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City retirement funds don’t escape downturn

Friday, February 27, 2009 by Michael Mmay

City staff members brought some grim, but not very surprising, news about the state of the city’s retirement funds to the Audit and Finance Committee on Tuesday. The three retirement funds (for general employees, police and firefighters) each lost around a quarter of their value in 2008. The only silver lining is that the struggling funds actually beat the market. In comparison, the S&P 500 lost 37 percent last year.

 

Austin’s Deputy Chief Financial Officer Jeff Knodel detailed the losses. The $1.28 billion employee fund was down 25.9 percent in 2008; the $404 million police fund was down 22.5 percent; and the $464 million firefighters fund was down 23.5 percent.

 

City Treasurer Art Alfaro put the losses in context. This was “the worst market conditions since the Great Depression,” the city was “not alone in its pain,” and the losses were “indicative of a turbulent market.” He had few words of comfort, except that “no one knows when the market will bottom out, but many experts predict that stocks will outperform bonds over the next 20-30 years.”

 

Steve Edmonds, the executive director of the City of Austin Employee Retirement System, spoke to the council next. “After a tough year,” he said. “The natural question is . . . what now?”

 

And Edmonds’ answer to that question could be summed up as ‘don’t panic!’ In other words, the fund managers are not going to try to time the market.  “We need to focus on the long term,” he said. “We’re working on a 30-40 year time horizon.  We can’t overreact to the current market stress.”  Edmonds pointed out that the city’s employee retirement fund had a 20-year annualized return of 8 percent, with 15 years of positive returns (and four of those years had gains of over 20 percent).

 

In 2008, the city hired a chief investment officer to manage the fund, which Edmonds said would help the city survive the hard times.  The Board of Trustees has control over the asset mix, which Edmonds stressed is the most important decision they make. For instance, the retirement fund is looking at investing in private equity firms, but needs to make sure that would be a smart move.

 

The downturn won’t affect pensions or benefits paid out to employees, which are guaranteed by the Texas Constitution.  It’s one advantage of this system over a 401k. But it could have an impact on future cost of living adjustments and funding levels. Knodel said they would be looking for input from Council on how to proceed. Council Member Sheryl Cole, who chairs the committee, asked the staff members to update the Audit and Finance Committee on a quarterly basis.

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