Whitepaper – Evaluating Pension Investment Strategies: A Comparison of Top- and Bottom-Performing State Public Pension Funds to a Passive Index Portfolio

The Institute for Pension Fund Integrity released their latest whitepaper today – “Evaluating Pension Investment Strategies: A Comparison of Top- and Bottom-Performing State Public Pension Funds to a Passive Index Portfolio.”

In our previous report, “Public Pension Performance: Comparing Pension Investments to Passive Index Portfolios,” we introduced a method for comparing each state’s public pension fund to a passive index portfolio. Clear and justified metrics of comparison allow retirees and taxpayers to easily understand their pensions and their strengths and weaknesses.

Now, we return to these funds to further deconstruct their investment portfolios by analyzing their various asset allocation configurations. This inquiry intends to illuminate possible correlations between asset allocation and performance or, conversely, eliminate this factor as a determining driver of pension fund performance.

Our major conclusions are these:

  • Asset Allocation – Overall, asset allocation did not drastically vary among the top- and bottom-performing funds. Global and domestic equity was, on average, by far the largest part of a pension fund’s portfolio. The top and bottom five funds’ distribution of these assets was nearly identical.
  • High Performing States – South Dakota consistently outperformed other states’ pensions, in both its ranking against the 60/40 strategy and its funding ratio. South Dakota’s commendable prioritization of benchmarks and fiduciary responsibilities exemplify the values of a successful pension.
  • Persistent Unfunded Liabilities – States across the nation continue to grapple with underfunded and poorly performing public pension systems. Understanding public pension fund performance is the first step toward creating a new plan of action to better fund each state’s retirement system. In the process, we must empower plan fiduciaries to fulfill their obligation of increasing returns for contributing plan members and resist the increasing pressure to wield public pension funds as weapons in current political debates.
  • Rise in prevalence of ESG and alternative investment strategies – This analysis is especially prevalent due to the trend in recent years to seek alternative investment strategies based on social, political, or otherwise divergent methodologies rather than those based on pure pecuniary interests. One of the most prevalent of these trends has been the emphasis of environmental, social, and governance (ESG) factors in pension fund investments. ESG investment can be an important tool for diversifying portfolios and impacting corporate governance, but ultimately has not been shown to garner the same return on investment as passive investment strategies.
  • Proxy Advisory Firms and Public Pension Funds – The outsized role played by the duopoly of proxy advisory firms in the U.S. has drawn criticism in recent years as a means for fund managers to avoid responsibility in the decisions impacting their fund’s performance. Unfortunately, there remains limited transparency into the decision-making process of these proxy advisors, and public pension performance seems to indicate that their recommendations do little to boost returns on investment. Among the five states ranked lowest against the 60/40 investment strategy, four rely on services from these firms. Meanwhile, the state with the highest performing public pension fund, South Dakota, receives no proxy advisory assistance.
  • A need to return to fiduciary obligations – Public pension fiduciaries need to focus solely on the financial returns of their investments. Considering the egregious unfunded liabilities facing public pensions across the United States, the emphasis on ensuring strong returns is more important than ever. IPFI has long pushed for the principle that while individual investors should be free to choose whatever strategy best meets their needs, the fiduciary duty which is the cornerstone of pension fund management must always prioritize maximized returns with reasonable risk above any other political or social considerations.

“If a fund can’t outperform a basic balanced passive investment strategy, it is time to fire the fiduciaries and outsource the management of the pension fund to a simple, no cost, passive mutual fund,” notes IPFI President Christopher Burnham. “We hope this information will be used to provoke a discussion of the successes and failures of the way some state fiduciaries and administrators manage our precious retirement and taxpayer dollars.”

Read IPFI’s latest whitepaper HERE.

Northam’s Biggest Conservation Opportunity


This past spring, Maryland’s congressional delegation — supported by most of Virginia’s delegation — announced the effort to designate large swaths of the Chesapeake Bay as a National Heritage Area. Our bay’s history, cultural diversity and magnificent ecosystem — the largest of its kind in the world — deserves this, and our congressional leaders are to be applauded. But our governor can step up and do even more: Join every other state on the East Coast and ban the industrial harvesting of the menhaden feeder fish in Virginia’s waters.

