Tag: investment return

ESG tug-of-war leaves taxpayers shortchanged

Mary Pat Campbell

Link: https://thehill.com/opinion/finance/4028654-esg-tug-of-war-leaves-taxpayers-shortchanged/

Excerpt:

The whole ordeal picked up steam years ago with efforts initiated by progressives in states like California, which has repeatedly imposed politically motivated restrictions on its largest pension funds, CalPERS and CalSTRS. In 2000, the state forced the funds to divest from tobacco companies, a move that cost nearly $3.6 billion in investment earnings. The pension funds have faced frequent — and occasionally successful — demands from activists and legislators on the left to divest of other progressive bogeymen, like firearms, oil and gas, and private prisons.

These politically motivated demands to place social goals above the fiduciary responsibility to pensioners persist, not just in California but also in Maine, Vermont, Massachusetts and many other blue states. At a time when many state pension funds are facing enormous fiscal imbalances, these policies are worsening the problem and shifting massive burdens onto taxpayers, who will have to foot the bill for the progressive aims of policymakers.

Indeed, research shows that putting social policies ahead of fiduciary responsibility can come at a hefty cost. A study found that public pension funds with ESG investment mandates have investment returns that are 70 to 90 basis points lower than those that do not — meaning retirees are financially hurt by these investment strategies.

Not to be outdone, conservatives in red states have been fighting back with anti-ESG policies of their own. Unfortunately, rather than establishing an environment that ensures taxpayers are best served, many of these policies elevate conservative cultural preferences above fiscal considerations. Like the pro-ESG policies of the left, these anti-ESG policies have cost taxpayers considerably.

Author(s): Brandon Arnold

Publication Date: 1 Jun 2023

Publication Site: The Hill

PW special report: NC treasurer’s love for cash in the pension fund hobbled returns during the stock market boom

Mary Pat Campbell

Link: https://ncpolicywatch.com/2022/08/05/pw-special-report-nc-treasurers-love-for-cash-in-the-pension-fund-hobbled-returns-during-the-stock-market-boom/?eType=EmailBlastContent&eId=8dfd910d-e76e-4e65-91ce-d144637d3017&eType=EmailBlastContent&eId=18903da7-2756-43a1-92ce-b1403da31f40

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Excerpt:

* The pension fund holds much more of its money in cash than other comparable state pension funds and more than its allocation policy suggests. State Treasurer Dale Folwell routinely overrides the policy to prevent “rebalancing.”
* Folwell emphasizes steeling the pension plan against stock market downturns. That’s led to the plan missing out on the big stock market gains of the last few years. Returns for the state pension fund are far lower than comparable public pension funds.
* Folwell repeatedly liquidated stock to shift money to bonds and cash.
*He has lowered the pension fund’s assumed rate of return in stages, which means the state and local governments have had to increase their contributions.

Author(s): Lynn Bonner

Publication Date: 5 August 2022

Publication Site: NC Policy Watch

The Government Pension Reckoning Cometh

Mary Pat Campbell

Link: https://www.wsj.com/articles/the-government-pension-reckoning-cometh-equable-institute-report-11660084312?st=j8a7o7efyyvjtdp&reflink=article_email_share&utm_source=Wirepoints+Newsletter&utm_campaign=24f39fc2e0-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_895ee9abf9-24f39fc2e0-30506353#new_tab

Excerpt:

The California Public Employees’ Retirement System reported a negative 6.1% return for the year, which includes a 21.3% positive return on private equity and 24.1% return on real estate as reported through the second quarter of 2022. What will happen if real-estate prices start to fall and some leveraged private-equity buyouts go south amid rising interest rates?

Collective-bargaining agreements limit how much workers must contribute to their pensions, so taxpayers are required to make up for investment losses. Employer retirement contributions—that is, taxpayers—make up 20% of government worker compensation. That amount has soared over the past decade as pension funds tried to make up for losses during the 2008-2009 financial panic.

A recent report by the Equable Institute found that state and local pension plans now are only 77.9% funded on average, which is about the same as in 2008. But some like Chicago’s are less than 40%. Advice to taxpayers in Illinois: Run.

