Federal Report: February 2002

Summary

Public Pension Funds Blame Enron for Million-Dollar Setbacks

CalPERS Selects Emerging Market Investment Managers

Court: City’s Termination of COLA for Pension Benefits Was Not Unconstitutional

DOL Sues Financial Group for Failing to Forward Employee Withholdings To Pension Plan

Bush Advocates Corporate Responsibility, Seeks to Protect Workers’ Pensions

Portman and Cardin to Introduce Pension Funding Bill

Public Pension Funds Blame Enron for Million-Dollar Setbacks

Across the country, pension funds for government employees, union members, teachers and other workers have lost more than $1.5 billion because of the sharp decline in their Enron Corp. holdings. For example, six of California’s largest public pension funds lost a combined $250 million when Enron’s once-soaring stock crashed and burned late last year.

The University of California’s pension and endowment funds lost $145 million on its Enron stock holdings — the most in the state and the second-largest setback reported so far by public investment funds across the country. The losses of other major California public pension funds ranged from $1.6 million to $49 million.

Only Florida’s state retirement system, with $325 million in losses on Enron stock, has been hurt more. Florida’s $94 billion state pension fund lost millions after being forced to dump 7.5 million Enron shares.

In Ohio, the state’s two pension funds for government employees lost $114 million. Washington State’s $42 billion retirement fund lost about $70 million. Wisconsin state employees lost up to $43 million in pension fund assets when Enron stocks and bonds held by the Wisconsin Investment Board became virtually worthless, U.S. Rep. Tom Barrett (D-Wis.) said.

“Enron’s self-destruction has had far-reaching consequences, and has now reached its hands into the pockets of Wisconsin workers,” Barrett said. “As we investigate this crisis, we should pay special attention to the affects on Wisconsin and other state employees, whose pension benefits have now been jeopardized by Enron’s mismanagement.”

As big as they are, the Enron losses represent just a sliver of the pension funds’ total assets, and aren’t expected to affect their ability to pay retirement benefits. Pension fund managers have reacted to these losses with a mixed message: They voice outrage at Enron and accuse it of fraud, yet at the same time reassure retirees and workers that the losses are such a small part of their multibillion-dollar portfolios that pension payments generally will not be affected. Fund managers said the losses generally represented less than one-tenth of 1 percent of overall holdings. But some pension funds lost a higher percentage, sometimes as much as 0.5 percent.

The public funds burned by Enron’s collapse are joining lawsuits accusing the company’s executives of covering up accounting shenanigans that devastated the stock. Several states and labor unions also have filed suit against Enron and its directors, seeking compensation for the pension losses.

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CalPERS Selects Emerging Market Investment Managers

The California Public Employees’ Retirement System (CalPERS) has selected four investment firms to actively manage up to $1 billion of emerging market assets. They were selected from a list of seven firms interviewed by the system’s Investment Committee. The investment firms chosen following a worldwide search are:

• AllianceBernstein, New York;

• Capital Guardian Trust Company, Los Angeles;

• Dimensional Fund Advisors, Santa Monica, Calif.; and

• Genesis Asset Managers Ltd., of Knightsbridge, London, U.K.

“This line-up of managers have disciplined investment strategies and the research capability to create long-term value for our fund,” William D. Crist, president of CalPERS’ Board of Administration, said Jan. 24. CalPERS’ emerging market managers will receive funding after the pension fund concludes its review of its permissible country guidelines.

In November 2000, CalPERS’ board directed a full examination of a variety of factors that the fund uses in determining which international countries are suitable for prudent investing. Historically, the pension fund has determined country selection based on six factors: market liquidity and volatility; market regulation and investor protections; capital market openness; settlement proficiency; transaction costs; and political stability.

CalPERS has expanded its framework to also include a higher standard of political stability and two additional investability factors: financial transparency and labor standards.

“With our managers in place and the future selection of permissible countries on the horizon, we will soon have the combination we need to actively manage investments in today’s emerging markets,” said Michael Flaherman, Chair of CalPERS Investment Committee.

CalPERS Investment Committee will consider in February country rankings that will dictate whether a country is permissible or restricted for investment by the pension fund. Once approved by CalPERS Board, emerging market managers will have an opportunity to review the fund’s new permissible country list to determine if they can effectively manage assets under the new mandates. Agreements with the fund managers will be contingent upon final contract negotiations, including fees, and terms and conditions.

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Court: City’s Termination of COLA for Pension Benefits Was Not Unconstitutional

The city of Providence, R.I., did not violate the constitutional rights of retired municipal employees when it terminated cost-of-living adjustments (COLAs) to the pension benefits of certain retirees, according to a ruling of the First Circuit U.S. Court of Appeals.

At a meeting held on Dec. 6, 1989, the City of Providence Employee Retirement Board voted to approve a variety of retirement benefits for police and firefighters, including an increase in the COLA for pension benefits. However, following the board’s vote, the city was reluctant to honor the terms of the new retirement plan, and it filed an action in state court challenging the validity of the retirement board’s action. Then, on Dec. 17, 1991, the parties agreed to a settlement pursuant to which retired police and firefighters would receive a 6 percent COLA. The settlement was approved by the court and entered as a consent decree.

