Archive for the ‘Oregon-PERS’ Category

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?


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In 2004 the State of Oregon decided to isolate the “employee contribution” part of PERS and put these amounts into what are called IAP (Individual Account Program) accounts. These 200,000 IAP accounts are essentially a defined contribution program, not unlike a 401K, for which members earn returns based upon market results with no guaranteed rate of return.


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Index based investment using a company’s total stock market value is a great concept and indexes such as the S&P 500 generally provide solid low cost diversification.

Unfortunately, Wall Street has now applied this concept to “sectors” of the stock market without adjusting for the size of individual companies.  This is not only exposing investors to added risk due to poor diversification yet also handicapping newer smaller companies on which the future economy is dependent.

Let’s take a look at the two largest holdings in the MSCI Health Care Sector Index.  An index used by more than 97 percent of all large fund managers.

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This week TD Ameritrade held its annual institutional advisor conference at Cesar’s Palace in Las Vegas.  CEO Fred Tomczyk, pictured on left below, summarized TD’s strong financial position in addition to his belief that money market accounts should be about safety and stability. For this reason, TD has chosen to minimize both duration and credit risk in these accounts. Tomczyk is clearly the right person to be leading TD Ameritrade.

Tom Bradley, pictured on right below, leads the institutional area and was instrumental in successfully advocating against the Merrill Lynch brokerage exemption rule, a rule which allowed investment professionals to avoid registration with either the state or SEC.  It is now up to the SEC to take action regarding this rule which has led to such widespread abuse.

I asked the first question of Tom after his presentation.  The question was, will TD Ameritrade now aggressively advocate that private equity and hedge funds be required to register with the SEC.   This same question was asked of both Karl Rove and General Wesley Clark, in addition to whether or not they are personally invested in private equity or hedge funds.  I will mention their responses below.

My sense is that requiring hedge funds and private equity to be registered with the SEC is essential to restore transparency and investor confidence. Bradley  responded that he is optimistic and sees the new SEC chair as a reasonable person but stopped short of committing to lead this much needed effort.  Bradley also noted that the SEC has had difficulty regarding effective enforcement, as indicated by the $50 billion Madoff scandal that broke in December.


In response to my question directly to Rove and Clark, Karl Rove said “I am too poor to invest in private equity and hedge funds,” but added that he thought that as long as these investors are large sophisticated investors, perhaps there is no need for registration.  He added that if he were not speaking at the conference he would be hunting with T. Boone Pickens, one of the nations largest private equity investors.

Pickens spoke the previous day and noted he had lunch with President Bush that week, a lunch Bush requested.   Pickens added that Bush asked him straight out, “Boone do you understand all this stuff Wall Street has created.”  Pickens replied, I am a geologist and have no idea what they were doing.

What neither Rove or Bush seem to realize is that the biggest investors in these hedge and private equity funds are now tax exempt public pensions, endowments and foundations.  What this means is that teachers, janitors and college students financial futures are directly tied to these investment vehicles, making registration with the SEC imperative.  Not to mention their interlocks to banks and their government insured deposits.

Clark was articulate in his response, noting that elimination of the “uptick rule” had fueled short selling by hedge funds, perhaps adding to market volatility.   He did not however answer the question regarding whether he was personally invested in such funds.  Clark also cited the Bush administration as being lax in its regulatory responsibilities.  Although perhaps true, Rove repeated several times that it was the Democrats who blocked the Bush administrations efforts to regulate Fannie Mae, a key catalyst to the current financial crisis.

My overall take on the Rove Clark debate is that Rove overlays his economic philosophy with too much politics and not enough basic math, although he was certainly right on the Fannie Mae issue.  Clark is a brilliant articulate leader, perhaps able to contribute to solving this mess, yet he is simply naive with respect to the impact of hedge and private equity funds.  One thing is for sure and that is the increasing importance of Paul Volcker to the Obama administration.  Volcker appears to be the only visible leader who truly “gets” what is needed to stabilize the system.   Pictured below is a photo of Rove and Clark responding to my question.


William Poole, pictured below, was also keynote speaker.  His presentation was superb, yet like many distinguished economists he is handicapped by not understanding accounting and taxation.  His perspective seemed to be that free market solutions are always best and did not seem to understand the importance of adequate disclosure to generate transparency and related investor confidence.  I asked Poole after his presentation if he supported hedge and private equity funds being required to register with the SEC and he replied no because they might just move to London.  He clearly has no grasp regarding the significance of this vast shadow banking system and how it has destabilized our economic system.  Such funds are now receiving most of their funding from US based public pensions and endowments and therefore the SEC or another government regulator clearly has the leverage to generate this needed oversight.   It is not likely that these funds will abandon their funding sources.


