The $46 billion Pennsylvania Public School Employees' Retirement System said last week its investment values rose nearly 15% during the fiscal year ended June 30.
That's better than the system's 3.5% average over the last 10 years (they might as well have put it all in the bank and saved fees), its 8% target annual return, the nearly 11% that its current mix of benchmark indices went up in the same period, or the 12% median return on the (mostly smaller) pension systems in the Wilshire Associates database.
It's also a welcome rebound from PSERS' losses the previous year. But it's not enough to keep up with the galloping increases in retirements and annual pension payouts, or to prevent the property tax increases and state "contribution" increases that will pull cash out of Pennsylvania wallets in years to come, unless and until the state learns to pay what it promises, or else promise less, to future retirees.
And last year's rebound isn't likely to repeat again soon, for a lot of reasons Chief Investment Officer Alan Van Noord patiently listed for me. For example:
PSERS says its US bonds rose 21% last year. With bonds paying record-low yields, values have not much space to do anything but fall, from here, once rates rise.
PSERS "private market" investments rose 22%. That sounds suprising, if you look at the relatively weak returns of most buyout funds, and the absolutely weak returns for venture capital. But Van Noord told me PSERS made most of its "private market" profits in bonds and other debt, whose value shot higher with other bonds as investors fled stocks. "It's really worked out quite well," but as with other bonds, there's not much room for repeat.
PSERS' US stocks rose 18%. Since June they've slumped, the economic news isn't great, and unless the market rallies on news of a Republican victory in November there's not a lot of hope they'll turn around anytime soon. "We're looking for the US to grow at a much slower rate" than other countries, Van Noord said. Maybe 2% a year.
PSERS' foreign stocks rose 15%. India and China are expected to out-grow the U.S. and Europe, long-term. PSERS' stock portfolio is roughly weighted toward today's capital concentrations, which means it's not likely to out-grow the collective market.
PSERS' "absolute return" (hedge funds) reported 16% profit. You'll have to take their managers' word for that. As in "private" investment funds, we don't know what's really in there, and in some cases neither does PSERS. But Van Noord says funds are being "conservative" in valuing their assets, these days.
PSERS real estate fell 10%. Van Noord says there's still a lot of "deleveraging."
Overall, Van Noord says the fund's advisers at Wilshire Consultants say the annual 8% profit target, which it exceeded last year, looks over-optimistic, given the very low rate of Treasury returns. "We're going to address this again in December," he added. "It's a Board decision."
Even when the system makes a lot of money, it's still losing ground. The Democratic State House passed a partial reform that would make it tougher for short-term employees to get pensions, for example. The Republican Senate says that's not enough, so it hasn't acted at all. Tick tock.