Criminally Bad Management of Police & Fire Pension

[TheCat]

Page: 26-27

As a result, according to the Fund Administrator, the only performance
reports that exist at this time for the 20-year period when Merrill Lynch
was the investment consultant were prepared by Merrill—information
which has not been verified by the custodian holding the assets...

Further, from 2002 through today, the difference between gross and net performance
has inexplicably ranged from as low as 5 basis points to 55 basis points...

...approximately 83 percent of total assets—have underperformed their respective indices for virtually all 1,
3, 5 and 10-year periods.

If the long-term performance is inflated (gross)
then the actual (net) investment performance may be worse... we compared the adjusted net
investment performance of the Fund that we were provided from 1988
through 2014 against a 75 percent S&P 500 and 25 percent Barclays
Aggregate index and concluded that the performance of the Fund would
Forensic Investigation of the Jacksonville Police and Fire Pension Fund
have improved by approximately $370 million had the assets been
invested in low-cost, highly-liquid, fully-transparent index funds.

...We note with great emphasis that due to the Board's failure to diligently
scrutinize Fund performance, the performance history is so uncertain
that any analysis is inherently speculative.

[TheCat]

Page 31:

Most significantly, conflicts of interest at investment consulting firms
were found to result in substantial financial harm to plans by the U.S.
Government Accountability Office ("GAO") in a 2007 report, i.e., plans
using consultants with undisclosed conflicts of interest had annual
returns generally 1.3 percent lower.

For almost twenty years, from 1988 through December 31, 2007, Merrill
Lynch, a broker-affiliated investment consultant, served as the
investment consultant to the Board. If, as the GAO study found, pension
consultant conflicts cost plans 1.3 percent, then over a 20-year period,
with compounding, such conflicts may have cost the Fund almost 30
percent of its value—perhaps $300-$500 million.

[TheCat]

Page 35:

Some have severely criticized these "portfolio monitoring"
arrangements between pensions and class action firms. One highly
regarded federal judge, Judge Rakoff, noted in 2009, that such an
arrangement was "about as obvious an instance of conflict of interest as
I've ever encountered in my life." He said he was shocked that persons
with a fiduciary duty to monitor pension investments would choose "to
save a few bucks" by hiring a law firm to monitor those investments that
could only profit by recommending litigation.

[TheCat]

Page 40:

The Task Force completed its work on March 19, 2014, and on that date unanimously adopted its Report for delivery to the Mayor, the City Council President and the Administrator of the Fund.

As noted in the opening of the Report, in FY 2000, the Fund's deficit was approximately $124 million. In FY 2008, it increased to $798 million and in FY 2012 to $1.7 billion. At the same time, the Fund's funded ratio dropped from 87 percent in FY 2000 to 39 percent in FY 2013.

"These numbers are truly astounding. In FY 2000, the Fund was 87% funded; in FY 2008, 53% funded; and in FY 2012, 39% funded. That is the lowest and most precipitous drop in funded ratio for any of Florida's large cities, despite the fact that every city in Florida – and for that matter in the country – experienced the same turbulent market conditions over that period of time."

[TheCat]


Page 46-47:

However, the Board has repeatedly come under criticism from citizens, media, foundations and City Council members for failing to be responsive to public records requests. Further, the Board has reportedly spent hundreds of thousands of Fund dollars in litigation related to requests for public records.

Most Disturbing is the litigation involving citizen Curtis Lee's request for documents.

"Requesting documents from the pension fund triggered a showdown that has lasted five years and counting — it is now at the Florida Supreme Court.

Before Lee could even touch the documents he wanted to look at, he was told he would have to pay $326.
Lee said he would pay only for the documents he wanted to copy.

The pension fund still wanted the $326, plus $280 to have someone monitor him while he sorted through the records.
Lee sued.

A court last May ordered the pension fund to pay $75,000 of Lee's legal fees. At that point in the case, the pension fund had spent $290,000 in legal fees to fight Lee over the public records case.

The legal bill has continued to grow, now inching toward $450,000, all over what started as a $326 fee."

[TheCat]

Do you have insight on the group that completed the report?

[Tacachale]

These guys, Benchmark Financial Services: http://www.benchmarkalert.com. It was authored by the president, Edward Siedle:

There's was a bit about them and the audit in the Times-Union this weekend:

Hired by the city for the $85,000 investigation, Siedle is a South Florida attorney who founded Benchmark after working as a U.S. Securities and Exchange Commission lawyer. His firm has examined state government pensions in North Carolina and Rhode Island.

http://jacksonville.com/news/metro/2015-10-31/story/audit-slammed-jacksonville-pension-funds-370-million-shortfall-others

Some others are quoted as taking issue with the report in the same article:

But some public pension officials contacted by the Times-Union criticize the methodology used in the report, saying the figure of $370 million is just a case of using 20-20 hindsight to proclaim that a different investment strategy would have earned more money.

"It's a useless scenario," said Florida Retirement System spokesman John Kuczwanski.

...

Benchmark took the fund's investment income from 1988 through 2014 and compared it to what the fund would have earned if its investment portfolio had been 75 percent in stocks and 25 percent in bonds. To calculate how that performance would have done, Benchmark used the gains posted by the S&P 500, which is stocks for large companies, and the Barclays Aggregate Index, which tracks the results from bonds.

