In this issue

CIOs vote with their feet

Casey Family Programs seeks a director of investments

Pension underfunding: more pressure to perform?

Comings and goings


Michael Travaglini and MassPRIM: Pay, Performance and Politics in Boston

In our last letter, we noted the muddle in Missouri over incentive pay for public pension managers. Missouri, like many states, is in fiscal lockdown. In this climate, the politicians are reluctant to pay fund managers a bonus, however much they’ve earned it by saving the taxpayers hundreds of millions they would otherwise have had to ante up for pensions. Still, the managers affected are – so far – still at their stations in Jefferson City.

But in Massachusetts, the boss has left the building. Massachusetts Pension Reserves Investment Management (MassPRIM) executive director Michael Travaglini has just quit to go work for a hedge fund, citing legislative moves to crimp performance bonuses.

Mr. Travaglini has a base salary of $322 thousand and earns a bonus of up to 40 percent if and when the fund beats its benchmarks. In fiscal 2008, for instance, he received a 20 percent boost – $64 thousand on top of his base.

The bonus was based on the three-year period ended June 30, 2008, when MassPRIM ranked in the top 5 percent of comparable funds, according to Wilshire Associates. Of course, 2008 itself was a bust, but the three-year average still merited the bonus. The whole point of averaging is to soften the effect of unusually bad years – and also unusually good ones. And even in 2008, when MassPRIM lost 1.81 percent, it was still in the top 20 percent among its peers.

One proposal in the legislature says that no state worker should earn more than the governor: $143 thousand (and in Massachusetts the guv doesn’t even get a mansion!). It probably won’t pass, but it shows the mood of the politicians in Boston.

“Someone else can hang around for that,” said Mr. Travaglini, “but it’s not going to be Mike Travaglini.”

“Most people will say, ‘Good riddance. If you want to make more money, go do it in the private sector,’ and that’s what I’m going to do. But there’s a real threat to not being able to recruit and retain competent people here.”

He added: “People can vote with their feet, and that’s what I’m doing.”


Anne Martin: Now Pulling the Lead Oar for Wesleyan

Back in October, Wesleyan University in Connecticut fired its free-wheeling chief investment officer Thomas Kannam, alleging that he had spent much of his time on outside business ventures apart from, perhaps even adverse to, his official duties. The school subsequently sued Mr. Kannam for this and that, and the lawyers in Wesleyan vs. Kannam are apparently still at work.

Now, Wesleyan has filled the six-month CIO vacancy by hiring Anne Martin, previously a direct report to Dr. Swenson at the Yale endowment. It’s just a half-hour up the road from New Haven to Middletown, but Ms. Martin is moving from Ivy to Ivy-wannabe and, in endowment size, from $16.3 billion to a mere $600 million. This is an awkward size for a college endowment: not small, but barely large enough to justify a fully-staffed investment office. And some reports suggested that the administration was seriously looking at outsourcing. But, they have chosen to hire a highly-credentialed investment chief instead.

Ms. Martin’s starting salary was not disclosed but her predecessor, the ill-starred Mr. Kannam, was paid $460 thousand in 2008, making him the second highest paid university employee that year.

Ms. Martin, a Stanford MBA, handled venture capital, energy, and commodities for the Yale portfolio. Previously, she was a managing director at Deutsche Bank in San Francisco for eight years and had a three-year stint as general partner at Rosewood Capital, also in San Francisco.

Among her other accomplishments, Ms. Martin rowed for the U.S. Olympic team in 1988 and continues to serve the sport as co-chair of the National Rowing Federation.


Shawn Wischmeier: Another Indianian heads for North Carolina

North Carolina Treasurer Janet Cowell, who fired the previous state pension CIO last year, has finally filled the vacancy. Mr. Shawn Wischmeier becomes chief investment officer of the North Carolina Retirement Systems (NCRS) on June 23 with a base salary of $320 thousand.

