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Area public pension plans continue to miss targets

The biggest public pension investment plans in Pennsylvania and New Jersey fell below their target performance last year, making little or no profit.

300 dpi Doug Griswold color illustration of two-faced man: one side is firefighter, the other side is a retiree. Can be used with stories about public employees retiring. The San Jose Mercury News 2009 03000000; 09000000; 11000000; DIS; krtdisaster disaster; krtgovernment government; krtlabor labor; krtnational national; krtpolitics politics; krtworld world; LAB; POL; krt; mctillustration; 03004000; krtfire fire; krtweather weather; krtwildfire wildfire brushfire bushfire fire; 04018000; 09003001; 09003002; 09003004; 09006000; 09016000; employe; employee; employment; FIN; job layoff; labor market; occupation; retirement; work force; worker; 11006001; 11006002; 11006010; citizen safety; krtuspolitics; krtworldpolitics; public employee public employe; public service; griswold; sj contributed; fireman firefighter fire fighter; pension; retiree; 2009; krt2009
300 dpi Doug Griswold color illustration of two-faced man: one side is firefighter, the other side is a retiree. Can be used with stories about public employees retiring. The San Jose Mercury News 2009 03000000; 09000000; 11000000; DIS; krtdisaster disaster; krtgovernment government; krtlabor labor; krtnational national; krtpolitics politics; krtworld world; LAB; POL; krt; mctillustration; 03004000; krtfire fire; krtweather weather; krtwildfire wildfire brushfire bushfire fire; 04018000; 09003001; 09003002; 09003004; 09006000; 09016000; employe; employee; employment; FIN; job layoff; labor market; occupation; retirement; work force; worker; 11006001; 11006002; 11006010; citizen safety; krtuspolitics; krtworldpolitics; public employee public employe; public service; griswold; sj contributed; fireman firefighter fire fighter; pension; retiree; 2009; krt2009Read moreDOUG GRISWOLD / San Jose Mercury News / MCT

The biggest public pension investment plans in Pennsylvania and New Jersey fell below their target performance last year, making little or no profit.

One year doesn't prove much. Markets vary; experts compare performance over longer horizons.

But all four of the largest Philadelphia-area plans - three for state workers and education employees in Pennsylvania and New Jersey and the city of Philadelphia plan - also failed to meet all their long-term targets for the most recent three-, five-, and 10-year periods.

Retirees aren't at risk because these pensions are government-guaranteed. When pension investments in stocks, bonds, and other assets fail to deliver, taxpayers make up the difference.

But pressure has increased on taxpayers because Pennsylvania and New Jersey host some of the most underfunded public pension plans in the nation.

When pension systems spend more than they bring in, they hasten the day when they will run out of money, forcing states and towns to choose between paying retirees straight from the yearly budget, at much higher cost, or canceling pension promises by going bankrupt.

Pension funds try to invest their way out of the hole in two basic ways:

Pennsylvania and New Jersey have hired hundreds of high-priced private investment managers, who try to beat the stock market, or fall less in bad years.

Montgomery County has gone in another direction, dumping private managers and buying cheap stock and bond funds that copy such benchmarks as the Standard & Poor's 500.

It's hard to tell yet that either way produces more profit. Some plans, such as Philadelphia's, have tried both approaches.

It's easy to see why fund managers may be tempted by exotic investments. Some experts say it will be much harder in the next decade for plans to reach their public goals of 7.5 percent to 8 percent annual returns.

McKinsey & Co. recently called the last 30 years a "golden era" and warned that pension investments will yield less in the future.

Likewise, William McNabb, chief executive of Vanguard, the largest mutual fund company, said recently that he expects stock returns will be a few percentage points below funds' targets over the next 10 years, and that private investments are unlikely to outperform stocks over time.

The pension plans blame the shortfall on legislators and governors who failed to pay into the funds in the early 2000s. Governments have belatedly pumped in extra cash to keep the plans from falling further behind - draining billions that could be used for other programs.

Pension funding eats one-sixth of the city budget in Philadelphia, which pays more retirees than city workers.

Payments to cover shortfalls at the Pennsylvania Public School Employees' Retirement System have forced up property taxes in school districts.

Despite spending billions a year shoring up their pension systems recently, Pennsylvania and New Jersey state pension assets are so far behind future obligations that the pair now rank with Illinois as the three least creditworthy states, according to Moody's Investors Service. The ratings force them to pay millions extra to get investors to buy state debt.

