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City Auditor: Situation Could Cost State Hundreds of Millions

Thursday, July 05, 2012

 

The city retirement fund and others in the state are at risk of losing millions of dollars if the oversight boards do not change their policies, which severely restrict the board's investment options.

City Auditor, James A. DelSignore, said the state’s retirement boards, The Public Employee Retirement Administration Commission (PERAC) and the Pension Reserves Investment Management (PRIM) Board, are creating a desperate situation for the city that DelSignore says could cost the Worcester and other retirement funds in Massachusetts hundreds of millions of dollars if it is not dealt with soon.

“We have had more or less the same board and we’ve been pretty steady, but we are having a big problem right now. It’s going to cost people all over the state millions if not hundreds of millions if nothing is done to resolve this,” DelSignore said. “Our oversight agency, PERAC, has been undermining us.”

"With these new laws we have to go through a search. There’s a form we filled out that says we did our due diligence. New law says a contractor can’t be granted indemnity by a retirement board," he said. "It prevents them from dealing with frivolous lawsuits. It doesn’t exclude them from gross negligence or fraud, which we’re not doing, but because it says in that law that we think PERAC put in there, we can’t hire anybody."

Trying to Stay Stable

DelSignore, who is also chairman of the Worcester Retirement Board says that their board has been trying to make stabilizing investments. Investment results, he said are shaky, depending on what’s in the news.

“One thing we try to do to invest in companies who aren’t going to go up and down like that is we try to get into things like private equity, infrastructure, natural resources, things like that,” he said.

But because of a new law set in place by PERAC, DelSignore says they have lost two investments, costing them a million dollars each.

“We haven’t been able to invest with Harvest, or Global Infrastructure. We are trying to invest $8 million with them, and I’m pretty sure we won’t be able to. We also lost an opportunity to invest with a timber company,” he said. “It’s a real problem.”

“This could reduce our risk and increase our returns. We are being stopped from doing this by our oversight agency. They recommended the PRIM Board for us to invest in private equity.”

Jobs Lost

DelSignore said that the PRIM Board has been having problems of its own, including the loss of someone whom DelSignore says oversaw investments for six to seven years. He says they have been replaced with someone “with lesser strength.”

“They seem to want to get out of the oversight business,” he said. “They haven’t approved any investments we have made in these areas of private equity,” he said. “The PRIM Board has had difficulty.”

DelSignore said they have had 200% turnover and their Chief Investment Officer resigned.

“Two people who oversaw private equity resigned a year ago,” he added. “They haven’t over performed other boards in four years. The only direct oversight they have is real estate, which we do have some investment with.”

The Other Side

President of the Retired State, County And Municipal Employees Association Of Massachusetts, Ralph White says that despite these issues raised by the city’s auditor, he isn’t worried about the same outcome.

DelSignore said he is worried that this is a backdoor way of PERAC taking over its autonomy, but White says there’s little gain for the state group if they did that.

“I don’t believe that will ever happen. There’s nothing to be gained by PERAC to take over the retirement board. Boards will always maintain their autonomy,” he said.

White did say that some retirement boards across the state have complained about other PERAC requirements.

“Boards have to reach certain standards and were required to invest through the PRIM Board. There have been complaints about that,” he said. “They feel they can do just as well on their own. And they were. Some boards were required and were rightfully angered. They felt that it was an imposition to their rights as board members.”

White said that despite this, 90 percent of boards across the state have funding through the PRIM Board.

“Most of the board members have done so on their own and have no complaints. The benefit is the fees are less because the funding comes out of a pool,” White said. “The opportunities for are there for certain categories of investment – like private equity – certain fields that could lead to locally incurring more fees. It’s still the board’s money. It’s just an investment vehicle and they can redraw their money at any time.”

“Many of the boards regard it as an opportunity rather than a violation,” he said. “In many cases, it’s done voluntarily.”

Education Requirements

One issue that White and DelSignore both saw as a negative impact are education requirements.

“There are certain requirements of the PRIM board relating to education that caused members to resign from the board because they didn’t want to take the time to attend the seminars. This is a relatively new policy calling for board members needing to attend a certain number of hours or else they would be removed from the board.” Many were volunteer members, White said and felt this to be an unnecessary requirement.

Relevant Now in Worcester

“We’re talking about this now in Worcester because of these renewals, but it’s statewide,” DelSignore said. “We put together a well-structured portfolio. We haven’t had any scandals. We all take it very seriously and are being held back.”

He said that the retirement board is trying to get legislation passed to take that line out preventing them from making investments.

“If something isn’t passed soon, we won’t be able to make any investments in private equity at least until the end of the year,” he said. “Other people aren’t talking about this yet. We’re alerting people. The enthusiasm isn’t as great in other places as Worcester. The passion is with Worcester right now.” 

 

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Comments:

Harvey Beehive

Government manages money about as well as it manages itself. At least there's consistency!

Edward Saucier

I thought I heard all the investing BS on CNBC, but the chairman of the Worcester Retirement Board made some real wild virtually impossible statements. He is trying to make stabilizing investments by investing in companies that don't go up and down by investing in private equity and other risky things. Things that actually caused the collapse of the financial markets.

Pension funds aren't supposed to put members money in "risky" investments. Pension fund administrators hire investment firms to make their investments. Pension funds come under the heading of "institutional investors." I think "private equity funds" are too risky for the regular pension fund as are "derivative" investments

Most private equity funds are offered only to institutional investors and high net worth individuals with substantial assets and who have had experience with sophisticated investments. Investors must be able to commit large amounts of capital for a long period of time, and recognize that their assets will be illiquid, as these ventures are generally long term and/or volatile in nature, and there is no public market for the funds. Finally, investors must be able to bear the risk and potential of losing their entire principal investment. GOOGLE - HSBC Private Bank Finance - Benefits and risks of private equity investing.

Rhode Island just got hammered for investing in a private equity firm called 38 Studio.

The big problem with private-equity is when firms make profits off companies that go bust, particularly when those profits directly contribute to the companies going under. The elites may not be bothered by that but any pension fund administered for state or private employees should find that to be morally repugnant.

Harvey Beehive

Ed...for once, I agree with you.




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