Your editorial of March 9 ("Hafer vs. State Street") left me in the curious position of largely agreeing with an editorial that began and ended by criticizing me.
In between, you acknowledged that you recognized the "serious issues" raised by my predecessor's decision to enter into long-term securities custody and lending contracts with State Street Bank and Trust Co.
You noted the "legitimate concern" of my exposure to personal liability, and cited the "questionable ethics" of ex-Treasurer Knoll in entering into these contracts while she was figuratively on her way out of the door of the Treasury Department, and when she had "no compelling reason" to do so.
On other issues, however, your editorial revealed that you are surprisingly uninformed about the facts of the case:
* You argue I should not have challenged this outrageous contract, even while conceding you do not know "what statutory authority" ex-Treasurer Knoll had to bind her successor. (We believe she had no such authority, which is precisely why we are voiding it.)
* You said I should be "making public the terms of the deal with State Street." Those terms are public, as you would have learned had you asked. (Interestingly, however, State Street chose not to include the contract documents as exhibits to its complaint, as our courts' rules require. We, therefore, included them in our filing.)
* You suggest I ought to publicly compare the terms of the current "irrevocable" extensions to similar contracts in our industry. That's exactly what I propose to do following completion of the RFP process -- which State Street so strongly objects to.
* You also wondered, "What is the past practice?" as if the answer were unknown. The answer is known: All prior securities custody and lending contracts had cancellation clauses that enabled the Treasurer to revoke them by giving specified notice to the contractor. Such a clause enabled a successor to either adopt the contract as her own or revoke it and search for a new custodian.
This current contract, negotiated and signed by my predecessor as she left office, is the first not to have a cancellation clause. In addition, she also negotiated amendments by which she signed away what had been the Treasurer's contractual right to approve those to whom our securities are lent, and those from whom we will accept letters of credit. It was a deliberate attempt to tie my hands and deny me the flexibility that she always had.
There is no question that we had made serious allegations and expressed them in frank terms. It's not my habit to mince words. But calling my remarks "demagoguery" was unwarranted. A demagogue is "one who makes use of false claims."
If you take the time to review the already-public documents and follow this case as in unfolds in court, you will see that our allegations, while very serious indeed, are thoroughly supported by the evidence.
Commonwealth of Pennsylvania
No funding problem
Your March 23 editorial concerning the value of actuarial audits states Los Angeles County will have to "find money to bolster its pension plan." I would like to correct the false impression that the county is faced with some kind of pension funding problem which I think your statement implies. It is true the actuarial audit of the 1996 valuation discovered $1.2 billion in previously unidentified pension liabilities.
As I told your reporter when he first called to obtain information about the recent actuarial audit, the additional $1.2 billion in liabilities has been completely offset by actuarial gains identified in the 1997 valuation.
These actuarial gains are attributable to investment gains in excess of our assumed rate of investment return and salary increases far less than the assumed rate of salary increase due to five years of no general county pay increase.
LACERA remains more than 100% funded. Thus, there has been no impact on the operation of the Retirement System Funding Agreement between LACERA and Los Angeles County.
The county still has $955 million in its Contribution Credit Reserve Account, which will allow it to offset its annual retirement contributions to the retirement system for the next three years.
Favorable financial markets and tight county budgets have allowed us to absorb the impact of the newly discovered liabilities leaving us in nearly the same financial situation we were in prior to the audit.
Obviously, if there had been no unidentified liabilities to discover, we would be in an even stronger position. But, I think you do the county, LACERA, our members and the citizens of Los Angeles County a disservice when you state that "these errors could affect the county for years." That statement is very misleading, especially when contrary information had been provided to your reporter.
Your are correct when you state that actuarial mistakes can have serious consequences for retirement systems. Misleading news commentary can also have serious consequences. Bond analysts and rating agencies could read your article and question whether the strength of Los Angeles County's fiscal position has been impaired. Our members and beneficiaries could read your article or hear about it and wonder whether their benefits are secure.
You are right when you say LACERA's recent actuarial experience should serve as a lesson and warning, but the lesson and warning should include the message that your paper's misleading reporting may further compound the problems caused by any actuarial adjustment that may be required as a result of an audit.
Marsha D. Richter
Chief Executive Officer
Los Angeles County
Employees Retirement Association
I would like to report a miscalculation reported in the manager Scoreboard questionnaire (P&I, Feb. 23) for the total amount of U.S. institutional, tax-exempt assets for manager-of-managers services from SEI Investments.
For new clients, the figure reported was $1.8 billion; the correct figure should be $4.4 billion. Therefore, we gained $3.6 billion in net new U.S. institutional tax-exempt assets between Dec. 1, 1996, and Dec. 1, 1997.
I apologize for this inconvenience and error on our part. The figures reported were for only one of our business units. We failed to add in the other units which utilize manager-of-managers services. Please update your records for our figures submitted earlier this year.
Diane C. Takata