Monday, April 2, 2012

Don't Tell the Taxpayers!

When you read about the financial problems confronting municipalities, you rarely hear about the role that short-sighted public pension fund asset allocation decisions have played.

I don't know whether the subject is just not "sexy" enough for readers to care about, but when a public pension fund consistently under performs its actuarial rate, it winds up costing the taxpayers real money.

After all, someone has to make up the shortfall.

Julie Creswell of the New York Times had a good piece this morning discussing the varying returns of public plan investment decisions. 

As it  turns out, those plans which focused on alternative investments - the current "cure all" fad for investors being promoted by consultants - has caused significant shortfalls.

For example:

The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.

The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent. That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems. 

Then there's California, which is facing severe fiscal problems on both the state and local levels.

California, of course, made the interesting decision to cut their allocation to stocks in September of last year, and so partially missed the +25% rise in the S&P 500 since September 30, 2012.

Ah, you say, but they did better in their alternatives allocation.

Well, maybe not:

Fees for the $242 billion in California’s giant state pension system, known as Calpers, nearly doubled, to more than $1 billion a year, after it increased its holdings in private assets and hedge funds to 26 percent of its total in 2010, from 16 percent in 2006

Calpers, which has earned 3.4 percent annually over the last five years...
{Joseph}Dear {head of Calpers}.. said that Calpers’s investments in real estate had been “a disaster” and that its hedge fund investments had not met their benchmarks and were under review. But he said that its private equity holdings had easily beaten public stock returns over the last decade. 

Left unsaid, of course, is how one calculates returns from any alternative investment, since there is by definition no public market trading for private equity investments.

And no one points out that if one had simply used a 50% allocation to stocks (via the S&P 500) and 50% allocation to bonds (via the Barclay Intermediate Government/Credit Index), the total return for the past 5 years would have been 3.7% annually, despite one of the most difficult stock market environments in the last century.

Wonder when the taxpayers will begin to notice?