Author(s): WSJ Editorial Board

Publication Date: 9 Aug 2022

Publication Site: WSJ

California public employees’ pension bill to go up after CalPERS lowers market expectations

Mary Pat Campbell

Link:https://www.thecentersquare.com/california/california-public-employees-pension-bill-to-go-up-after-calpers-lowers-market-expectations/article_54d02942-47e4-11ec-940a-e3e851214b73.html

Excerpt:

The CalPERS board voted Monday to select a portfolio with a return of 6.8% and an expected volatility rate of 12.1%. This expected rate of return is two-tenths of a percentage point lower than last year’s target of 7%. The vote concluded a review of the pension fund’s assets, which occurs once every four years. 

This expected reduction in the rate of return means that some employees will have to contribute more to their pension funds because the fund expects to earn less from its investment portfolio.

For employees hired after the implementation of the Public Employees’ Pension Reform Act (PEPRA) in January 2013, CalPERS estimates they will contribute an average of 1.2% to 1.5% more toward their pensions. These changes will go into effect for school employees, excluding teachers, in July 2022 and will be enacted for most other local government employees in July 2023.

Author(s): Madison Hirneisen

Publication Date: 17 Nov 2021

Publication Site: The Center Square

Public Pension Plans Need to Put a Year of Good Investment Returns In Perspective

Mary Pat Campbell
Public Pension Plans Need to Put a Year of Good Investment Returns In Perspective

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For the last 20 years, state and local pension plans’ assumed rates of return have been far too optimistic. The distributions of average (geometric mean) assumed investment returns and actual returns from 2001 to 2020 demonstrate this. The figure below shows the distribution of the average assumed investment return rate versus actual investment returns for 200 of the largest state and local pension plans in the United States. The median assumed rate of return over the last 20 years was 7.7 percent per year, the median actual rate of investment return for these public pension plans was 5.7 percent.

This two percent difference helps to explain the nearly 30 percent drop in the average pension plan funded ratio over the same period. In recent years, many pension plans lowered their assumed rates of return.

Author(s): Truong Bui, Jordan Campbell

Publication Date: 30 June 2021

Publication Site: Reason Foundation

Database: New York’s pension system hits record returns. Here’s who is getting the most

Mary Pat Campbell

Link: https://www.poughkeepsiejournal.com/story/news/politics/2021/06/01/database-nys-pension-system-gets-record-returns-who-earned-most/5254524001/

Excerpt:

A rebound in the financial markets after the start of the COVID-19 pandemic fueled record growth in the state’s pension fund for government workers.

The pension fund for 1.1 million employees and retirees grew a whopping 33.6% for the fiscal year that ended March 31, Comptroller Thomas DiNapoli announced Wednesday.

The return on investments increased the fund’s value to nearly $255 billion, making it one of the largest public pension funds in the nation.

….

The fund’s long-term expected rate of return is 6.8%.

The health of the fund is critical to its 673,000 active workers and 447,000 retirees, and it comes as more public sector employees are retiring, a review of state records showed.

Author(s): Joseph Spector, Sean Lahman

Publication Date: 1 June 2021

Publication Site: Poughkeepsie Journal

Report: Teacher pension error traced to single miscalculation in April 2015

Mary Pat Campbell

Link: https://www.thecentersquare.com/pennsylvania/report-teacher-pension-error-traced-to-single-miscalculation-in-april-2015/article_34d84a56-c306-11eb-a252-4b78895ea004.html

Excerpt:

The calculation error that upended the state’s largest pension fund has been traced back to a single month in 2015, according to an investigation from Spotlight PA.

The discovery came to light in a trove of documents obtained by reporters that found a tiny discrepancy that boosted the $64 billion Public School Employees Retirement System (PSERS) by a third of a percentage point in April of that year.

The consultant firm hired to review PSERS’ investment returns between 2011 and 2020, ACA Compliance Group, performed limited checks that skipped over the month in question, according to the report. The company that crunched the actual numbers, Aon, blamed the discrepancy on a data entry error.

No matter the fault, the miscalculation unraveled PSERS’ rate of return, dropping it from just above the mandated 6.36% threshold to prevent a contribution increase down to 6.34%. Now, about 100,000 workers who joined the system in 2011 or later will pay more beginning on July 1.