This story has some curious features, beginning with the termination of former CIO Patricia Gerrick last August. The local press first reported that Ms. Gerrick had “resigned unexpectedly” with no explanation given. They did note that she had been fired from her previous job as CIO of Indiana’s PERF pension system. (She received some compensation after filing a federal discrimination suit, but was not reinstated.) But that seemed to have no direct bearing on her termination in North Carolina.

Then, various allegations emerged regarding favors offered to her by placement agents (allegedly accepted by Ms. Gerrick on behalf of her daughter) while she served as North Carolina CIO from 2004 to 2009.

See Charlotte Observer, 23 October 20098:

No formal charges were brought, and the Governor and Treasurer have made only lawyerly remarks about her departure. But the local press routinely says she was “fired.”

There is also a layer of political context. Ms. Gerrick was hired in 2006 by former Treasurer Richard Moore (who also arranged to double her salary in 2008, from $167,900 to $340,000). But Mr. Moore ran for governor (and lost), then was succeeded in the Treasurer’s office by Ms. Cowell in 2009. In light of pay-for-play pension scandals in California and New York, Ms. Cowell has made a special effort to keep her own skirts clean, calling for reform legislation to prevent such goings-on in her state. And it may be that that she chose to underline this stance by moving out the previous treasurer’s appointee and moving in her own.

Which brings us to Mr. Wischmeier. By a curious coincidence he, like Ms. Gerrick, had also been chief investment officer of the PERF fund in Indiana. He got that job in 2006, recruited by Korn/Ferry from Eli Lilly’s Global Treasury Group. Mr. Wischmeier, with an MBA from Kellogg/Northwestern and both an MS and BS in chemical engineering, has done a commendable job in his four-year run at PERF, moving the plan’s investment performance up from the bottom to top quartile among its peers, and winning national recognition as Institutional Investor’s Large Public Plan of the Year.

It’s a big step up, from Indiana’s $14 billion fund to North Carolina’s $68 billion. Based on compensation for PERF-sized funds, it’s likely that he has at least doubled his base salary, even though he’s starting at slightly less than the $340 thousand his fired predecessor made in 2008.

Meanwhile, back in Indianapolis, the PERF CIO job has been filled by promoting deputy CIO David Cooper. Mr. Cooper, who had been responsible for fixed income and real assets, was named by Institutional Investor in March as one of their 12 Rising Stars among public funds. It appears that he’s now rising even faster than he might have expected.


Florida’s FRS dives into hedge funds

Florida Retirement System (FRS), the fourth-largest state pension ($113 billion at 2009 year-end), is making its first major allocation to hedge funds this year. The State Board of Administration (SBA), which oversees FRS, just approved a plan that could move its total hedge holdings up to $6 billion pending legislative approval.

The meeting of the three-person SBA board had a definite “team of rivals” vibe. Attorney General Bill McCollum (Republican) and Chief Financial Officer Alex Sink (Democrat) are duking it out to see who will get the Governor’s chair being vacated by Charlie Crist. Mr. Crist, who is ex-officio chair of the SBA board, is fighting a close race for the U.S. Senate as an independent, after upstart Marco Rubio snatched away the Republican nomination from him. But they all suspended their campaigns long enough to stop by Tallahassee and give a unanimous thumbs-up to the new-look portfolio.

The plan presented to the SBA was worked out by consultant firm Ennis Knupp and SBA Executive Director and Chief Investment Officer Ashbel C. “Ash” Williams, with input from SBA’s own advisory council.

Mr. Williams is himself a hedge-fund vet and may have been a prime mover in the new allocation. This is his second at-bat as SBA Executive Director. He was lured away by a Wall Street job in 1996. Then, Governor Crist brought him back in 2008, with a base salary of $325 thousand and the double-barreled job of both executive director and chief investment officer. Mr. Williams spent that in-between decade as a managing partner at Fir Tree Partners in New York. He’s also an endowment guy, as board chair of Florida State University Foundation (he’s an FSU alumnus). His timing was exquisite, with his second stint beginning at the trough of the market in 2008, and nowhere to go but up.

A little back-story on the recent leadership of SBA:

A money-market pool run by SBA for local municipalities (separate from the pension fund) blew up during the credit-crunch in late 2007. A run on the fund reduced it from $27 billion to $14 billion in just a few days.

