Christopher Peak Photo
Ribeiro, Harp, Cousin at pension vote.
A quest to better fund city cop and firefighter pensions collided with a quest to hire more female and minority-owned investment firms, putting two unrelated issues on the same table.
The collision occurred Thursday at the monthly meeting of trustees for the Policemen & Firemen’s Pension Fund in City Hall.
At the meeting, representatives for the police and fire unions tried to block a proposal to recruit smaller investment firms to manage their retirement accounts — at least, until the city deposits the rest of this year’s payment to the pension fund.
The move was a gambit, essentially, using small businesses that are often owned by minorities, women and veterans as a bargaining chip to spur the city to pay now.
The two issues are unrelated: When the city makes its payments to shore up the fund has little to do with who then invests the money. But the union reps tried to tie them together. By tacking an amendment onto a new “emerging manager” policy, they tried to force the city to cough up nearly $9 million in promised contributions that it hadn’t produced as the state’s budget crisis thinned their cash reserves.
The maneuver failed in a 3-2 vote that split along racial lines, with the two white union reps who serve as fund trustees voting against the mayor and two African-American trustees.
An Emerging Strategy
“Emerging managers,” as they’re known in the investing field, are smaller firms that don’t yet have a track record of managing funds for public agencies and other large clients. The Harp administration is seeking to actively recruit more of them, diversifying the multi-manager system that divvies up pension investments. Mayor Toni Harp learned about that strategy at a national pension conference last year.
At Thursday’s City Hall meeting, trustees for the Police & Fire Pension Fund (P&F) suggested adding new language that says emerging managers should be considered in any new hiring. Defined as firms with less than $3 billion in assets or a shorter track record, those emerging mangers wouldn’t be allowed to manage more than 20 percent of the fund. Similar language was adopted last June by the City Employees Retirement Fund (CERF).
“Morgan Stanley does not have the full Rolodex,” Controller Daryl Jones said. “It’s our responsibility to go out and find these emerging managers. At the end of the day, I’ve seen only two women walk in here in four years. And how much money has been doled out in the last four years? I personally believe women think differently and could do a better job.”
Emerging managers, often racial minorities, women or former service-members, are routinely overlooked by public pensions. Even if the money manager personally has a long résumé, trustees fret about the risk of a turning over millions in public funds to an untested company.
But several white papers on emerging managers say they generally outperform their larger peers. Quantitatively, they’re more likely to win higher returns, especially in a bear market.
Northern Trust Global Advisors, a financial-services company, for instance, found that from 2005 to 2010, as the Great Recession hit, firms managing less than $3.6 billion in assets gained 0.67 percent each year from their large-cap equities, while the S&P 500 index was down -0.80 percent over the same period. That rate of return beat out the household names managing more than $124 billion, who roughly broke even.
The real difference, Northern Trust’s analyst found, was that emerging managers outperformed the markets by an average of 0.72 percent during quarters when stocks went down — far ahead of the 0.22 percent average that the big firms notched in those bad months.
Northern Trust’s study also put the difference another way: If fund managers of all sizes are ranked by performance, the emerging managers make up 44 percent of the top quartile and 28 percent of the bottom quartile, even though they make up 36 percent of the total pool. In other words, they’re more likely to be among the top money-makers and less likely to be among the losers.
Other studies, though, suggest that the higher returns are almost a form of beginner’s luck. In a 2009 study, researchers at the University of Minnesota and University of California at Irvine found that the emerging managers do best in their first year, earning 4.31 percent above than the market index. But the gains wear off, dropping to 1.10 percent by the second year.
Anecdotally, reviewers explain, the emerging managers make more money because they’re creative in their picks, nimble in their staffing, and ambitious in their plans. They have something to prove that the big guys don’t, and because of their size, the employees often take home a bigger chunk of the commission doing it, adding a personal incentive to strike it rich.
That has led reputable pensions like CalSTRS, CalPERS and the Teachers Retirement System of Texas to create platforms for emerging managers.
While New Haven’s policies don’t explicitly prohibit emerging managers, the current investment guidelines state that applicants should be judged on their past experience, financial resources and staffing levels. In practice, that has meant that smaller firms often don’t get to make their pitch — even though the P&F fund could sorely use some strong returns.
Underfunded for Years
The city has money to cover only 43 percent of what it owes cops and firefighters.
Created in 1958, New Haven’s pension for public safety employees is underfunded, both in the short and long terms, like many public pension funds.
