Public Pensions Miss Fantastic Bitcoin Gains (#GotBitcoin)
Public pension plans fell short of their projected returns this year, adding to the burden on governments struggling to fund promised benefits to retired workers. Public Pensions Miss Fantastic Bitcoin Gains (#GotBitcoin)
Public plans with more than $1 billion in assets earned a median return of 6.79% for the year ended June 30, the lowest since 2016
Public plans with more than $1 billion in assets earned a median return of 6.79% for the year ended June 30, the lowest since 2016, according to Wilshire Trust Universe Comparison Service data released Tuesday. Public pension plans project a median long-term return of 7.25%, according to data collected by Wilshire Associates in 2018.
Each year, pension funds must make this estimate on how much they expect to earn on investments.
The projection determines the amount the government that is affiliated with the pension fund must pay into it.
Robust returns reduce the need for government support. When returns fall short, however, the amount the government must contribute increases, potentially diverting money from other public services.
“I think a lot of plans fell a little bit short,” said Becky Sielman, principal and consulting actuary at Milliman. “Bonds generally did well, but there are other asset classes that didn’t do as well.”
Overall, a decades-long bull market in stocks has been good for pensions. Large public plans had five years of double-digit returns and a 10-year annualized return of 9.7% for the year ended June 30, according to Wilshire.
But those returns still haven’t brought pension funding levels close to what is needed to pay for future benefits. State and local pension plans have about $4.4 trillion in assets according to the Federal Reserve, $4.2 trillion less than they need to pay for promised future benefits. Contributing factors include increasing lifespans, overoptimistic return assumptions, and government decisions to skimp on pension payments. Record losses in 2009, when pension funds fell by a median 19.19% according to Wilshire, also played a role.
In hopes of reducing their unfunded liabilities, pensions have pushed further into riskier, less traditional investments over the past decade. Large public pension plans had a median 11.47% of their assets in alternative investments such as private equity for the year ended June 30 and a median 4.45% of their investments in real estate.
Pension Funds Double Crypto Asset Exposure in Morgan Creek’s Fund to 1%
Morgan Creek Digital now takes up around 1 percent of the assets of two Fairfax Retirement System pension funds – an investment which has more than doubled since taking their first position in the fund that closed in February.
Two of the three pension funds under the system from Fairfax County, Virginia, the Police Officer’s Retirement System and Employees’ Retirement System, invested $55 million in Morgan Creek’s second fund in October.
The new allocation came after seeing good preliminary results from the first fund, in part because of the performance of crypto, which makes up 15 percent of the Morgan Creek’s investments; the majority of the fund’s positions are in blockchain-related infrastructure companies.
“The final close for fund one was only in February of this year, and it is a short time frame admittedly,” Katherine Molnar, chief investment officer of the police officer’s fund, told CoinDesk.
“It’s gone well and part of that is because of Morgan Creek’s decision for how they’ve timed buying bitcoin. The liquid part of the fund has done quite well based on how they have timed ramping that up in the portfolio.”
The police officer’s pension fund contributed $22 million of the investment while the county employees’ fund put up $33 million. Molnar said $50 million of the investment went to the second fund raise while $5 million was a separate co-investment in a specific undisclosed project under Morgan Creek.
Those figures represent around 1.5 percent of the police officer’s fund’s 2018 total assets and around 0.8 percent of the county employee’s fund‘s total assets from the same year. For context, both pensions normally put up around 2 percent of their assets in a new investment.
This time around, convincing the board to re-up the investment was easier than taking the initial stake.
“We didn’t have to do a lot of extra explanation or discussion, and people are generally pleased with the way the performance is off to a good start. It was a much easier legal process because the lawyers did a good job on the first contract.”
The Morgan Creek fund was characterized as a private equity venture capital fund, and a replacement for a small capitalization US equities fund in their portfolio – one of the higher return and higher risk parts of pension fund investing.
While the crypto part of the Morgan Creek Digital fund is performing well, the pension fund’s CIOs expressed the most interest in the blockchain side of Morgan Creek, which makes up 85 percent of the fund.
Andy Spellar, chief investment officer of the employee’s fund, told CoinDesk:
“Think about every time you go to buy a property and refinance – you have to pay title insurance for someone to figure out if there’s a lien against your property. If the ownership of your property is digitized and transferred instantly, in the way that this is done in a day, title insurance goes away.”
As pension funds suffer from low interest rates, technology venture capital funds become more attractive to funds trying to meet their return targets, Spellar added.
“It’s a problem across the board for everybody,” Spellar said. “The level of interest rates is a major component of your total return over time.”
Since all assets are priced off of cash, low cash rate affects the price of every other asset class, Molnar added. This hasn’t yet convinced the two funds to invest in purely crypto-focused funds, however.
“We’re not doing this for crypto exposure, but we do get some of that, and it does so far exhibit some uncorrelated behavior relative to other asset classes,” Spellar said. “To be honest it’s so early in its lifecycle that I don’t have a good idea of whether that will hold up or not.”
Spellar, in general, sees any kind of disruptive technology as a hedge against traditional investment.