The city complied with the terms of the consent decree for about two years. Then, in 1993, the city again balked at funding the COLA benefits, and on Jan. 6, 1994, the city council passed an ordinance that terminated the 6 percent COLA increase. On the same day, the city council passed another ordinance that established a new plan for retiree benefits, which did not include the 6 percent COLA increase.

Meanwhile, the city filed a second action in state court seeking a declaration that the consent decree was invalid because it had not been entered with the ratification of the city council. The Rhode Island Supreme Court ultimately ruled that the consent decree was valid and binding upon the city, but that the decree covered only those employees who had retired on or before Dec. 18, 1991.

While the controversy was ongoing, between 1991 and 1995, the city and members of the police and fire departments negotiated a series of collective bargaining agreements that provided for a 5 percent COLA increase. Although the Providence Code of Ordinances requires the city council to ratify all collective bargaining agreements, the council never ratified the agreements with the police and firefighters. Beginning in 1995, the city council passed a number of ordinances, each of which placed the amount of COLA benefits for retired police and firefighters below the levels established under the collective bargaining agreements.

The case is Picard, et al. v. Members of the Employee Retirement Board of Providence, et al. (Nos. 00-2367 and 00-2580).

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DOL Sues Financial Group for Failing to Forward Employee Withholdings to Pension Plan

The U.S. Department of Labor filed suit in federal district court in Minneapolis against officials of the 401(k) plan sponsored by Tuschner & Company, Inc. (TCI) for its employees. TCI was a Hennepin County financial group that filed for Chapter 7 bankruptcy on March 10, 2000.

According to the department’s lawsuit, defendants John M. Tuschner, Dennis B. Reiter and Francis A. Dahlberg, plan trustees, did not put money into the 401(k) plan that was withheld from workers’ paychecks and did not keep these funds separate from TCI’s general assets. This failure occurred from February through June 1999.

TCI also withheld money from paychecks of some employees as loan repayments to the plan and failed to segregate these repayments. The funds were commingled with the company’s general fund and used for operating expenses. TCI’s 401(k) plan had 25 participants and assets of $213,400 as of December 31, 1998.

The lawsuit seeks to have the defendants repay the plan for any losses, including lost opportunity costs, resulting from their fiduciary breaches, and permanently bar them from serving as fiduciaries or service providers to any employee benefit plan covered by ERISA.

If necessary, the department is asking that the defendants’ own accounts be used to restore the losses. The lawsuit is also seeking to have the court appoint an independent fiduciary to oversee the plan after the trustees are removed.

The case (Chao v. John M. Tuschner, Civil Action # 02-CV-114) was filed on January 14 in the federal district court in the District of Minnesota in Minneapolis.

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Bush Advocates Corporate Responsibility, Seeks to Protect Workers’ Pensions

President Bush, seeking to distance himself from the Enron Corp. bankruptcy, urged corporate America to be more accountable in his State of the Union address Jan. 29. He also called on Congress to pass legislation to protect worker pensions.

The pitch for good corporate citizenship, a staple of Bush’s presidential campaign, was part of his State of the Union push for pension safeguards and the disclosure of more corporate financial information. Enron’s collapse in December cost many unsuspecting workers their life’s savings.

“Through stricter accounting standards and tougher disclosure requirements, corporate America must be made more accountable to employees and shareholders and held to the highest standards of conduct,” Bush said to applause. “Retirement security also depends upon keeping the commitments of Social Security, and we will. We must make Social Security financially stable and allow personal retirement accounts for younger workers who choose them.”

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Portman and Cardin to Introduce Pension Funding Bill

Reps. Rob Portman (R-Ohio) and Ben Cardin (D-Md.) are poised to correct an anomaly in current law that pegs pension plan funding requirements to the now-defunct 30-year Treasury rate. The move was hailed by the ERISA Industry Committee (ERIC), which claims the requirement threatens the retirement security of millions of Americans.

The legislation would not only correct the problem but, in the process, would provide a much-needed boost to the economy.

ERIC President Mark J. Ugoretz said: “The Portman-Cardin initiative corrects the problem caused by the U.S. Treasury’s buyback and then sudden elimination of its 30-year bond. Current law pegs funding requirements for defined benefit pension plans to the 30-year Treasury bond rate which is no longer a relevant benchmark.”

Separately, ERIC sent a letter to President Bush urging him to address in his budget proposals to Congress the pension funding crises caused by the U.S. Treasury’s axing of the 30-year bond.

Simply stated, required pension plan contributions increase as the 30-year Treasury rate decreases. Due to the government buyback and subsequent discontinuance of 30-year Treasury bonds, there are doubts if the rates for the long-term debt instrument are a stable or appropriate benchmark for plan funding. As a result, required contributions to pension plans have skyrocketed even though the plans are well funded for their liabilities, ERIC said. In some cases plan sponsors will face a tenfold increase over last year’s contributions solely because of the artificial drop in the long-term bond rate.

Ugoretz also claimed the Portman-Cardin bill could stimulate the economy by not diverting to already financially sound pension plans the scarce resources for jobs, equipment, transportation, and other investments that could stimulate the economy.

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