USPF Perspectives & Insights - Issue #2

Now Surfacing in the States: Imaginative Early Retirement Options

State of California – The pressure is on state and municipal pension funds and retirement systems in the USA.  If market returns are negative – think of the impact on state funds such fall 2008 – there are unpleasant options for these asset owners:  (1) raise taxes; (2) cut benefits; (3) defer payments into the system until the economy recovers.  All of these alternatives can lead to long-term unintended consequences.  But the red ink on the ledges of state system is real – and immediate.

In the midst of the current recession, state and municipalities across the country are seeking to employ every method they can devise to cut the costs to local governments (who pay premiums into the state funds to fund their respective employees’ benefit plans, including retirement).

The most unhappy alternative, especially in stressful economic environments, is raising consumer and business taxes – now seen by many government officials as not only generally unacceptable but sure political suicide. With that in mind, a new round of innovative early retirement options have been ginned up and introduced around the country during the past year, but perhaps none more imaginative than those in the State of California, where many cities and municipalities face record deficits.   (The state itself is “risking financial meltdown,” as described by Reuters News, with a $25 billion deficit looming if the books are not balanced soon.)

The operative theory behind state and local governments’ early retirement incentives is essentially the same: provide long-term, higher salaries employees with enough “goodies” to encourage them to retire sooner than anticipated, clearing the way for hiring new employees at lower salaries.  Or in some cases, creating job slots that will remain vacant, at least for a while. What is amazing is the mix of incentives that some California cities have invoked. Here are a few samples:

The City of Merced is offering its employees a “Golden Handshake” which provides those who chose to retire within their window (which expires in July) with two extra years of service credit. Senior employees also qualify for an additional cash payment.

Thousand Oaks took a different approach, offering, on a first-come, first serve basis, with payments of up to $20,000 into the Retirement Health Service Account for each employee electing to retire. The city fathers have limited the number of eligible retirees to the first 20 that qualify. Other cities have mixed the benefits to suit their specific needs.

Ventura cobbled together a combination of severance pay, with a maximum of 13 weeks, along with 12 months medical insurance coverage to employees of retirement age with 20 or more years of service. All of these early retirement incentives must pass muster with state and federal law, as well as the agreements each city has with CALPERS, the California Public Employees Retirement System.  (Note that CalPERS has about 2,500 local employer entities participating in the state system.)

Many of the agreements permit cities to offer early retirement options to employees as young as age 50, but that incentive in itself is often not enough to persuade a worker to leave. Creative juices are clearly flowing and we should expect to see more interesting early retirement plans in the months ahead in California and in other states and cities.

For more on California’s Retirement Options, follow the links:

 California State Teachers’ Retirement System

 California Public Employees’ Retirement System (CalPERS)

New York State Pension Fund – Best Kept “Secret” Investor Looking for In-State Investments

Albany, NY-- A nine-year old program designed to encourage investment of New York Municipal Pension Funds in private sector companies within the state has had a remarkable record of return, but it may also be one of the best kept secrets in the Empire State. Perhaps that explains why New York State Comptroller Thomas DiNapoli has been traveling around the state recently aggressively promoting the investment opportunity.

Known as the In-State Private Equity Program, the idea is to invest some of the money held in the state’s massive common retirement fund in New York-based companies that require capital for growth or a refinancing of ownership. While no one is making over-the-top predictions for future growth, the numbers to date are very impressive: An internal rate of return of more than 30%, with $134.1 million returned to the fund on the base of $74.9 million invested in 27 different companies -- all firms located in New York State.

The program is designed to provide private investment returns consistent with the risk of private equity while also expanding the availability of capital for New York businesses. The funds cover a full range of investment stages, from venture capital for new businesses, to growth equity for established companies that are seeking to expand, and buyout funding for businesses that are undergoing ownership transitions and seeking growth.

Venture backed businesses are of significant interest for economic development because early stage companies have the potential for significant growth, and are frequently involved in developing new technologies that may lead to the formation of related businesses.

In a report to State officials released in April, Comptroller DiNapoli explained that “…the program has proven to be an important contributor to New York’s economy by making equity capital available to small businesses traditionally overlooked by investment professionals in this asset class….it provides a unique model for how the pension fund can identify profitable opportunities, while supporting business growth and job expansion right here in New York State...”

To learn more about the Comptroller’s recent visit to Rochester where the fund was discussed, access the following link:

New York City Comptroller’s Office: Bureau of Asset Management

What’s New in Florida?  Terror-Free Retirement Accounts

Tallahassee, Florida –  A number of state pension systems in the USA have begun divesting companies in their portfolios [that have] interests in or dealings with the pariah nations of Iran and Sudan, as a means of protesting those countries’ domestic or foreign policy practices. Now, the state of Florida is taking that practice one step further by offering teachers and other public employees in the Sunshine State the opportunity to invest in a new retirement plan, similar to a corporate 401(k), that does not invest in businesses with interests in Iran and Sudan.

While state officials are not sure how many of the 121,000 eligible state employees will choose to participate, they view the option as another way for the “average worker” to protest the manner in which both countries handle their affairs.

“Individuals can now stand up against genocide in Darfur and Iran’s quest for nuclear weapons,” said State Senator Ted Deutch (D-Boca Raton) who led the initiative. The terror-free fund will be available as one facet of an optional state retirement program, operating much like a private sector 401(k). Florida will contribute a set percent amount for each participant annually and the money will be invested in stocks, bonds and money markets. For the first year of the program the state’s contributory level has been set at 9%.

For more information, follow the link to:

Florida Retirement System Pension Plan

Prepared by Dave Vieser and the Editors of the Institute

Perspectives & INSIGHTS is prepared by the Governance & Accountability Institute, Inc.

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