Public Pensions Huge Topic of Interest

The under funding and under performance of public pension funds is garnering more interest as they come closer to insolvency. Public pension funds in Dallas and Houston are lobbying the Texas legislature for authority to access more public funds as a way of solving their financial problems. The Texas Tribune has an excellent analysis of the financial issues and the politics behind trying to use public funds to cover their dollar shortfalls.

Calpers, the huge California public pension fund is front page news on the WSJ today as they struggle with under funding and under performance.

"Calpers, which typically acts as a bellwether for smaller funds, already has made other decisions to eliminate all hedge-fund holdings and sever ties with roughly two-thirds of the private-equity firms that handle its money. It oversees retirement assets for 1.8 million active or retired police officers, firefighters and other public employees."

The under performance is associated with the high fees charged by Private Equity funds and Hedge funds to manage and invest the pension money.

It is observed that Private Equity returns over the last 20 years are reduced by over 5% annually due to excessive fees.

As the article indicates, Calpers has been reducing it's exposure to Hedge funds and is looking for ways to dramatically reduce Private Equity fees.

So, while Calpers is reducing exposure to Private Equity and Hedge funds, Texas Municipal Retirement System (TMRS), has been increasing their exposure. They both cannot be right and be working in the best interest of the taxpayers and pensioners!

TMRS has allocated 10.95% of it's funds to Absolute Return (Hedge funds) and they earned 2.97% gross return. Subtract the fees and the return is even less.

Private Equity, which is being ramped up by TMRS, earned 1.68% last year with only a .45% allocation of funds. 

These returns are far short of the assumed investment return of 6.75% that TMRS uses to calculated the unfunded liability.