Illinois Lawmakers Entertain Bold Bond Sale Plan

A radical bond sale pension strategy has caught the eye of Illinois lawmakers, drawing both positive and negative criticisms alike.

The plan, first offered by the State Universities Annuitants Association’s (SUAA) proposed the Prairie State sell $107 billion in bonds to help fully fund the state’s pension system, which Reuters reports was just under 40% funded in fiscal 2017, totaling $129 billion.

At the Illinois House Personnel and Pensions Committee’s Tuesday hearing, Runhuan Feng, an associate math professor for the University of Illinois, offered a more detailed explanation, where selling taxable 27-year fixed-rate bonds was the key to getting the state’s five pension systems to 90% funded status. According to Reuters, Feng said Illinois pension costs would see a $103 billion reduction by 2045.

If the gamble were to be implemented and pay off, it would do wonders, as the current funding system sees the state facing a fiscal annual pension payout of $8.5 billion in 2019, reaching heights of nearly $20 billion in the year the $103 billion proposal expects to see that number in reductions.

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A bill for the bond issuance was filed by SUAA chairman Robert Martwick, who pointed out that it was in its infancy, with bond experts to testify.

The proposal, as with any risky concept, was received with both optimism and skepticism from lawmakers. While some were curious if there were additional reductions the sale could provide without violating state constitutional rights for public pensions, others speculated how the plan would affect the state’s already poor credit ratings and if the borrowing would negate future bond sales for projects.

“Are we going to be tapped out completely?” Democratic State Rep. Scott Drury said, reported by Reuters.

Tags: Bond Sale, Illinois, Illinois House Personnel and Pensions Committee, Pension, State Universities Annuitants Association

Miami’s pension trust is eliminating its investments in real estate funds, according to a draft of recent investment policy changes.

The City of Miami General Employees’ & Sanitation Employees’ Retirement Trust (GESE) has removed a target real estate asset allocation of 5%, and has shifted that into large cap and fixed-income investments. For the quarter ending Sept. 30, 2017, the GESE had a 4% asset allocation in real estate worth $26.8 million.

In a draft of its investment at a trustees’ board meeting last week, a section had been crossed out that previously read: “A portion of the real estate investment may be through an open-end commingled property real estate fund … a portion may also be invested through REITs. The REIT manager may invest up to 7% (at market) in a single issue.”

REITs significantly underperformed the broader market in 2017, as the FTSE NARIET All Equity REITs index gained 8.7% last year, compared to the S&P 500, which closed out the year up 21.8%. And so far this year, the All Equity REITs index is down 4.82%, while the S&P 500 is up 5.58%.

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In addition to the elimination of real estate investments, the fund’s consultant suggested the fund make changes to its manager evaluation and review criteria in order to hold its investment managers more accountable for fund performance.

In its evaluation, CSSC Investment Advisory Services said that one of the principal causes of “sub-par” investment performance is the retention of poor performing managers for too long. It also said that a provision in the GESE’s investment policy statement (IPS) that defines what is considered “good standing” for its active managers “has likely had the greatest adverse impact on overall plan performance.”

According to the policy statement, a manager will be considered in “good standing” if his or her returns during the most recent three-year period is equal to or better than 90% of the median (50th percentile) manager’s return in the appropriate peer universe.

“There is no explanation in the IPS for why a manager performing 10% below the performance of the median manager’s three-year return is acceptable, much less desirable,” said CSSC in its review. “Yet, performance at that level is accepted and poor performing managers that meet it appear to be safe from replacement.”

The firm proposes defining “good standing” as having a composite score ranks in the top 33rd percentile of the appropriate peer universe for the most recent reporting period. It said the 33rd percentile was selected as a “conservative, initial transition step” toward a higher standard.

“The concern is that too many of the Trust’s current active managers would be subject to replacement, if a higher standard is initially applied,” said CSSC. “And, yet, most managers within that 33% would be considered ‘average’ and not truly superior.”

Tags: City of Miami General Employees' & Sanitation Employees' Retirement Trust, Divestment, Miami, Pension, Real Estate