Returns for the five plans in calendar year 2015 ranged from 0.64 percent for New Jersey down to minus-3.06 percent for Philadelphia.

New Jersey has $72 billion invested for state and local pensions. But the fund still has fallen nearly $100 billion short of its retiree obligations.

Gov. Christie plans to boost the state's "employer contribution" to $1.9 billion in fiscal 2017-18, up from $700 million in fiscal 2014-15. Moody's has commended Christie's plan to curb pensions by limiting eligibility and payouts, but the Democratic Legislature has stoutly resisted cuts. In previous versions of this story, New Jersey pension investment targets were ascribed to the wrong fiscal years.

New Jersey has reported slightly higher returns than Pennsylvania plans over the last 10 years. But it set a higher target - 7.9 percent - and missed it over the most recent three-, five-, and 10-year periods.

The profits aren't enough to stabilize the need for more money. New Jersey Treasury spokesman Christopher Santarelli blames failure to fund the plan under five previous governors, who borrowed, hoped, and delayed. Pension costs "continue to be our Achilles' heel," he said.

The $49 billion Pennsylvania school pension system is scheduled to raise its direct taxpayer "contribution" to $4 billion next year, from $2.1 billion in 2014. The fund beat its yearly target with 8.8 percent returns in 2014, but lost money in 2015 and has returned an average of just 5 percent over the last 10 years.

Comparing funds is tough because each has different needs, risks, and allocations, protests Evelyn Williams, PSERS spokeswoman. She said the fund "increased the diversification" of its investments and reduced risk after the 2008-9 financial crisis. She said the 7.5 percent return target is spread over "the working life of a member, generally 30 years." Despite "difficult" 2015 returns, "PSERS remains focused on its long-term investment performance," she said.

The Pennsylvania state employees system has about $26 billion invested - about the same as in the early 2000s, while liabilities have doubled.

Direct taxpayer subsidies rose from $1.2 billion in fiscal 2014 to an expected $2 billion in 2017. The fund returned 0.5 percent last year, and trailed its 7.5 percent target over the last three-, five-, and 10-year periods.

"The return assumption is long term, over 20 to 30 years," said SERS spokeswoman Pamela Hile. She maintained that the system had yielded 8.9 percent a year on average over the last 30 years, counting the bull markets of the late 1980s and 1990s.

SERS' actuarial consultants concluded recently that "7.5 percent remains a reasonable long-term assumption," Hile said. That target is shared by 36 of 126 public plans surveyed by the National Association of State Retirement Administrators. Some 23 have more conservative assumptions - and 67 plans, including Philadelphia's and New Jersey's, are betting on still-higher returns.

Philadelphia's special focus on high-fee hedge funds and energy and junk-bond investments left it trailing the market in the last two years, says chief investment officer Fran Bielli.

The city fired four hedge-fund managers in April and cut fees for three more. It's been moving money to low-fee index-fund managers, trimming costs.

Bielli says returns can vary a lot depending on what you look at. Measured on the city's July 1 fiscal years, Philadelphia outperformed its long-term target, PSERS and CalPERS, the giant California pension system, over the last three- and five-year periods.

Montgomery County fired its mix of stock, bond, and private fund managers two years ago and has replaced them mostly with index funds managed by Malvern-based Vanguard, plus private-equity funds managed by SEI Investments, Oaks.

Montgomery County's pension system is smaller and a lot better-funded than the state or Philadelphia's plans. The county contributed less than $4 million to keep it solvent in each of the last two years.

Though Gov. Wolf and other Democrats have called Montgomery County a model, earnings have been middle-of-the-pack, compared with the Pennsylvania and New Jersey funds, in the two full years since indexing. It has outperformed Philadelphia.

Pension boards, including elected officials, their appointees, and member reps, have incentives to keep targets high: When they cut expected returns, assets appear even less adequate to pay future pensions.

"They certainly should adopt more realistic targets," says Olivia Mitchell, professor of business economics and public policy at Penn's Wharton School and chair of the Pension Research Council.

She says plans should count the likelihood that pensioners will live longer alongside investment results when they project returns. She and other scholars say that target returns should be cut in half, and that governments should make larger, more realistic payments to avoid much larger deficits.

Too often, Mitchell concludes, pension actuaries and other professionals paid by the systems let political worries get in the way of relentless math.

JoeD@phillynews.com

215-854-5194@PhillyJoeD

www.inquirer.com/phillydeals

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