Illinois’ New Governor Installs Two Pension Taskforces

Illinois is dealing with a titanic pension problem, and its new governor is installing two taskforces to help figure out how to fix it.

Gov. J.B. Pritzker’s two groups, the Pension Consolidation Feasibility Taskforce and the Pension Asset Value and Transfer Taskforce, are geared toward different sectors.

The first team concentrates on consolidation of local plans for police and firefighters—it will look at the 671 smaller Illinois public pension funds and figure out how to combine them in order to cut costs and achieve higher returns. Smaller plans pay higher fees because their dollar values can’t meet institutional standards. This narrows their investment options as well.

The state’s public funds have a combined $170 billion assets under management but are carrying liabilities of more than $355 billion.

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Co-chairing the consolidation panel will be William Brodsky, former chairman and CEO of the Chicago Board Options Exchange (now known as CBOE Global Markets), and Pat Devaney, president of the Associated Fire Fighters of Illinois and former Illinois Senate Minority Leader Christine Radogno.

The second study group, the Pension Asset Value and Transfer Taskforce, will examine how to increase funding for the major public plans. The panel is taking a similar approach to Connecticut’s Pension Sustainability Commission. Possible sources of fresh funding include state-owned real estate and infrastructure holdings. The five retirement systems—teachers, state universities, state employees, general assembly, and judges—are in a big jam.

The five major pension systems have racked up $134 billion in liabilities, but the state has tens of billions of dollars in asset classes like real estate that could be put to good use for the funds. Jaqueline Avitia-Guzman, Sears Holdings’ head of corporate development, and Jamie Star, who chairs Longview Asset Management, will co-chair that division.

The two coalitions will submit their findings to Deputy Gov. Dan Hynes, who hopes their ideas will “improve the health of pension funds around the state.”

Illinois is reeling from years of neglected contribution payments and the impacts of global financial crisis of 2008. The state’s 36% funded ratio has left its lawmakers scratching their heads for solutions, going as far as to entertain a $100 billion bond sale last year. If left unchecked, the results could be disastrous.

Last week, Pritzker published a report examining issues with 2020’s fiscal budget that he claims Bruce Rauner, his predecessor, misjudged. Pritzker projected a $3.2 billion budget deficit, which is 16% higher than the former administration determined in November. The newfound gap comes from poor state revenue, and various interest penalties and fees paid. The new governor said the required contributions for the pension systems is “scheduled to hit” $9.2 billion in fiscal 2020. That’s one-quarter of the state’s annual budget, and $600 million more than the current fiscal year will demand.

“Overly aggressive assumptions built into the FY19 budget about implementation timeframes of the voluntary buyouts of pensions or COLAs [cost-of-living adjustments] will likely increase the state’s pension contributions beyond what was previously expected,” said the report. It also noted that due to Rauner’s “four years of failure,” Illinois made “virtually no progress in managing its pension responsibilities and the governor developed no realistic plan to address them going forward.”

Pritzker’s paper said these Rauner-induced problems resulted in eight credit downgrades during his regime. He warned the near-junk status for Illinois bonds will cost Illinois “hundreds of millions” of dollars in annual interest payments for all future refinancing or new borrowing if the credit rating doesn’t reverse.

“Illinois has a long way to go to dig out of the fiscal mess we inherited, but with discipline and focus, we can take common sense steps that will make life better for the hardworking people of this state and restore fiscal stability,” said Hynes.

Neither the governor’s office nor the taskforce leaders have responded to requests for comment.

Tags: Bruce Rauner, Illinois, J. B. Pritzker, Pension, Pension Asset Value and Transfer Taskforce, Pension Consolidation Feasibility Taskforce

The San Francisco Employees’ Retirement System (SFERS) has managed to eke out a small positive investment return of 1.1% in the first seven months of the 2018-2019 fiscal year despite falling equity markets for much of the period, says Chief Investment Officer William Coaker Jr.

In a report to the board of the $24.7 billion pension system Wednesday, Coaker said that while the retirement plan’s equities portfolio saw a -5.1% return in the first seven months of the fiscal year that began on July 1, private equity saw a 11.02% return, while real assets produced 6.04%, and private credit returned 5.70%

The San Francisco pension system shoots for an expected average rate of return of 7.4% on an annualized basis, so given that, the 1.1% return in the first seven months of the fiscal year are paltry. The reality, however, is many institutional investors would relish that 1.1% return in a fiscal year that has seen intense volatility in equity markets.

A strong rise in stock prices in January offset the worst December in almost in 90 years, but even then, pensions plans aren’t doing well. For example, the second-largest retirement system in the US, the California State Teachers’ Retirement System (CalSTRS), reported that it is around a break-even point of as January 31 in the July-to-June fiscal year, meaning it has a zero-percentage point return. CalSTRS returned -3.2% in calendar year 2018, it recently reported.

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Coaker has been quick to point out at pension system meetings that a restructuring of San Francisco’s investment portfolio has helped the system’s investment results this fiscal year. Equities dropped to less than 35% of the portfolio as of Jan. 31, down from 48.3% in October 2016, lessening the results of stock market volatility.

Coaker said at the Feb. 13 meeting that the S&P 500 fell -9.03% in December as an increasingly “worrisome narrative from the US on trade with China” played out. In January, he said, the markets bounced back, and the S&P 500 returned 7.87%. Coaker noted that China made several conciliatory statements in January, including a commitment to buy a large volume of US goods.

“The S&P 500 experienced its worst December since the Great Depression, while January was the best start to a year in 30 years,” he said.

Coaker cited the strong performance in private equity specifically at Wednesday’s meeting, noting that the 11.02% return in the first seven months of the fiscal year in the asset class was “backed by a strong IPO market as well as strong revenue and profit growth among privately held companies.”

Part of Coaker’s strategy has been to expand the SFERS private equity program and as of Jan. 31, private equity made up 20% of the system’s portfolio, up from 13.4% in October 2016.

As Wednesday’s meeting, Coaker disclosed that the San Francisco system had made up to $100 million in venture capital investments in December 2018 and January 2019, which are classified as part of the private equity asset class.

His CIO report showed that the SFERS board meeting in closed session in December made an up to $25 million commitment in Eclipse Fund III, which is managed by Eclipse Ventures. At the board’s January meeting, it approved a commitment of up to $75 million in LAV BioSciences Fund V. The venture capital fund is managed by Lilly Asia Ventures.

The board also approved the following private market commitments meeting in closed session in December:

A commitment of up to $40 million in Kimmeridge Energy Net Profits Interest Fund V. It is classified as a natural resources fund within the SFERS real assets portfolio. According to its website, Kimmeridge puts its focus “purely on the development of low-cost unconventional oil and gas assets in the US upstream energy sector.”
A commitment of up to $100 million in Blackstone Real Estate Partners IX. The commitment is considered a real estate investment in the SFERS real estate portfolio. The fund is managed by the Blackstone Group.
A commitment of up to $75 million in Fortress Credit Opportunities Fund V. The fund is managed by Fortress Investment Group. The fund is classified as part of SFERS private credit portfolio.
A commitment of up to $50 million in Fortress Lending Fund I(A). The fund, managed by Fortress Investment Group, is considered a senior debt investment within the SFERS private credit portfolio.

San Francisco Employees’ Retirement System Becomes Major ESG Force

Tags: Returns, San Francisco, SFERS