How risky is the state pension fund?

Over at Philly Deals, Joseph DiStefano is pushing back against a recent NPR report that claims Pennsylvania has the riskiest investment portfolio of any state pension fund in the country. According to DiStefano, NPR is exaggerating the problem and missing the real issue facing public pension systems.

Here is the crux of the NPR story:

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".

The formula is based on a study by Northwestern University that tried to determine the risk level of public pension fund investments. The premise was that some types of investments, like stocks or real estate, are inherently risky because their value can fluctuate dramatically. In contrast, buying low-yield government bonds is considered much more financially secure.

DiStefano thinks that an investment analysis is important, but the real issue for public pension fund is the cost of providing benefits to reitred government workers. In DiStefano's mind, the level of benefits to retirees and the ability of the pension fund to meet it's long-term obligations is a better metric than the type of investments it makes. He even cites a study that found Pennsylvania was in the middle of pack when it came to resources to meet long-term obligations.

He agrees that there may be a problem down the road if the state system gets low on funds and has to sell off assets, but the chance of a huge crash isn't likely.

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.

Next Wednesday, the city's pension board will appear before City Council for their annual budget hearing. It will be interesting to see if anyone asks about the risk level of the investments being made by the fund.

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