PERS IAP Accounts – Too Much Politics? Disclosure Lessons from Oregon Secretary of State Dennis Richardson

See prior September 18. 2017 blog post  for important background regarding PERS adoption of age weighted IAP accounts.

Once again, it appears that younger workers are being short changed by PERS in the adoption of age weighted IAP accounts.  Remarkably, there was no opportunity for public discussion on vendor selection or strategy regarding how the age based portfolios would be constructed.

Rather, it was announced in September that the French insurance conglomerate AXA’s subsidiary Alliance Bernstein, what some call the AIG of France, would be awarded the contract to manage more than $8.2 billion in participants IAP accounts.   Some will argue that this isn’t really an $8.2 billion contract since it will simply involve reshuffling assets among participants internally.  My thought would be, tell that to the participants.

Paris Based AXA and Le Vie Bonne Courtesy of Oregon PERS

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One obvious question to PERS directors and Democratic State Treasurer Tobias Read is why a domestic vendor was not chosen for this important public contract.  All sitting members of the Oregon Investment Council were appointed by Democratic Governors.   And where were the labor unions?

One has to wonder what it will take for the board to appreciate that supporting domestic based businesses should be a focus, especially when they can do a better job at a lower cost.  In addition, there was no disclosure whether any lobbyists were involved and whether any council members were directly lobbied.  The Council only discloses “placement agents,”  those who have formal fee arrangements based upon how much business they secure with the council.

For capital markets to function and a democracy to work we need some level of disclosure regarding key government contract decisions.   So before explaining how younger workers are being short-changed in their IAP accounts, let’s look back at one Governor who put forth common sense PERS reforms, John Kitzhaber, a Democrat, who was driven out of office due to a conflict of interest regarding his significant other and her renewable energy consulting.

See this blog post regarding Kitzhaber’s resignation for more details not covered in the news media.

Kitzhaber’s past political opponent for Governor Dennis Richardson went so far as to file criminal legal complaint against Kitzhaber during his campaign.


Richardson went on to become Secretary of State, pledging more transparency and no conflicts of interest.  In today’s Oregonian, however, Gordon Friedman wrote a story about Richardson initially refusing to disclose who was funding an upcoming trip to China and who the participating Oregon based businesses would be.


Read full story here:

Dennis Richardson plans trade mission partly paid by Chinese governments |

Most surprising to me is that the participating businesses don’t seem to be employment intensive but rather a mix you might expect to see on cable’s home shopping channel.

When I reviewed both Kitzhaber’s and Richardson’s tax returns for various leading journalists during the race for governor  I was struck by the lack of interest in three areas regarding Richardson.  The first is that Richardson made a contribution to his church that equaled almost a third of his taxable income.  Nothing wrong with that in that churches are vital part of our social structure whether one is Catholic, Mormon, Jewish, Evangelical or Muslim.

Where it gets odd is that churches enjoy tax exempt status yet are not required to file the standard 990 form with the IRS that all other tax exempts file, including foundations and various charities.  Does the church have $100 million in assets or $100 billion, who knows?  This is important, especially given the momentum to allow churches to openly engage in political advocacy.

The second strange thing about Richardson’s return is that implies he had a significant source of income from China, $242K in 2013, that is, unless there is an error on his tax return.   This wasn’t even a talking point when he ran for Governor against Kitzhaber.  See schedule from his return below.  Again, perhaps this is an error on the part of his CPA?


The third issue was the irony of him claiming Kitzhaber’s conflict of interest when Richardson’s wife was employed as his legislative assistant while a sitting legislator.  Of course this is common practice yet also the very essence of a conflict of interest.  See following story by Nigel Jaquiss for a few details.WWNigelRichardsonwifevisual.png

Perhaps my point is that there are plenty of conflicts of interest to go around and its time someone step up and demonstrate leadership.   Perhaps a legal challenge to the current PERS Age Weighted IAP plan would be a good start.

State Treasurer Tobias Read worked for Larry Summer and Cheryl Sandburg at the US Treasury, both of course are proteges of the godfather of hedge funds, Robert Rubin.  Reed should know this is a bad decision for participants and a gravy train for AXA.

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Tobias Read, Oregon Treasurer

Is the current AXA Glidepath Plan a Bailout for Private Equity and Hedge Funds?


Note that if you are 45 years old you will have 100 percent of your IAP balance invested in the pooled OPERF fund, which is roughly invested one-third in private equity, hedge funds, alternatives and fixed income with a private equity like character.  Older employees will only have 50 percent in OPERF and thus much less exposure to these higher risk less liquid investments.

The indexing is conceptually sound yet the implementation here looks downright goofy.  For example, on the bond side, why not use short, intermediate and long term funds linked to market accepted indexes.  The current mix looks to have significant risk from being too long term oriented if interest rates rise and considering that more than 85 percent of participants transfer their funds out upon retirement.

Some will also argue that younger workers want higher risk less liquid alternatives and hedge funds yet I might ask the participants, thinking balance would be more desirable.  After all, the primary member base is composed of teachers, nurses, etc., not accountants and lawyers.

Below is the link to the Oregonian story by Ted Sickinger based upon the last OIC meeting:

Oregonian-PERS managers shift investment of members’ money to age-based |

Time to Pop the Hood And See What’s Inside?

While many enjoy talking about the stellar returns of private equity in the past, little attention is paid to what investments are actually  now in these funds.  Think long term is the mantra and don’t be concerned about liquidity.  Don’t worry about knowing your actual fees, these are internal transactions to the partnership.

If the OIC wants to make this IAP change it should require that the annual audit reports for each of these funds be posted on its website, especially given concerns regarding these firms ability to self value their investments.  Perhaps Secretary of State Dennis Richardson could lend a hand here when he returns from China.

TPG, with which Oregon PERS has more than $1 billion, has provided aggressive valuations in the past and experienced huge failures.  Below is the link to a legal case summary for a senior TPG employee, Adam Levine, who sued  TPG over wrongful discharge.  Rather interesting reading and a good case for making these audit reports public so that participants can at least annually see what is in the funds.

The legal case was filed by Levine in the United States District Court on April 2, 2015.   Levine claimed he could destroy TPG in a matter of weeks by disclosing its business practices.  Levine later filed a whistleblower complaint.

Legal Filing Adam Levine v. TPG Capital


Related News Story on Levine – TPG conflict from Huffington Post

Summary:  Oregon PERS Board Chair Faces Tough Math

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John Thomas, PERS Board Chair

Per media reports, Thomas believes the board’s focus needs to remain on how to manage the crippling costs associated with the pension fund’s existing $24 billion unfunded liability, not adding another wrinkle to an already complicated system that will increase costs and may not deliver much value to members.

As OIC Chair, the board who makes the investment decisions, Rukaiyah Adams notes that the basic logic of recognizing differences in PERS participants ages and investment perspectives is sound.

I might add that the problem is that the implementation is clearly flawed and once again kicking the can down the road on the backs of younger PERS participants.  This time with the actual mix of investments rather than updated administrative rules set by the PERS board.

The current plan will serve only to divide members as they see significant differences in returns on their IAP statements and the impact of such aggressive investments in private equity and so called alternatives, such as math algorithm based investing, falling more heavily on younger participants when the next inevitable market decline occurs.