RH Jones: Caution advised in use of our pension funds

From RH Jones, February 11, 2009
Subject: Caution on using our funds to shore up banks

To all:

K. Fluke, PhD. and I think that our STRS Ohio should take care on: “The Proposal to Shore Up Banks With Pension Funds” as reported in the NY Times. Give pension funds at least a month to decide. Money for Obama’a TARP should be given a chance first. Our STRS should wait and see.

I am in concurrence with Dr. Fluke,

RHJones,
A STRS retired teacher member

A Proposal to Shore Up Banks With Pension Funds

By MARY WILLIAMS WALSH
New York Times
February 9, 2009

Click image to enlarge.

Financial institutions in the United States probably need hundreds of billions of dollars in additional assistance, and one congressman wants to harness state and local pension funds to help them.

James Estrin/The New York Times “Some of us are getting tired of writing checks with public money” and seeing no results, said Representative Gary L. Ackerman, Democrat of New York. Rather than rely more heavily on the Treasury, which has already put $350 billion in the nation’s banks, Representative Gary L. Ackerman sees an opportunity in the trillions of dollars in public pension funds. Most of the funds suffered giant losses last year in the market turmoil. But they do not need all of their assets immediately, because their time horizon for paying benefits is decades long.

Mr. Ackerman, Democrat of New York, is sponsoring legislation that would allow public pension funds to pool some of their money and use it to create a sole-purpose entity that would buy $50 billion to $250 billion worth of preferred stock in America’s banks. That would strengthen the banks’ balance sheets and, Mr. Ackerman hopes, get them lending again.

“Some of us are getting tired of writing checks with public money” and seeing no results, Mr. Ackerman said. He said pension fund officials who had heard about the measure so far were eager to participate.

Since the nation’s banks are shaky, and pension funds cannot afford more investment losses, Mr. Ackerman’s measure also calls for the Treasury to guarantee the funds’ principal, plus an annual return of about 8.5 percent.

This guarantee would solve one of the biggest problems now facing most public pension funds: They need to achieve average annual investment returns of 8 percent, and in today’s markets, they cannot do so with the types of securities they are required to invest in.

Plan rules generally limit the amount of market risk the plans can take on. At the moment, risk-free assets like Treasury bills are paying next to nothing. The benchmark 10-year Treasury is yielding just under 3 percent.

If public pension funds had to adjust their numbers to reflect the bleak state of the stock and bond markets, many would no longer be viable. Even if they lowered their investment-return assumptions by three percentage points — to 5 percent, which is the rate of return the Treasury has been promised on its bank investments — their business models would no longer make sense.

The models typically call for two-thirds of the cost of the benefits promised to retirees to be covered by investment gains. At 5 percent a year, on average, the investments will not generate enough cash.

Getting the plans back into balance would then mean pumping in lots of cash, which presumably would come from taxpayers in the states and municipalities that sponsor the plans. Local governments would be hard-pressed to come up with extra money in this downturn.

A federally guaranteed return of 8.5 percent, meanwhile, would avoid such misery, and give the public pension funds a new lease on life. There would, of course, be considerable risk that the banks would not be able to generate those returns, in which case the federal government would be on the hook, as it would for any loss of the funds’ principal, under the proposal.

Mr. Ackerman, a member of the House Financial Services Committee, has been circulating a draft bill and assessing support. The bank investment program would be available only to public pension funds, not pension funds sponsored by companies. The corporate plans are covered by federal funding rules and as a result tend to be stronger.

Some public plans have made mistakes during the boom years. The state of New Jersey, for instance, used its pension fund to balance the state budget for a number of years and parted with hundreds of millions of dollars, something a corporation would not be allowed to do.

The state of Illinois has a pension model that assumes the benefits will never be entirely funded instead of covered over 30 years, as is generally required. In Pennsylvania, the state legislature passed a law in the 1980s allowing local governments to contribute smaller amounts than what is actuarially required to meet their obligations.

Mr. Ackerman and his advisers acknowledged that some public pension funds had made missteps, but said there was not time to tighten up the whole sector’s practices before starting a bank bailout. There are about 2,700 public pension funds in the United States.

“Sometimes, you have to do things to benefit people who didn’t behave so well,” Mr. Ackerman said, explaining that the need to keep public pension funds afloat and promote bank lending were too urgent to wait.

How such a plan would work with the Treasury’s newest assistance package for banks, set to be unveiled Tuesday, was not clear.