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On January 31st I posted a brief video on youtube summarizing a program in which the Oregon Investment Council is lending its securities portfolios, using State Street as an intermediary, to hedge funds and private equity firms so that they may meet the ownership standards required to conduct short selling– betting on the declines of stocks.   The video can be seen by searching for Bill Parish Public at youtube.com or by following this link: Public Pensions Fuel Short Selling.

Below is the Agenda, note this was for January 2009, it mistakenly lists Jan 2008, highlighting the review of this program in addition to a photo of Tom Motley, the representative from State Street in charge of Security Lending.


It is somewhat astonishing that these hedge and private equity firms are therefore profiting on the decline of the very same securities owned by the Oregon Investment Council.  Clearly, the lending of securities owned by public pensions should be banned immediately by the Obama administration.  While short selling may be an important part of the overall market, the notion that right of ownership can be lent for the purpose of such investments is simply ridiculous, no matter how long it has gone on.

A link to this video was also sent to several leading journalists and today the Wall Street Journal printed a story today regarding AIG’s security lending portfolio.   Although AIG’s program is different in detail, the same overall concept is used.  That is, AIG was lending its right of ownership to others so they could engage in transactions which regulators would otherwise prohibit.


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On Sunday December 21, 2008  Oregonian columnist Steve Duin wrote a column  titled  “A fool and his trust are soon parted.”  Clearly, Oregon State Treasurer Randall Edwards, in his management of the plan, has breached his responsibility to Oregon’s parents savings for college, saddling those making conservative bond choices with losses of almost 40 percent.   President elect Obama’s home state, Illinois, also uses Oppenheimer.

In 15 years as an investment manager, perhaps the most disappointing experience for me was when Edwards, pictured below far left, and Richard Solomon, far right, who later went from the College Savings board to chair Oregon’s $70 billion PERS fund, chose Oppenheimer to be the key vendor to Oregon’s College Savings plan over Vanguard.


Most startling about the choice was that they had full information regarding why Vanguard was a better choice, including documentation from me outlining the unique risk involving the Tremont Group, a wholly owned Oppenheimer subsidiary, that lost $3 billion on the Madoff Scandal.   Even today, after numerous scandals, few are openly recommending that hedge and private equity funds register with the SEC, something I have aggressively pushed for since 2003.

The deciding factor in Edwards and Solomon’s choice was $350K in advertising Oppenheimer agreed to contribute in order to promote the plan.  Those would be the television ads Edwards appeared in, ads that, well, greatly simplified his re-election campaign.  Also particularly disappointing was the fact that Edwards wife had recently been Chair of the Portland Public Schools board, a role in which the importance of a quality college savings plan would seem most apparent.

Hopefully the new incoming State Treasurer Ben Westlund will replace Oppenheimer as the key vendor with Vanguard and make it possible for advisors like myself, who are residents of Oregon, to recommend the Oregon plan.   Thus far I have recommended the TD Ameritrade plan, based upon Nebraska’s plan, which is mostly Vanguard funds.  Unlike Oppenheimer, Vanguard does not pay kick backs to advisors and public officials or what are often referred to as “fees” and “administrative reimbursements,” by recipients.

In many states, parents mistakently choose their home state plan, i.e.  Oregon, in order to receive a deduction for state income tax purposes.   Simply changing this policy, as Pennsylvania did, is another easy way to fix the problem.  That way parents can choose the best plan for their children and escape the plans that were structured to benefit advisors.  The following summarizes the change in Pennsylvania:


Pulitzer Prize winning reporter Nigel Jaquiss of Willamette Week also wrote a story this week about the Oregon 529 Plan which includes pdf files of correspondence from myself to former State Treasurer Randall Edwards regarding why Vanguard should have been chosen rather than Oppenheimer.  Jaquiss story  Titled “Bill Cassandra Parish” provides a good detailed summary of what happened in 2004.

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See two related videos by searching for parishinvestments at youtube.com.

The first video is titled “Clinton Tax Scheme” and the second is titled “Missing Clinton Financial Disclosure.” The purpose of this comment is not to disparage the Clinton’s but rather draw attention to the most astonishing tax loophole in 25 years.

