Public Pension Plans Are Thirsty for Liquidity

Link: https://www.plansponsor.com/public-pension-plans-thirsty-liquidity/

Excerpt:

Chicago’s municipal pension plan recently redeemed $50 million from a large-cap equity fund. Seems like a non-event. Happens all the time. But the reason the pension plan did so is chilling: It was done specifically in order to make pension benefit payments. This should be a cautionary flag to underfunded pensions and to the state and municipal governments that sponsor them.

….

First, when pensions are underfunded they have a tendency (or need) to take on more risk in order to try to generate higher returns.

For example, underfunded pension plans are increasing their allocations to private equity. Nothing wrong with that. But that means more of the portfolio is illiquid. It would be very unlikely that private equity positions would be sold to “make payroll,” specifically because they are so illiquid. But this leaves fewer assets that are liquid enough to be sold, and that increases the pressure on those liquid assets to be sold at a decent price. Moreover, if the plan has significant assets in liquid securities, such as large-cap equities or Treasurys, those assets can easily be sold, but then the portfolio will be out of balance and will require additional trading and rebalancing anyway.

Secondly, the pension plan must keep more cash on hand than it otherwise would. If your policy portfolio calls for a 3% allocation to cash, that is designed for diversification and dry powder. But a pension plan sponsor should be providing significant amounts of cash into the pension each year. If the sponsor is not making its contributions, then the pension plan has to carry more cash than it otherwise would.

Author(s): Charles Millard

Publication Date: 7 April 2021

Publication Site: Plansponsor

Part I: Lamont’s Budget: A Game of ‘Caps,’ Except for The Privileged Few

Link: https://ctexaminer.com/2021/03/26/lamonts-budget-a-game-of-caps-except-for-the-privileged-few/

Excerpt:

For over a decade, state employee compensation has exceeded compensation in Connecticut’s private sector by about 40 percent, the biggest gap in the nation. 

The consequence is that the State Employee Retirement Fund (SERF) is drastically underfunded. It is difficult to fund such wildly overgenerous benefits, especially since the state didn’t even start to fund them until years after beginning to award them.

What now is an ongoing gravy train for state employees is ultimately a train wreck for them and the state. There are only three ways to avoid the wreck: (1) massive tax increases and/or service cuts, a disastrous option (2) significant cuts in state employee benefits and/or (3) a federal bailout.

Author(s): Red Jahncke

Publication Date: 26 March 2021

Publication Site: CT Examiner