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Mike Kanin is the Publisher of the Austin Monitor. As such, he doesn't report on much--aside from the workings of the Monitor--any more. In his previous life as a freelance journalist, Kanin has written for the Washington City Paper, the Washington Post's Express, the Boston Herald, Boston's Weekly Dig, the Austin Chronicle, and the Texas Observer.
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Officials looking to shore up performance of city’s pension funds
A continued shortfall in the performance of the City of Austin’s Employee Retirement System (ERS) pension fund has led to a high-level discussion about possible changes in the plan. For future city employees, that could spell reduced retirement benefits.
“The losses from 2008 were so substantial,” said City Treasurer Art Alfaro, “that it would be very difficult to rely on investment return alone.” Translation? Unless the city of Austin pours more money into the ERS fund, or finds another way to offset some of these losses, future city employees may be looking at a reduction in their pension earnings.
In addition to the fund maintained by ERS, the city has two other major pension funds: One for its firefighters and one for police. The relative health of these funds is measured by the city’s ability to pay out over a period of years. A fund is considered healthy if it can afford to pay the pensions of its employees over 30-year span.
The Austin police are currently able to pay their pensions out over 33 years. Recent numbers for the fire department are not yet available. At last check, they were under the 30-year mark. However, those numbers did not include the 2008 market fall. More recent figures may bring that fund up to between a 30-and-40-year payout rate.
The ERS fund finds itself at a payout rate of infinity. That’s financial-speak for the fact that, as things stand, the city would never be able to pay the full pensions of all of its current and future employees.
Alfaro notes that state law protects current city employees from any benefit reduction. That would put the burden for making up any ERS fund losses in the hands of future employees. This could make for awkward inter-employee relations, should future employees lose some benefits.
Alfaro says that the city contracted with the Public Financial Management Group to come up with a series of options for the ERS plans. That report has been completed but has not yet been made public. It is currently in the hands of city executives.
All three major pension funds are also in the process of being reconfigured to take a more aggressive approach with their portfolios. According to Alfaro, this will include their participation in such alternative investments as hedge funds and distressed real estate management.
Alfaro told In Fact Daily that the officials hoped that “a more diverse fund allocation” would help “soften (the) volatility” that the Firefighters Relief and Retirement fund and ERS had experienced in 2008 and 2009. Though 2009 represented a growth year for both funds, each struggled with a dive in the markets in 2008. Both funds are currently heavily invested in equities.
The city’s police pension fund has already switched to an approach that includes alternative investing. Alfaro told a meeting of the council’s Audit and Finance Committee on Tuesday that the Police Retirement System’s portfolio currently includes investments in private equity, hedge funds, and natural resources. “In the long run,” says Alfaro, the police fund is positioned “to have a greater rate of return and lower-risk profile than the (current) city plans.”
“But,” he added, “in situations where the equity market really takes off, they’re going to lag (behind) the rest of their peers.”
Hedge funds continue to be a controversial investment tool. According to a New York Times overview, “while most investors in hedge funds were pleased with the performance in 2009, many were still cautious about putting new money in risky strategies.”
The police pension fund saw a positive growth rate of 12 percent in 2009. It uses its own benchmark of eight percent when examining its success. By that measure, “they feel like they did well,” says Alfaro.
The Firefighter Relief and Retirement Fund grew at a positive rate of 15.1 percent in 2009. Compared to an industry benchmark, that was below an expected 20.8 percent for this past year.
The ERS beat its benchmark by just under five percent. It grew at a rate of 25.6 percent, compared to an expected performance rate of 21 percent. In his presentation, Alfaro noted that, as currently composed, the “ERS portfolio continued to be among the top performing public pension plans in the country.”
Still, this wasn’t enough to compensate for the huge 2008 losses. “We need to make some changes to get (that fund) healthy,” says Alfaro.
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