BlackRock was hired to sort out the problem, which they did, and Executive Director Coleman Stipanovich resigned while SBA searched for a new permanent chief. Mr. Stipanovich had an unlikely background for the job. A Vietnam vet with a masters in criminal justice, he got his start as a sheriff’s deputy in Gainesville. That he ended up running the $160 billion SBA perhaps had more to do with the standing of his brother, J.M. “Mac” Stipanovich, who ran Jeb Bush’s first campaign for governor in 1994. Mr. Bush finally won the governorship in 1998 and was chair of the SBA board in 2000 when Coleman Stipanovich was hired.

Mr. Stipanovich was making $182 thousand when he resigned in December, 2007. His successor, Mr. Williams, as noted, was hired six months later at $325 thousand, after a search by Ohio-based Hudepohl & Associates. Mr. Williams had more conventional credentials for the job, including an MBA from Florida State.

Although it previously had no explicit hedge fund allocation, FRS has been edging away from equities and toward alternatives for several years.

FRS will make room for hedge funds (which will go into the existing “strategic investments” category) by shrinking the current equity and fixed-income categories. Domestic and foreign equity will be merged into a single global equity allocation and reduced from 57 to 52 percent. Fixed Income will be reduced from 26 percent to 24 percent. Full implementation of the plan will require legislation to change a current statute, which limits total private investments to 10 percent. FRS already allocates about 4% to private equity.

FRS, unlike many of its peers – is not constrained by actuarial underfunding. It didn’t take a contribution “holiday” when times were good, so it entered the recession 106 percent funded. The average state pension in 2007 was only 83 percent funded. The Pew report, which sounded the alarm on widespread public pension underfunding, gave FRS high marks for its conservatism.

Ennis Knupp has projected that FRS would be 93% funded on June 30, 2009, the latest fiscal year-end, which means it’s still among the strongest public pensions in the country.


Position opening: Casey Family Programs – Director of Investments

I have been retained to find a Director of Investments for Casey Family Programs, the nation’s largest operating foundation focused entirely on foster care.

The Director of Investments will work with the Chief Investment Officer on selection and management of the foundation’s entire private markets portfolio.

Please call or email me, Charles Skorina (415-391-3431) for particulars.


AR: Absolute Return + Alpha: Annual Hedge Fund report card

And speaking of alternatives, I had lunch with Suzy Kenly of AR/Absolute Return + Alpha in Manhattan, on the hottest day of the year. She reminds me that they’re looking for responses to their survey to identify the top 50 hedge funds. There’s still time to add your opinion (and get a copy of the completed report in return), but just barely. Email or me at for a copy of the report card. Mail report card to:


Public pensions: even more underfunded than we thought?

Economists and actuaries have squared off on the solvency of public pensions. A while back, we looked at charges that some major public pensions were even more underfunded than they looked, taking the $200 billion CalPERS fund in California as exhibit A. It’s certainly not the worst, but it is the biggest. And, whether they want the job or not, they’re inevitably seen as the flagship of the public pension fleet.

We cited a recent study called “Going For Broke: Reforming California’s Public Employee Pension Systems” by Stanford University’s Institute for Economic Policy Research (SIEPR), which argued that CalPERS (and its sibling CalSTRS) did, indeed, have some serious problems. Other critics have made similar criticisms, but this one was right in their back yard, with the imprimatur of Stanford University, and it caused some heartburn up in Sacramento.


The SIEPR report was issued on Friday, April 2. It took just three working days for CalPERS to fire back with a press release (on Wednesday, April 7) attempting to rebut the Stanford economists. We were impressed. Not so much with the content, which looks like something thrown together in three days by a PR shop, but rather with its rapidity. And, to our delight, it kicked off a tussle that could pass for high drama in the desperately dull world of pension administration.


We waited hopefully for a riposte from Palo Alto and, sure enough, here came another salvo from the economists, defending their original charges.