Author(s): Christen Smith

Publication Date: 1 June 2021

Publication Site: The Center Square

Discussion of “The Sustainability of State and Local Government Pensions: A Public Finance Approach” by Lenney, Lutz, Scheule, and Sheiner (LLSS)

Mary Pat Campbell

Link: https://www.brookings.edu/wp-content/uploads/2021/03/1c_Rauh.pdf

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Main Comments
• Stabilization goal is reasonable to consider
• However, public sector’s approach to funding with risk assets creates
additional issues for this type of debt (unfunded pension liabilities)
relative to government bonds
• Instability due to market risk isn’t in the model, because the model is
deterministic: no distribution of possible outcomes
➢ Higher expected return you target, the greater the distribution of outcomes
• Only meaningful scenario is r=d=0% → fiscal adjustment is 14.9% of
payroll vs. current 29%. So a 51% increase.
➢ I will provide some reasons I think this might still be too low

Author(s): Joshua Rauh

Publication Date: 25 March 2021

Publication Site: Brookings

Internal PSERS documents show how Pa’s biggest pension fund got key financial calculation wrong

Mary Pat Campbell

Link: https://www.inquirer.com/business/psers-pension-error-mistake-teachers-fbi-20210530.html

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After Pennsylvania’s biggest pension plan botched a crucial financial calculation, the FBI launched an investigation, the fund’s board began its own probe, and 100,000 public school employees suddenly faced paying more into the retirement system.

Now The Inquirer and Spotlight PA have obtained new internal fund documents that shed light on that consequential mistake. The material traces the error to “data corruption” in just one month — April 2015 — over the near-decade-long period reviewed for the calculation.

The error was small. It falsely boosted the $64 billion PSERS fund’s performance by only about a third of a percentage point over a financial quarter. Even so, it was just enough to wrongly lift the fund’s financial returns over a key state-mandated hurdle used to gauge performance.

The documents reveal that a fund consultant, Aon, blamed the mistake on its clerical staff for inputting bad data. The material also shows that even though the fund hired a consultant, the ACA Compliance Group, to check the calculations, the consultant made only limited checks, and skipped over the month with the critical errors.

Author(s): Joseph N. DiStefano, Craig R. McCoy, Angela Couloumbis

Publication Date: 30 May 2021

Publication Site: Philadelphia Inquirer

Hard Lessons From the Coming Public Pension Plan Shortfall

Mary Pat Campbell

Link: https://www.thestreet.com/investing/hard-lessons-from-the-coming-public-pension-plan-shortfall

Excerpt:

I predict that state and local government balance sheets, already reeling from the pandemic, will be devastated in coming years by the stock and bond markets’ disappointing returns.

That’s because these governments’ pension plans are based on unrealistic assumptions about how those markets will perform in the future, and are therefore woefully underfunded. In fact, even with their optimistic assumptions, those funds are already underfunded. Their “actuarial funded ratio” (the ratio of the actuarial value of their assets to the actuarial value of their liabilities) is just 71.5% currently.

These plans are hoping to make up their actuarial deficits by earning outsized investment returns. I’m willing to bet their earnings instead will fall far short of historical averages, and they will have to make up the shortfall either by raising taxes, cutting services, or declaring bankruptcy.

Author(s): Mark Hulbert

Publication Date: 25 May 2021

Publication Site: The Street

Public pensions won’t earn as much from investments in the future. Here’s why that matters

Mary Pat Campbell

Link: https://www.marketwatch.com/story/public-pension-systems-dont-think-theyll-earn-as-much-from-investments-heres-why-that-matters-11620674757

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State pension systems dropped the rate of return they assume for their investment portfolios again, continuing a two-decade long trend that public-finance experts say is necessary, even as it presents some challenges for the entities that participate in such plans.

The median assumed return in 2021 is 7.20%, according to a report published early in May by the National Association of State Retirement Administrators, down roughly 1 percentage point since 2000, as the investment managers charged with managing trillions of dollars for municipal retirees have adapted to a more challenging market environment.

Author(s): Andrea Riquier

Publication Date: 11 May 2021

Publication Site: Marketwatch