Chicago Moves to Consolidate More than 650 Pensions

Task force cites lower overhead costs and access to larger pools of capital as benefits to the potential mergers.

Illinois Gov. J.B. Pritzker’s Pension Consolidation Feasibility Task Force formally issued a report explaining the benefits, procedures, and reasons to consolidate about 650 municipal pension funds throughout the state.

By working as independent and relatively small entities, the pensions are mitigating their investment opportunities and paying for respective overhead costs that could be vanquished under consolidation. Some of these retirement funds are small, only clocking in about $2,000 in assets under management in some cases. This serves as a huge obstacle for the funds to access relatively expensive asset classes outside of the traditional equity and bonds.

Consequent to their scale, the suburban and downstate police and fire pension plans generate significantly lower returns than their larger peers, on average pulling 2 percentage points less than the state municipal employees’ fund.

The task force performed an analysis that simulated the aggregate pensions’ return profile in a hypothetical scenario that takes advantage of economies of scale similar to a fund the size of the Illinois State Board of Investment or the Illinois Municipal Retirement Fund.  

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The simulation calculated their returns between 2004 to 2013, and found that if they were conjoined, they would have returned between 6.73% to 7.62%, a 112 to 201 basis-point increase (above the 5.61% generated during that period), and would have netted an estimated $160 million to $288 million annually.

“The larger pooled systems tend to operate more efficiently in terms of investments fees and expenses than smaller ones,” the task force report’s read.

Pritzker earlier this year denounced the idea of consolidating the downstate pensions into the state’s funds, citing that the state’s credit rating was already sitting just above junk status and was very sensitive to being degraded.

Forfeiting the opportunity to unlock these returns encapsulates the state and taxpayers in a never-ending cycle of property tax hikes and increased employee contribution rates to meet their pension obligations, the task force asserted.

“The greatest financial issue facing these systems is that the growth in liabilities has been consistently diverging from the growth in assets. … A fixed 90% funded level target date, market experiences vastly different from actuarial assumptions, and insufficient contributions into the system, have compressed remaining unfunded actuarial accrued liabilities into a shorter and shorter timeframe,” the task force said. “This has led to unsustainable growth in required employer contributions and has consistently increased the burden on state and local government operating revenues.”

The characteristics of each pension fund were surprisingly modest. Some only have one active beneficiary and $2,000 in assets under management, with only 3% of the plans having assets exceeding $100 million. Consequently, this leads to liquidity concerns around smaller plans bearing larger risk, and therefore lower returns.

The average number of plan participants per plan is 67 individuals, with 24 plans having only one active participant. Only five plans have more than 500 active members. The funded ratio for the average suburban and downstate police and fire pension plan is 55% funded.

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Bye-Bye, Buybacks? Share Repurchases Falling 15%

Corporate fad to cash out investors is flagging, Goldman study finds.

It has been one of the sweetest deals on Wall Street: Investors relinquish their shares for a premium to the market price, paid in cash, often helping raise the stock’s value. But this longtime perk of a bull market appears to be fading.

Share buybacks are on course to drop 16% in 2019 for the S&P 500, versus the year before, according to a Goldman Sachs study sent to clients. And in 2020, the survey added, share repurchases will dip another 5%. Certainly, buyback activity is still strong relative to history: The $754 billion expected for this year still would be the second largest ever, with last year’s $895 billion holding the record.

But the trend is down, Goldman noted. The culprits, the study read, are “heightened uncertainty, low CEO confidence, and tepid earnings growth.” This all comes amid an overall cut in corporate spending. Total cash outlays for 2019’s first half slid 4%, the firm said.

Thanks to the trade war and weakening economics overseas, not to mention a retreat in US manufacturing growth, American companies expect much lower earnings for the third quarter, whose reporting period has just begun. Meanwhile, a Duke University survey recently found that a majority of chief financial officers expect the US will be in a recession within the next year.

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Some spending activities will nudge up in 2019, Goldman found. Notably, dividends will grow by 5%, the firm forecasted. These payouts are another way companies reward shareholders with cash. Dividends have a sanctity that buybacks don’t.  Trimming dividends is always a red alert that a company is in trouble, and poisons its share appreciation.

Buybacks have taken a lot of political heat lately, with Democrats eyeing ways to require companies to pare their repurchases. The rap on buybacks is that the money could be better spent on worker raises and expansion that leads to more jobs. This, to be sure, is a controversial position, with buyback proponents saying investors should reap benefits beyond rising stock prices and that the extra cash in their hands boosts the economy.

Among corporate sectors, health care has seen the steepest buyback decline, down 29% in the first half. Small wonder: The health industry is taking the most flak from Congress these days.

 

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