finances. There are no timely disclosure requirements for bank loans. So investors typically find out about them via government annual financial reports, which means a loan might not be publicly disclosed a year or more after the fact.

Case in point: Between 2012 and 2015, governments collectively filed about 88 documents disclosing a direct borrowing deal with a bank to the MSRB. Meanwhile, a Moody’s Investors Service analysis of annual audits found more than 100 bank loans and other private financings in 2013 alone that were large enough to be considered material relative to the issuer’s resources and therefore of interest to investors.

Credit ratings agencies have joined the MSRB in urging the U.S. Securities and Exchange Commission to amend financial disclosure rules to include bank loans. Until that happens, don’t expect either to let up on this issue.

California’s Fee Fight

The Golden State this week ushered in new transparency requirements on fees paid by public pension funds to private equity investment firms.

The bill, sponsored by State Treasurer John Chiang and authored by Assemblymember Ken Cooley, will apply to all public pension funds in the state, which is home to two of the nation’s largest.

The bill places California among the states with the most robust fee reporting requirements for pension funds.

The Takeaway: At issue here are so-called performance fees, which private equity and hedge fund managers charge plans for any profits they generate. Pension plans generally disclose management fees but have avoided reporting performance payouts because they're not required to under accounting rules and because they're hard to calculate.

But because pension funds have been putting more money toward these alternative investments over the past decade, fee transparency has become a hot topic.

In recent years, Kentucky, New Jersey and South Carolina have also revamped fee reporting requirements. In the first year of Kentucky’s new policy on reporting private equity fees, for instance, the Kentucky Retirement System estimated it spent $108.3 million in fees -- a 75 percent increase over the amount reported the prior year.

The pressure to pass these kinds of laws isn’t just coming from legislators.

Pension funds have increasingly been frustrated with how difficult it is to extract their annual fee information from private equity and hedge fund managers. In fact, a group of institutional investors -- which includes the California Public Employees' Retirement System -- is pushing back on money managers to standardize how they report fees and profits.

One thing making the new California law easier to enforce: CalPERS is already requiring its money managers to adopt the proposed standard.

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