Behind this clash of the titans is a long-standing dispute about how the liabilities of a pension fund should be measured. On one side stand the academics — financial economists — who believe in “economic” or “market-value” evaluation.” On the other side are the pensions and their actuaries, under the banner of “actuarial evaluation.”

The actuarial value of their liabilities governs to what extent a pension is “funded.” The actuaries say the present value of CalPERS liabilities as of June 30 2008 were $268.3 billion. Their assets were $233.3 billion. Divide the latter by the former and, voila, a healthy funding ratio of 86.9%. Anything over 80% is considered adequate in PensionWorld, so everything is fine.

Then come the pesky economists who say the actuaries have it all wrong. Instead of using a discount rate of 7.75% (same as the projected portfolio return) to find the present value of those future liabilities, you should be using be using the rate appropriate for a riskless cash-flow, more like 4.14% (since the risk that vested benefits won’t be paid to retirees is effectively zero).

For “economic” or “market-based” valuation argument, see, for instance:

Robert Novy-Marx and Joshua D. Rauh, “The Liabilities and Risks of State-Sponsored Pension Plans,” Journal of Economic Perspectives 23, no. 4 (Fall 2009): 191-210.

Or: Biggs, “The Market Value of Public-Sector Pension Benefits” (April 2010):

What if the academics are right? Uh-oh. That would be very bad. Using this “economic valuation,” the liabilities shoot up to $478.3 billion, and the funding ratio drops to just 49.9%. And if California (and 49 other states) have to officially admit that their pensions are underfunded, then they have to do something about it. Uh-oh, again. “Doing something” means raising taxes, increasing debt, or reducing the pension formulas for current workers. All about as appealing as a ground-glass sandwich.

The CalPERS response amounts to saying that they are playing by the rules they’ve been handed by the legislature, actuaries and accountants. In effect, they’re just following orders.

SIEPR is saying that those orders are flawed. Current rules ignore the risk that those projected portfolio returns may not pan out. The SIEPR researchers ran Monte Carlo simulations showing that there is a 71% chance that CalPERS will have a deficit within the next 16 years, and a 44% chance that such a deficit will exceed $250 billion.

Like a saloon fist-fight rolling out into the street, the dispute went national on April 27, landing in the editorial pages of the Wall Street Journal. The editors, unsurprisingly, supported SIEPR over CalPERS, endorsing the think-tank’s recommendation that California shift to 401K-type defined-contribution plans that the unions bitterly oppose. On May 11, the Journal printed letters from pension and union officials who, unsurprisingly, lambasted the SIEPR study. And a week later, the head of the SIEPR study, Dr. Joe Nation, fired back still again, with a letter arguing that their analysis was conventional among academic economists and had been used by many other respectable researchers.

See Wall Street Journal Editorial (27 Apr 2010):


See: SIEPR response to CalPERS response:

See: Dr. Joe Nation letter to Wall Street Journal (18 May 2010):


See: Letters from union and pension leaders to Wall Street Journal (11 May 2010):


It’s all been good fun, but what are the practical implications for how public pension money will be managed? If we get a decade of “normal” portfolio returns, then probably nothing. But, what if the “New Normal” is not like the “Old Normal?”

If returns are poor and/or much more volatile and states like California have no surpluses to give them and can’t cut benefits, they will be under pressure to find higher risk-adjusted returns, somehow. And people are going to take another look at the economists’ case. The SIEPR researchers, and academics generally, think that pensions should rely more on bonds and less on equity to reduce volatility, but this seems to conflict with the incentives of the pension managers, since it would require more state support or employee-contributions to balance the lower returns. In other words, more ground-glass canap├ęs.

We note that last summer, when the Montana public pension issued an RFP for actuarial consultants, they specifically said they weren’t interested in hiring any actuaries who favored the “economic evaluation” approach. Only traditional “actuarial” evaluators need apply. At least they were candid about it.

For now, it appears that the pensions make their own rules and economists can only kibitz.

P.S.: A late development as we go to press:

GASB (the Government Accounting Standards Board), one of the few exogenous forces which might push the states toward more realistic evaluation of their pension liabilities, is said to be close to issuing some new rules on the subject.


Stay tuned.

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