Kuczwanski said it's not the first time he's seen someone use that methodology to assess investment performance, but it misses the mark for how pension funds operate in real time.

He said putting 75 percent into the stock market would be a "very risky scenario" for a pension fund because the price of stocks change rapidly.

"In hindsight, it's easy to say that something different could have performed better, but you take what you have at the time and you make the best effort within risk tolerances," he said.

Keith Brainard, research director for the National Association of State Retirement Administrators, said it's misleading to say a different investment approach would have gotten higher returns. He said pension funds invest for the long term and "at any point, you can stop and say, 'Oh look, a different allocation would have produced a different return.' "

He said the best way to gauge performance is by examining the actual array of investments — stocks, bonds, real estate and any other investments — and comparing how the pension fund did with each type of investment compared to the overall market.

Bill Guilliford was the one who chose the firm for the "forensic audit". Amusingly, he and Seidle seem to talk a lot alike.

http://jacksonville.com/news/metro/2015-03-12/story/councilman-gulliford-seeks-forsenic-audit-pension-fund

[The_Choose_1]

So the bottom line is Nothing is really going to change. Fuck!

[spuwho]

This report is being very heavily criticized as shrill and lacking understanding of investment pensions actually work

Perhaps we should send the auditors to London, Las Vegas and let them stay at swank resorts 6 times a year to get them up to speed on good public pension policy.

[TheCat]

I found the report to be candid, clear and refined. At least two times that I can remember the report remarks that some Jax's pension management issues are likely industry wide issues.

Most of the report did not deal with the potential under-performance of the fund. Analysis on how the fund should have invested vs. how it actually invested is tricky. It may have been more valuable to compare our fund's results to the results of other pensions. Can the Florida Retirement System serve as a sort of "s&p"?

The focus of this report is squarely on the wily management (and contracted General Council) and further, the seemingly severe lack of oversight by all interested parties. .

These are some of the issues that the report highlighted, which I don't think relates to a lack of knowledge on how "pensions actually work".

In no particular order:

1.   The fund is underperforming and has been underperforming for decades.

2.   Continually withholding public records, to the point of spending millions on legal fees.

3.   Appointing a fund manager, John Keane, with zero financial credibility/training/certification...etc.

4.   A passive and agreeable board.

5.   A General Council (not city GC) that seems to lead the fund  - according to the report the GC has conflicts of interest.

6.   An over-funded senior pension plan for Keane and a few others, while managing an underfunded pension plan for police and fire employees. A plan deemed illegal by city council and the city's general council. A fund Keane created.  A fund that wasn't officially recognized until 2012, the same year the council auditor found out it existed. It was established in 2000 but back loaded. It was then front loaded once city council said it was illegal.

7.   Extravagant travel that seems to be funded by marketers on behalf of investment products.

8.   The fund manager, John Keane, negotiates on behalf of the unions. This is described as "most unusual".

9.   According to former City General Counsel James C. Rinaman Jr.: 
"There is no legal authority for the Fund to collectively bargain with the city for pension benefits on behalf of the police and fire unions. There is an inherent conflict of interest for the pension trustees to bargain for pension benefits. Their duties are limited to administering and managing the pension funds, and negotiating for new or increased benefits conflicts with performance of that duty." 





10.   No independent performance reviews for 20 years.

11.   Apparently, overpaying investment management fees. Or, worst, seeming ignorance of how much the fund pays in investment management.

12.   Failure to investigate how badly Merrill Lynch hurt the fund. Instead, accepting a $273k payout from a class action suit.

13.   Paying potentially high investment management fees. Although, the report makes it sound like the "active management" approach is a higher cost failing industry standard. It cost more but literally produces less. Are the fees reasonable or high, the fund doesn't know because they (we) don't know how much is spent on fees.

14.   Apparently, industry standard pension contracts include something called "most favored nation", the jax fund does not have this caveat. MFN requires the investment consultant to certify that the fund is receiving the lowest fee they offer. Summit Strategies "agrees that MFN provisions are commonplace, particularly with respect to public pensions and helpful in reducing fees." Then again, the MFN may just be legal bs that doesn't mean anything.

15.   Trichter stated that "one overlooked but key contributing factor to the Fund's performance over time is the outsized amount of administrative and investment fees it pays." According to Trichter, the professional services and administrative fees the Fund paid in FY 2013 as a percentage of assets amounted to 78 basis points—more than double the all-in costs of 30 basis points paid by the Florida Retirement System.

16.   First fee analysis happened in 2015, as a result of this report.

17.   The Board does not utilize an investment committee as does the Florida Retirement System. According to the Report, Task Force members indicated that they had experience with other organizations which used investment committees in addition to investment consultants, and that they believed that the use of an investment committee is a "best practice."

18.   This report references the Brown created pension task force and inserts the following quote:  "These numbers are truly astounding. In FY 2000, the Fund was 87% funded; in FY 2008, 53% funded; and in FY 2012, 39% funded. That is the lowest and most precipitous drop in funded ratio for any of Florida's large cities, despite the fact that every city in Florida – and for that matter in the country – experienced the same turbulent market conditions over that period of time."