When the stock market headed south at the end of last year, it took taxpayer-backed investments down with it.
Of 10 large pension plans that cover teachers, police, college savers, and city and county employees in the Philadelphia area, none reached their long-term investment targets — typically over 7 percent a year — for calendar year 2018, leaving taxpayers on the hook for the difference.
Only one — the Public School Employee Retirement System (PSERS), with over $50 billion in assets — reported making any money at all, a positive return of 0.7 percent. They might as well have put it in the bank, if one-year returns were the goal.
The Pennsylvania Treasury’s TAP tuition savings plan was off 0.6 percent for the year. The New Jersey pension system reported a 2 percent loss. The Pennsylvania State Employees’ Retirement System (SERS) was down 4.3 percent. SEPTA’s pension plan — which includes office workers and bus drivers — posted a 3.8 percent drop.
That’s better than the counties, which recorded losses starting at 4.2 percent for Philadelphia, heading downward to 6.9 percent in Delaware County.
Not coincidentally, PSERS reported the lowest proportion of assets invested in U.S. stocks in the group — less than 7 percent, compared with 19 percent in the TAP plan, roughly one-quarter for the two state-worker plans and the Philadelphia plan, and between one-third and one-half for the suburban counties and the SEPTA plan.
Montgomery County, which invests mostly in Vanguard index funds, was off 5.6 percent. Since it dumped its private “active” stock pickers and other fund managers for its current low-fee strategy after 2013, Montgomery has mostly beaten Bucks, Chester, and Delaware Counties and the SEPTA pension plan, while mostly trailing the New Jersey and Pennsylvania state plans.
Are one-year numbers really useful?
PSERS, SERS, and New Jersey have a reporting advantage: They didn’t adjust their large private holdings to reflect the drop in stocks in the fourth quarter. Instead, they reported private-investment value estimates mostly with a one-quarter lag, as of Sept. 30, before the market tanked.
Over longer periods, some of the counties have outperformed the state plans. Bucks County pension investments averaged 8.4 percent over the last 10 years, beating their own targets, the two Pennsylvania state plans, and the city plan over that period. Bucks came within 0.1 percent of the 10-year results for New Jersey, whose pension system is 100 times larger and uses sophisticated strategies.
Bucks County has continued to beat the other suburban-county plans in recent periods. County Commissioners Chairman Robert Loughery says he and fellow pension trustees keep updating their strategy, and in recent years have loaded up on local asset managers — Center Square and Equus Capital Partners real estate, for example — on the advice of Philadelphia-based consultant PFM.
“When we can touch and feel the managers, that’s proven [to go] well for us," Loughery said.
The Bucks board goes “back and forth,” Loughery added, on whether to dump active investment-pickers and buy index funds, as Montgomery did when Josh Shapiro (now state attorney general) chaired the board of commissioners. Bucks and Chester Counties have recently gone out on a limb, paying state-backed Ben Franklin Technology Partners to invest in local start-ups in hope of cashing in while boosting local employment, despite the risks. Loughery says early returns from the project are promising.
State pension managers like to take a long view. PSERS’s chief investment officer, Jamie Grossman, testified in his annual state Capitol budget hearing in February that over the last 25 years, his system’s relatively heavy reliance on private investments has boosted long-term returns to about 7.25 percent a year, instead of 6 percent for a hypothetical mix of 60 percent stocks tied to a global index and 40 percent global bonds.
But the 392-page final report that the state published in December found that PSERS returns trailed all 10 similarly sized public pension funds it compared, including SERS and the Georgia and Illinois teachers’ plans, for 2017 and the previous five- and 10-year periods.
Stock prices have rebounded sharply this year. If they don’t collapse again, the funds’ paper performance will get a special boost next year, when the stock collapse of late 2008 and early 2009 will no longer be calculated in 10-year returns, city Finance Director Rob Dubow and other officials said. The city still has less than 50 cents for every dollar it expects to need to have to pay pensioners.
In Pennsylvania, public pension plans are big business. There are more than 3,000 township, borough, city, local authority, county, and state government retirement plans, far more than any other state.
And each pension board hires its own money managers, lawyers, accountants, and advisers, who charge a range of fees. But do all these plans form a vast laboratory of public investment and efficient profit-making? Or is it just another taxpayer-funded bazaar for Wall Street, Silicon Valley, and homegrown vendors seeking a slice of the common wealth?
The proliferation of pension plans, Auditor General Eugene DePasquale said in a February report, costs Pennsylvania taxpayers “higher administrative expenses” and results too often in “low investment returns” — though neither DePasquale’s office nor anyone else in government, seems to track plan investment returns systematically.
The largest plans — SERS, PSERS, and the New Jersey and Philly systems — invest billions in sophisticated portfolios. Yet they continue to run multibillion-dollar deficits, which damage state and local government credit ratings, drive up borrowing costs, and over time add more billions to yearly public “employer contributions.” These will equal about 15 percent of the state budget for the two Pennsylvania state plans this year, and about one-sixth of Philadelphia’s yearly budget.
Pension managers blame the deficits on past funding shortfalls, chronic slow growth, and the way retirees live (and collect) far longer than they used to.