Last week the Clinton’s disclosed their tax returns through 2006 yet, remarkably, were not asked the three most important questions in what could be the biggest news story of the Democratic Presidential campaign. The questions are as follows

Question 1) Did former Bill Clinton receive, or should he have received, either a 1099 or W-2 from the partnership with Ron Burkle. This is important because it will reveal weather he was a consultant, employee or passive investor. Bloomberg reported that the partnership has paid Clinton more than $15 million since 2003 and, based upon quotes from the Clinton’s in the press, it does seem clear that at least part of this amount was consulting fees or wages.

Question 2) What have been the total cash and property related distributions from the partnership to the Clinton’s since 2003? This is important because only earnings and profits are taxable when distributions are made to partners. Other distributions of partnership assets such as cash or property are not taxable and never hit the tax return. The youtube video titled “Clinton Tax Scheme” explains how this can work.

Question 3) What is the Clinton’s current investment basis in the partnership? This is important since parters can often forego property distributions in lieu of increasing their basis, ownership interest, in the partnership. For example, if partners decide to distribute excess non-taxable cash from various businesses owned to partners, one partner could opt to not take the non-taxable cash distribution and instead increase their investment basis or stake in the partnership. My analysis indicates this amount could be somewhere between $10 and $150 million.

It is most surprising that Senator Clinton has gotten this far without disclosing these key facts. Perhaps it is also indicative of the medias lack of understanding of basic partnerships. The following are a few partnership basics summarized right from the tax code. Again, do visit youtube and search for “Clinton Tax Scheme” to see how this works.

Partnership Basics, Section 704 of Internal Revenue Service Code:

1) Two types of partners exist, general and limited. General partners, like the Clinton’s, get a share of all key benefits and responsibilities related to the partnership. Benefits include earnings and profits and responsibilities include a share of debt incurred. These are flexible arrangements that can be modified at any time with all partner’s content. For example, one partner gets all the depreciation deductions in lieu of the other getting a larger percent of earnings and profits.

2) Earnings and profits are not the same as cash flow in that only earnings and profits generate a taxable dividend to partners. For example, if the partnership takes out an insurance policy on a key partner, those proceeds or cash flow can then be distributed tax free to the remaining partners. The reason is that these proceeds are not “earnings and profits” but rather distributions of partnership property.

3) The word “basis” has two meanings, one per the IRS and another per the equity in the partnership. Tax basis per the IRS simply recognizes how much an investor has at risk for purposes of calculating the taxable gain once the investment is sold.

Partnership basis, on the other hand, recognizes how much each partner has invested in the partnership for purposes of allocating assets when the partnership is dissolved or wound down. This partnership basis is not taxable since not a taxable dividend but rather a distribution of partnership property.

4) What triggers the recognition of taxable dividends to partners is earnings and profits, as determined by the IRS. Simply put, if there are no earnings and profits, there are no taxable dividends. Put another way, if the partnership generates cash that is not earnings and profits, that cash can be distributed tax free to general partners. It is common for private equity firms to borrow money in their various companies names and then distribute the debt proceeds to partners rather than reinvest in the business.

The smart decision for the Clinton’s in this case would be to forego a cash distribution in lieu of increasing their investment basis in the partnership. For example, if the Clinton’s invest $1 million with Burkle and later are entitled to $5 million in cash flow that is not distributed to them, their basis or equity interest in the partnership becomes $6 million. My analysis indicates that the Clinton’s investment basis in the Burkle partnership could now be anywhere between $10 and $150 million.

5) Most private equity partnerships have ammassed large net operating losses from failed companies that can be used to offset gains from profitable companies merged into the partnership. This effectively means that there are no net earnings and profits and therefore no taxable dividends. In this case distributions of cash and property effectively become tax free. While many CPA’s will argue this can not be done, they are simply not seeing how loopholes can be used to accomplish this. Again, do watch the youtube video titled “Clinton Tax Scheme” by searching for parishinvestments at youtube.com

Press reports indicate that the Clinton’s tax lawyer is Howard Topaz of Hogan and Hartson. Here are two links:

1) American Law article indicating Clinton’s tax lawyer is Howard Topaz of Hogan & Hartson

2) Howard Topaz profile at company Website

Again, there are three very basic questions that the media should ask of Senator Clinton and failure to due so is a great disservice to the American public, both her supporters and detractors. This information based upon original Parish & Company research has been forwarded to Gretchen Morgenson and Floyd Norris of the NY Times.

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