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A Tale of Two New York Pension Funds?

Leo Kolivakis's picture




 

Via Pension Pulse.

Some news from New York state. First, Joan Gralla of Reuters reports, New York state pension fund rises to $146.5 billion:

New
York state's pension fund earned 14.6 percent, rising to $146.5
billion in the 2011 fiscal year that ended on March 31, the state
comptroller said on Thursday.


 

The
state pension fund, one of the nation's biggest, is also exceptional
because it is around 100 percent fully funded. In contrast, many
states, counties, cities and towns around the country confront enormous
shortfalls in their pension funds.

 

However,
the New York state fund has yet to fully recover losses suffered in
the 2008-2009 recession, Comptroller Thomas DiNapoli said.

 

The
record high of $156.6 billion was set in 2007; in 2009, the fund fell
to just under $111 billion, a spokesman for the comptroller said by
email.

 

Public pension managers are
under the gun to improve returns because so many layers of local
governments promised their workers pensions that they now find hard to
afford.

 

The
difficulty of affording public pension benefits has helped spark
clashes between unions and politicians, as seen in Wisconsin, which
limited unions' rights to bargain contracts.

 

As
with any investments, returns vary with the periods measured. For
example, the $233.6 billion California Public Employees' Retirement
System, the biggest U.S. public pension fund, had a net return of 12.9
percent for the 12 months to March 31. California starts its fiscal
year on July 1, and for its fiscal year-to-date, the fund returned a
much fatter 18.6 percent.

 

In
contrast to the New York City's $119 billion pension funds, which a
deputy mayor criticized on Thursday for overly focusing on domestic
equities, the state's pension fund also relies on international
equities.

 

New York City's pensions are run by boards whose members are appointed by the mayor, the comptroller and the unions.

 

DiNapoli,
an exceptionally powerful investor because he is the state fund's only
trustee, said domestic equities rose 17.6 percent while international
equities produced 14.3 percent.

 

Real
estate investments yielded a 26.7 percent return, beating private
equity investments, which returned 18.9 percent. Emerging markets
equities produced 16.1 percent, while Treasury Inflation-Protected
Securities yielded 9.7 percent and core fixed-income investments
returned 8 percent.

Pretty impressive returns,
but the 27% real estate return tells me something was definitely marked
up or there was major risk taken in opportunistic real estate deals.
Still, New York's state fund seems to fairing way better than other
states which are dangerously underfunded, which tells me they're doing
something right in New York.

At the city level, however, Joan Gralla of Reuters reports that NYC urged to alter investing mix to cut pension gap:

New
York City is overweighted in U.S. stocks and should invest more of its
pension funds in other assets, such as U.S. Treasuries, and must lower
benefits for new hires, Deputy Mayor Robert Steel said on Thursday.

 


Putting
more cash into international equities and fixed income,
inflation-protected bonds, commodities, currencies, and real estate
could improve returns, he said, helping the city afford over $80
billion of contributions over the next decade.

 

Steel said it could take two to three decades to return pension contributions to affordable levels.

 

Steel,
a former Treasury undersecretary and Goldman Sachs executive, bashed
City Comptroller John Liu's oversight of the city's pension funds, which
he said returned more than 21 percent in the city's last fiscal year
when the S&P 500 stock index's total return was 31 percent in that
period.

 

The
current mix of investments is about 70 percent U.S. equities and 30
percent bonds. Steel urged returning to public pension funds'
traditional greater reliance on Treasuries.

 

City
unions, Mayor Michael Bloomberg and Liu all appoint members of the
city's five pension fund boards. They would have to approve Steel's
proposals.

But the mayor has a
rocky relationship with the unions, having threatened them with layoffs.
He also has clashed with the Democratic comptroller and has even hired
his own investment managers, breaking with tradition.

 

The
mayor wants to compress public worker benefits to private-sector
equivalents. He has focused on limiting pension benefits for new hires
because the current benefits are legally protected.

 

Politicians
around the country are grappling with the same problem -- how to close
huge shortfalls in their pension funds while still funding schools,
public safety and other services.

 

New
York City is a financial trendsetter and other public pensions may
follow its lead, as they have in the municipal bond market. At a total
of $119 billion, the city's five pension funds are the sixth-biggest
U.S. public pension fund.

 

Steel also said the city should prune its boards' overlapping roles.

 

Steel
would keep the separate funds for the police, firefighters and
civilian workers. The smallest pension fund, which covers school
workers who are not teachers, would be merged with the teachers' fund.

 

The
four remaining boards would set investment strategies but lose power,
including the prized ability to pick investment managers. That job
would go to professionals working for Liu and the mayor -- whose pay
should be boosted, Steel said.

I know Robert Steel is an former Goldman
executive, which means many will disregard his views out of sheer hatred
for that firm, but I like his recommendations. He knows what he's
talking about and he's right to bash City Comptroller John Liu's oversight of the city's pension funds. The performance in the last fiscal year is appalling.

NYC is going to experience tough times ahead. According to the Globe and Mail,
JPMorgan Chase's results explain the glum mood among traders on Wall
Street. Year over year, the bank's trading results look not bad. But
looking at them relative to the first quarter, there's a big slowdown
in activity, and a big slide in pay.This doesn't bode well for state
revenues.

But there is also a governance gap in the city's pension
funds which Mr. Steel rightly points out. It's obvious the board is
doing a lousy job picking investment managers. I also have a huge bone
to pick with US governance where boards overly rely on pension fund
consultants who steer them into the wrong managers. The tyranny of
pension consultants is a major governance flaw of US pension funds, all
about cover-your-ass politics, and it is killing pension funds around
the country. This is a major scandal that no reporter has covered
adequately.

Finally, you might argue that US equities will
outperform international equities in the coming few years or that they
will all underperform bonds as global stock markets experience
volatility in an era of deleveraging and deflation.
If that turns out to be the case, good old bonds will continue to
outperform stocks over the next decade. On an absolute return basis,
however, I think there are plenty of opportunities, including seeding experienced hedge fund managers
using managed account platforms. If Mr. Steel wants to invest in
excellent managers, I have more than a few of them right here in
Montreal to introduce him to.

 

 

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Fri, 07/15/2011 - 15:14 | 1460482 ThirdCoastSurfer
ThirdCoastSurfer's picture

Look at the results! From $156b in 2007 down to $111b and now back to $146b, so in 4 years the net result is down 6% but look how they all cheer! 

Instead of cautiously investing to maintain and build America's infrastructure they gamble and distort.  These pension funds should be required to invest in the muni bonds and they should be baned from any equity investment. While Goldilocks is out to ruin the world, I sure hope that the little boy that cried wolf is able to maintain confidence and that the other little boy can keep his finger in the dike a lot longer because I sure don't want those who depend on these pensions to ever have to feel the effects of the other side of the trade. 

 

Fri, 07/15/2011 - 14:48 | 1460402 centerline
centerline's picture

Too bad the money is already toast.  Good management will keep a few people getting checks for a little longer.  That's about it.  Fun times coming soon.

Fri, 07/15/2011 - 13:24 | 1460089 ebworthen
ebworthen's picture

 

Cities and States create underfunded pensions then make promises that they cannot possibly keep.

When their schemes fail, they pull the rug out from under their citizens and cut the pensions, gut them, and raise the corpse of patriotism dressed in "austerity" garb and animate the mouth to speak of "responsibility".

Our problem is not one of management but of morality and a lack of gallows for the malfeasant.

These pensions don't need managers any more than a dog needs fleas.

Canadian fleas won't help the underfed abused dog anymore than Amerikan ones.

 

Fri, 07/15/2011 - 14:54 | 1460418 centerline
centerline's picture

The pension funds were gambled into oblivion.  Not directly per se - but simply because they are party to a system founded on unsustainable math and leveraged into the statosphere.  Either way, the wealth will be vaporized - either by inflation, or by deflation - likely both (just depends on the timing and perspective).  It is already "dead money walking" as a result.

Fri, 07/15/2011 - 12:58 | 1460020 akak
akak's picture

Zzzzzzzzzzzzz .................

Fri, 07/15/2011 - 12:51 | 1459994 ZackAttack
ZackAttack's picture

I don't believe it's possible to manage $100+ billion to outperform the general market in any sort of consistent fashion.

Fri, 07/15/2011 - 13:07 | 1460044 Leo Kolivakis
Leo Kolivakis's picture

Really? Tell that to Bridgewater, PIMCO, Barclays Global, and a few others...

Fri, 07/15/2011 - 13:16 | 1460088 akak
akak's picture

"... Tell that to Bridgewater ... BRAWWWK! .... tell that to Bridgewater .... BRAWWWWK! .... tell that to Bridgewater ....... BRAWWWWK! ........"

 

leo want a cracker?

Fri, 07/15/2011 - 13:07 | 1460043 Leo Kolivakis
Leo Kolivakis's picture

Really? Tell that to Bridgewater, PIMCO, Barclays Global, and a few others...

Fri, 07/15/2011 - 13:06 | 1460042 Leo Kolivakis
Leo Kolivakis's picture

Really? Tell that to Bridgewater, PIMCO, Barclays Global, and a few others...

Fri, 07/15/2011 - 12:30 | 1459901 PsefTikos
PsefTikos's picture

My aplogies, my page crashed, I refreshed and it posted multiple times.

Fri, 07/15/2011 - 12:28 | 1459893 PsefTikos
PsefTikos's picture

....actually 150K is a good investment - very good ROI.  You spend 150K and save a life (or lives).  How much is a life worth? Let me commodify a life at a couple of million/billion each (what do you think your life is worth?)  The ROI is spectacular...

Fri, 07/15/2011 - 12:27 | 1459892 PsefTikos
PsefTikos's picture

....actually 150K is a good investment - very good ROI.  You spend 150K and save a life (or lives).  How much is a life worth? Let me commodify a life at a couple of million/billion each (what do you think your life is worth?)  The ROI is spectacular...

Fri, 07/15/2011 - 12:26 | 1459883 PsefTikos
PsefTikos's picture

....actually 150K is a good investment - very good ROI.  You spend 150K and save a life (or lives).  How much is a life worth? Let me commodify a life at a couple of million/billion each (what do you think your life is worth?)  The ROI is spectacular...

Fri, 07/15/2011 - 12:14 | 1459832 onlooker
onlooker's picture

14.6% sounds pretty good to me. What was the average over the last 3 years-- anyone know?

Fri, 07/15/2011 - 12:11 | 1459819 PsefTikos
PsefTikos's picture

I want my lifeguard making 150K...they are expected to fight sharks hand-to-fin in order to save my life!

Fri, 07/15/2011 - 11:47 | 1459663 mt paul
mt paul's picture

raise the debt ceiling... 

my federal pension needs

a 6 % COLA increase...

pay more taxes peasants...

Fri, 07/15/2011 - 11:43 | 1459639 Bruce Krasting
Bruce Krasting's picture

You make it sound like there is deep thinking going on here. Not the case. The portfolios are on auto pilot. 70/30 equity debt. On the equity side it is Russel 2000 with a bias towards S&P 100. The only question left is the international side. There it is major market/large caps. 5/10/15% international is the only variable. (AKA: Narrow and Deep)

These policies have been in place for years. Once set, they establish (by computer) what stocks to buy.

Oh, by the way, who set up this way of portfolio management for the City? Who executes the algo execution orders? Goldie, of course.

Fri, 07/15/2011 - 21:42 | 1461440 nmewn
nmewn's picture

Bruce!...you found my missing knife! ;-)

Fri, 07/15/2011 - 12:48 | 1459981 Dirtt
Dirtt's picture

Goldie, of course.

Krasting:  Beacon of light.  Few and far in between.

Fri, 07/15/2011 - 11:25 | 1459510 mt paul
mt paul's picture

gold is not money

to the man

who has none...

Fri, 07/15/2011 - 11:07 | 1459375 Seasmoke
Seasmoke's picture

all Pensions everywhere are a Ponzi ......and all ponzis eventually collapse

Fri, 07/15/2011 - 11:07 | 1459374 PulauHantu29
PulauHantu29's picture

Why doesn't everyone work a few extra hours a week to help Bail out all the States that have a deficit in funding their own public pension fund since the people in those same States down want to work harder....pay more taxes...and fund their own retirement?

Don't you get a warm and fuzzy feeling knowing that you can work harder to help a lifeguard or some other worthy public employee in California?

Fun Fact of the Day: California Edition
Here is a small clue that might help explain California's fiscal problems:

"According to a [Newport Beach] city report on lifeguard pay for the calendar year 2010, of the 14 full-time lifeguards, 13 collected more than $120,000 in total compensation; one lifeguard collected $98,160.65.

More than half the lifeguards collected more than $150,000 for 2010 with the two highest-paid collecting $211,451 and $203,481 in total compensation respectively....Lifeguards are able to retire with 90 percent of their salary, after only 30 years of work at as early as the age of 50."

http://orangepunch.ocregister.com/2011/0...

Fri, 07/15/2011 - 10:53 | 1459313 all_in_now
all_in_now's picture

Leo, when you plan to get tired of kissing up the ugly assess of these bastards?

Fri, 07/15/2011 - 11:02 | 1459333 Leo Kolivakis
Leo Kolivakis's picture

Hmm, case you haven't been reading me, I'm not exactly the world's greatest ass kisser. If I were, I'd still be working at a large Canadian pension fund, probably making a lot of money but miserable as hell.-:)

Fri, 07/15/2011 - 13:20 | 1460096 akak
akak's picture

Hmm, case you haven't been reading me, I'm not exactly the world's greatest ass kisser.

Funny you dare make such a claim while having your brown nose permanently affixed to Bernanke's anus, and simultaneously NEVER being able to muster even a whimper of outrage at the massively corrupt, unsustainable and immoral financial and monetary status-quo, inevitably rising to its defense whenever challenged or condemned here instead.

Fri, 07/15/2011 - 10:48 | 1459296 Gene Parmesan
Gene Parmesan's picture

The tyranny of pension consultants is a major governance flaw of US pension funds, all about cover-your-ass politics, and it is killing pension funds around the country. This is a major scandal that no reporter has covered adequately.

 

You're out of your mind. We're in the midst of some of the most under-reported, damaging and overt financial scandals of all time playing out their last acts and you're apparently calling for the media to run with an investigation of pension consultants? Wow.

Fri, 07/15/2011 - 10:38 | 1459271 Thisson
Thisson's picture

Leo, you're seriously deluded to think that Pension funds should be even more reliant on treasuries and equities.  How about advocating a 10% holding of PHYSICAL gold?

Fri, 07/15/2011 - 10:54 | 1459316 Leo Kolivakis
Leo Kolivakis's picture

I am advocating a more intelligent approach, including in-house maangement of equities, enhanced indexing, and liquid absolute return strategies using a managed account platform.

Fri, 07/15/2011 - 12:49 | 1459985 ZackAttack
ZackAttack's picture

Points to the scoreboard... Asset class of the decade, and they all completely missed it.

Fri, 07/15/2011 - 10:59 | 1459329 Financial Newbie
Financial Newbie's picture

"I am advocating a more intelligent approach..."

 

Careful.

I'm sure there's a lot of intelligent/experienced individuals who have physical gold in their portfolio.  Sometimes return OF capital is more important than return ON capital.

 

So you might be better of to say "different" as opposed to "intelligent" approach, unless you're actively seeking to rile up the ZH'ers, Leo...

 

Cheers,

-FN

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