Decades from now, the P&F fund won’t have enough money to pay out what employees are being promised, without more investment. According to a June 2016 valuation, the P&F fund meets only 43.2 percent of its liabilities — way down, just in the last decade, from covering 60.6 percent in mid-2008.
In dollars, the city is $398.3 million short on what it owes cops and firefighters. That’s more than halfway to New Haven’s debt limit of $749.1 million in unfunded pension liabilities, which represents three times the tax base.
That type of encroaching debt bankrupted Detroit and Stockton, cut retirees’ benefits in small towns in Alabama and Rhode Island, and threatened to bust Texas’s biggest cities.
New Haven’s P&F fund has been bleeding out money while not delivering substantial returns, according to the city’s own budget records. In FY 2015, the fund managers barely scraped together $410,000 in profits, while charging $171,000 in administrative expenses. In FY 2016, the fund managers lost $5.6 million on the markets, while charging $184,000 in administrative expenses.
Meanwhile, actuaries continue to move the city’s expected payout higher and higher. Recently, seeing the minimal profits, they lowered the expected rate of returns to a more conservative 7.75 percent. And, based on a review of six years of employee time-sheets, they estimated overtime will drive up costs further than expected.
This year the city allocated extra funds to start paying down that gap. Of the $15.6 million in increased revenue the city expected this year, the budget devoted more than half — $8.7 million, or 56 percent — to pension increases.
But so far, the city hasn’t had the cash on hand to make its full budgeted annual payment of $34.6 million to the P&F fund. “The situation changed, when we lost roughly $5 million in our aid from the state. We’re looking at ways to meet our obligations, not only to the pension but to everything else in the city,” Controller Jones explained. The city paid most of what’s owed, but about $9 million is still due by the end of the fiscal year.
That angered some public safety employees, their union representatives said. Jones told them not to worry. He cited the city’s track record of following through on actuaries’ recommended contribution every year since 1995, and said the city will do the same in the next six months before the year is out.
“Social Cause” or “Business Decision”
Police union rep Brian McDermott, at left, faces off against Mayor Toni Harp.
The union representatives said during Thursday’s meeting that they they wanted a guarantee, something “a little more stringent,” with “some checks and balances in place,” as Patrick Cannon, the fire union rep, phrased it. He suggested amending the new emerging manager policy to say the P&F fund can’t hire an emerging manager until the city deposits its full contribution.
“By lowering the standards of where our investments go, I’m concerned,” Cannon said. “I want to make sure that we don’t violate our fiduciary responsibility. We don’t want to change our guidelines and fall asleep at the switch here. Minorities, women, veterans, they’re a great cause, and I want to make sure we’re clear that we’re not lowering the guidelines for asset management, like the years of experience, for a social cause.”
Brian McDermott, the police union rep, said that he’d been hearing complaints from officers that the trustees were prioritizing the wrong issues.
“Police officers I’m here to represent bluntly say, ‘This is what you’re worried about? Money managers who make a lot?’” he said. “How do I look to these men and women of the police department, who know that we’re short, that the city hasn’t made its full contribution, that the pension is woefully underfunded, and say that’s what we spent our energy on in this meeting is investment managers who make three or four times what the highest NHPD officer makes? I’m concerned about them, and I’ll work very hard for the people I’ve been voted here to represent.” He added that the trustees shouldn’t be “looking out for Wall Street fat cats, instead of police and fire.”
Mayor Harp countered that Cannon’s amendment had nothing to do with the policy. “They don’t comport with one another,” she said. If the trustees voted to fire a manager and reinvest elsewhere, the opportunity to apply should be open to smaller firms, regardless of whether the city’s check has cleared, she argued. “It’s just allowing them in the door,” she said.
Police Commissioner Evelise Ribeiro added that trustees had a responsibility to hire the manager who could make the most money. “I heard the word ‘social cause,’ and I disagree with that term. I don’t think by looking at emerging managers, this is a social cause. It’s a business decision,” she said. “Just that, period.”
Joined by Fire Commissioner Rev. Steven Cousin, Harp and Ribeiro voted against Cannon’s amendment, shooting it down in a 2-3 vote. Then they passed the emerging manager policy, 3 to 2.
The pension fund returns are being eaten up by "investment fees" while the future liabilities are skyrocketing due to bad contracts and reckless overtime.
The solutions are: