(More on this story, including SERS' response, in Thursday's Philadelphia Inquirer here)
The Pennsylvania State Employees' Retirement System (PennSERS) tops a list of the most "risky" state employee pension funds, National Public Radio claims in reports here and here, citing data from Pensions & Investments magazine and a formula attributed to Joshua Rauh, a tenured associate finance professor at Northwestern University.
NPR applies a simple analysis that ranks bonds and cash as the safest investments. The more a state fund keeps in other kinds of investments - stocks, private investments, hedge funds, real estate - the more "risky".
As the Inquirer and P&I have reported, Pennsylvania leads the nation in the total proportion of "alternative" private equity, hedge fund, real estate and other illiquid investments managed by high-fee private money managers, some of whom are contributors to Gov. Rendell and other politicians who control the funds.
But do these investments really make the funds "risky," as NPR claims? I asked Rauh, and he wrote back: "SERS and Washington State are the two state public pension funds with the largest allocation to private equity. This is really what sets SERS apart and what pushes them up the list in terms of aggressiveness of their investments.
"Is it a good or bad idea for public pension funds to invest in private equity? The jury is still out. On the one hand, public funds should be doing more asset-liability management than they are, using bonds to match the benefit payments they have promised to employees.
"However, if their size and patience allows them to reap higher returns from illiquid investments than other investors could, there is also a role for them as private equity investors."
The tough choices will come a few years down the road, Rauh said, "if the pension funds start getting really low on assets and have to liquidate some assets to pay benefits. I did some calculations suggesting that under baseline investment return assumptions and without pension reform, Pennsylvania will run out of pension fund assets completely in 2023. The horizon of state pension funds may not be as long as people think" NJ is already trimming benefits.
Rauh has ranked state pension funds based on when they are likely to run out of money. According to his newly-published paper, "The Day of Reckoning", here, Pennsylvania ranks near the middle of the pack. New Jersey is in greater danger: it could run dry by 2018, five years sooner than PA, under current investment assumptions.
NPR's "risky" claim as regards PennSERS's asset mix is goofy. Dollar for dollar, Pennsylvania's pension system isn't the most "risky". But years of political over-promising and underfunding have made it risky enough, and things are as bad or worse in other big states.
"not clear these investments make the funds “riskier”" that's is what is being argued do you disagree?— jamzo- I agree. NPR has taken an odd approach to covering an important issue. The PA pension fund buys some weird stuff, but its main problem is assets don't cover liabilities because PA politicians over-promised and under-funded. According to Rauh's research, the problem is bad here but even worse in NJ and many other states.— distefj
- As long as this fund exists it is risky to PA taxpayers. No new government employee should have a pension. they should have a 401 K type account like the people they have pledged to serve who pay their salaries...— Grill
- Agree with Grill re the 401k-type account. Also, who cares if it's risky because the good-old PA taxpayers will once again bail out the unions.— bpp1999
The fund is mandated to seek a return of 8% a year. Tell me under this requirement what type of bond gives you an interest rate this high? Answer not a government backed one. There is a lot going on here that makes simple analysis difficult. Here are a couple of items from the SERS website that should be contemplated. First the fund has about one worker for each person receiving a retirement check. It pays our ~$2.2B/year and receives about $500M in investments. Worker contributions make up nearly 65% of these of the funds received by SERS (so the state and school districts are only matching half or less of employee contributions). Adding school teacher pensions to SERS have weakened SERS because most school districts have skimped on their payments over the years (the state has too). SERS currently has over $20B in assets and has met or exceeded its mandated return rate of 8%/year for most years. While the fund may run out of money at some point and some hard decisions may be needed in the future I don't think knee-jerk decisions are warranted at this point.— meteo30- The truth is that "private equity" funds have a very loose definition of what the "market price" of the investment is. Since the investments are "private placements" in most cases it is easy to have a gross misspricing on what the real value of the assets are if they needed to be sold in the near future. This provides for a lot of hanky panky opportunities for politicans and unscrupulous money managers who can contribute to "pet" democratic or republican projects and still recoup their "costs" through fees that might well be based on inflated estimates of what the private placements are worth. The same is true of money placed with most hedge funds. The managers recieve 2% of the gross value of the assets every year plus a large portion of the "profits" and it is only taxed at the 15% capital gains rate. This is an extraordinary chance for politicans and their hedge fund and private equity fund managers to completely legally skim money from the public trust funds. When the market collapses again they will all have the cover of "who would have guessed that this would have happened" and head off to a millionaires retirement while the tax paying public is left holding the bag for the public pensions and the average worker is wondering what happened. One who knows.— nickel
Comment removed.- This year Social Security is paying out more than it takes in. Recent “current” published estimates projected it would happen six years from now. That seems to be a pretty significant accounting mistake. Do you think the current reports/estimates regarding the status of these Pension funds are more or less accurate than what was reported about Social Security? Guess what; nothing is going to be done about it. The house is on fire and we are all asleep. Who knows what will happen?— 1stTimeCaller
- 1stTimeCaller: Social security is a crock that we are forced to use. It is run by bureaucrats and most decisions are made with the help of politicians. So what did you expect?— gatethree
401ks are a discredited gambit by the very financial service industry that profits from their management, destroyed their value by unwarranted risk taking and now wants to loot the last pile of money the Bernie Madoff fraudsters have yet to touch. The fact that corporations have weaseled out of their defined pension obligations by hook or by crook or by offering inferior 401ks as a replacement has nothing to do with the one sector that has gone unscathed by corrupt free market economic gambles. The public employees have nothing to do with the fact that business has fallen off, temporarily reduced tax revenues. The mistakes and crimes of the private sector should not be socialized into austerity measures of faithful hard working people of state and local governments. Shareholders should expect no dividends and corporations should pay surcharges to pay for their bailouts and lost revenue to local governments for as long as it takes to make these obligation set on a sound footing.- 1stTimeCaller: You're trying to say that the estimates for SS should have anticipated the recession? What are the lotto numbers for tonight?— Politburo
- Gatethree and Politburo: You can’t pull out more than you put in without eventually running dry. My poorly made point was similar accounting gimmicks and false projections are probably being used to report on both Social Security AND Pension Funds. I wouldn’t be surprised if it was worse than what is being reported. I don’t play the lottery and as for anticipating this current recession I’m not sure what the realistic standard should have been. However, if a household was on the brink of financial collapse and used more debt to pay off old debt without cutting costs and finding revenue– it would only be a matter of time before that household came apart - literally. If the United States doesn’t both dramatically raise taxes and cut costs we should anticipate real problems fast. Not something that I want and I don’t claim to know what the right answer is to fix it. But the problem looming on the horizon is obvious and scary. Somewhere between point A and point Z are the earlier points “flash mobs”, “home invasions”, etc. Panicking/hatemongering or pretending there isn’t a problem isn’t going to help. Getting tough on corruption and redefining success as something other than personal riches may help but I am not optimistic that those changes are ever going to happen. I fear this society’s demise has reached critical mass.— 1stTimeCaller
- Comment removed.
- The State and the City should declare bankruptcy and therevy gain the ability to re-negotiate these outrageously generous pensions for government workers. The public cannot and will no longer pay the nut for the political class that cut these deals to get re-eletced. Yo, you represent We, the people...not just the unions. We're the people who pay the nut so PAY ATTENTION. No more taxes! Cut the spending. There's no more blood in the stone.— The Monk of Magdalena
- Comment removed.
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