“We’re looking for disruptive innovation – anything that can be negatively correlated to other things we own,” Spellar said. “So if we own a bunch of banks, this is a way to hedge against their monolithic and slow moving processes.”
Is Your City’s Pension Fund A Little Short? Marijuana Might Help
Public officials look to cannabis tax revenue to shore up retirement programs and budgets.
South Beloit, Ill., faces steep bills to fund its firefighter and police pensions and repave its cracked streets. Now, Mayor Ted Rehl has a plan to help cover the shortfall: marijuana.
South Beloit, less than a mile from the Wisconsin state border, will welcome its first cannabis dispensary later this year. Recreational cannabis became legal in Illinois on Jan. 1 but remains illegal in Wisconsin. The Illinois town hopes to collect roughly $1 million a year in taxes on marijuana purchases, mostly by Wisconsinites.
“If we made that million dollars, we would be able to do streets and we would be able to put a nice amount in the retirement fund,” Mr. Rehl said.
The past decade has been difficult for American cities and states, where tax revenues and public-worker pension funds took massive hits as a result of the 2008 economic crisis. Even when the stock market recovered after the financial crisis, superlow interest rates have also weighed on the pension plans. With recreational cannabis now legal in 11 states, public officials are looking to marijuana tax revenue to help shore up government finances and address funding shortfalls.
Illinois, where lawmakers are grappling with the highest pension debt of any state, was the first state to legalize retail sales of cannabis through legislation rather than a popular vote. Towns in Illinois and California, facing state-level mandates to increase annual pension payments, are eagerly anticipating revenue from recreational marijuana sales. Cities in several other states, including Oregon, Massachusetts and Alaska, are also collecting cannabis taxes.
To be sure, many cities and states are directing portions of their cannabis revenue toward residents or communities that were historic targets of marijuana enforcement. But plugging budget holes remains at the top of many public officials’ to-do lists.
In the aftermath of state cannabis-legalization measures, “you tended to see poorer towns that are not in such good fiscal shape being more welcoming and willing to license dispensaries,” said Roy Bingham, CEO of BDS Analytics, a Boulder, Colo., cannabis-industry consultant.
California local governments collected a total of $1.86 billion in revenue from cannabis sales during calendar year 2018 and nearly as much in the first three quarters of 2019, according to Brea, Calif.,-based HdL Cos., a consultant to local governments and public agencies.
Cannabis revenue last year helped Port Hueneme, Calif., balance its budget without dipping into reserves for the first time in eight years. Rather than charge a tax, Port Hueneme is requiring its seven retail dispensaries to turn over 5% of their gross sales and donate another 1% to local charities, said police chief and interim city manager Andrew Salinas.
Mr. Salinas said Port Hueneme, which collected $1.8 million from cannabis in 2019, has used cannabis tax revenue to help cover the city’s growing pension payments, to pay for additional police officers and to add recreation programs. The donations, meanwhile, have benefited a local homeless shelter and subsidized a July Fourth fireworks display.
“Cannabis saved the fireworks show,” Mr. Salinas said.
But researchers and analysts expect marijuana revenues, which rely on changing tastes and disposable income levels, to be unpredictable and volatile. California’s cannabis revenue for the first six months of 2018 came in 54% below what the state projected, according to the state Legislative Analyst’s Office.
Another risk is more widespread legalization. South Beloit’s market advantage, for instance, depends on a continued ban in Wisconsin.
Cities and states also face a delicate balance: Tax marijuana too much and people will stick with the black market, which Moody’s Investors Service pegs at about $40 billion nationwide. BDS Analytics estimates that marijuana flowers cost 77% more to buy legally than illegally in California.
A cannabis-infused chocolate bar purchased in Illinois’ capital city of Springfield might cost $25 before taxes. But after the state, city and county take a cut, the consumer would end up paying $33.19.
City officials say they are budgeting conservatively and keeping their expectations low. Springfield plans to use a portion of its marijuana taxes to promote economic development on the city’s blighted East Side and another portion to shore up the city’s police and fire pension funds. But Mayor Jim Langfelder is well aware that even the full $700,000 in projected revenue won’t go far in comparison with the funds’ combined shortfall of $354 million.
“The cannabis sales is going to be a small piece of it,” said Mr. Langfelder. “But every little bit helps.”
Even the possibility of minimal revenue is appealing to cash-strapped public officials.
The governor of New Jersey, a state also struggling to fund pensions, has pushed for legalization and voters are set to weigh in on the issue this year. The Virgin Islands’ governor is asking lawmakers to approve additional marijuana taxes and recently proposed borrowing against that revenue to bolster the territory’s near-empty pension fund.
Pension costs, in particular, tend to dwarf cannabis revenue projections. The city of Chicago expects to make a total pension payment of $1.7 billion this year but expects to collect only $4.1 million from marijuana taxes.
In contrast, Chicago estimated it would receive $32.5 million in alcohol taxes and $18.9 million in cigarette taxes in 2019.
“The one thing that’s clear, and this is true of a lot of different vice taxes—alcohol, gaming—it’s not going to solve a state or local government’s revenue problems in and of itself,” said Fitch Ratings analyst Eric Kim.
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