Our state is the only one on the East Coast that allows a Canadian company to ply our waters and suck up more than half a billion fish every year, rendering them into fish meal and oil for use as animal feed in Canada. These forage fish, Atlantic menhaden, are the essential part of the marine ecosystem called the “most important fish in the sea” because it is the base feedstock for bluefish, striped bass (a $7 billion-plus industry along the East Coast), and most of the other fish in the bay and waters off of our beaches.

The logic behind this is really simple: Less menhaden feedstock for bass and blues means less bass and blues. Some marine scientists estimate that by allowing Cooke Inc. of New Brunswick, Canada, to come south and take our feeder fish, it reduces other bay fish by as much as 30%. Cooke uses spotter planes to find swirling pools of menhaden and then directs 200-foot-long “mother ships” to the spot to vacuum up whole schools.

Last year, Gov. Ralph Northam, along with Virginia Secretary of Natural and Historic Resources Matt Strickler, showed responsible leadership by joining other states to hold Cooke Inc. to account after it intentionally exceeded the Chesapeake Bay fishing cap set by the Atlantic States Marine Fisheries Commission, which manages the fisheries for the U.S. Commerce Department, and transferring oversight of Cooke within the commonwealth to the Virginia Marine Resources Commission (VMRC), the body that also manages every other fishery in the commonwealth.

Now the governor and the VMRC need to really make history by taking the next step and ending the practice of reduction fishing in Virginia’s waters altogether. Again, every other East Coast state has effectively banned industrial harvesting of menhaden. Our congressional delegation has joined with neighboring Maryland to designate the bay as a National Heritage Site. The depletion of all fish in the world’s greatest estuary, starting with the menhaden, also depletes the coffers of state and local governments. As our state emerges from 18 months of this terrible pandemic, you’d think that we would want to really help our tourism, restaurants, marinas, fishing guides and tens of thousands of others who rely on a thriving Chesapeake Bay. To deal with the recent dearth of bass in the bay, Maryland imposed a moratorium on recreational bass fishing this summer, signaling trouble ahead for all who ply its waters.

Gov. Northam, you should do this because it will help create and maintain thousands of jobs across the state. It also will increase revenue for the state’s treasury. You should do this because it holds the potential to dramatically improve the environment in our beloved bay. You should do it for the more than 1 million men, women and children who buy fishing licenses in the commonwealth each year. However, at the end of the day, and the end of your term, you also should do it to leave a legacy of such important environmental impact that generations after us will benefit from your graciousness.

Letter from IPFI president, the Hon. Christopher Burnham, to the Hon. Glenn Hager, Comptroller of the State of Texas, on proposed law in Texas regarding money managers of the state employees’ and teachers’ pension funds


May 10, 2021

The Honorable Glenn Hegar
Comptroller of the State of Texas
P.O. Box 13528
Austin, Texas 78711

Dear Comptroller Hegar,

I am writing to you to share our strong concern with legislation introduced into the Texas State Senate in early March, SB-13. I am the former State Treasurer and sole fiduciary of the State of Connecticut pension system, former Member of and Assistant Minority Leader of the Connecticut House of Representatives, former Assistant Secretary and CFO of the United States Department of State under Secretary Powell and Secretary Rice, and former Under Secretary General of the United Nations, where I was also sole fiduciary of the UN pension’s retirement fund. Throughout my career as a fiduciary, I have worked hard to keep politics out of the management of other people’s money. In 2018, I founded the Institute for Pension Fund Integrity (IPFI), a not-for-profit think-tank that advocates for not letting any politics seep into the management of our public pension plans.

The legal concept of “fiduciary duty” dates back to the Crusades. English Common Law added to it a “duty of loyalty”, and a court in Massachusetts in the early 19th century incorporated into it the “prudent man rule”.

No where does political activism, no matter how laudable, negate that duty. For matters of national security (i.e., laws we passed in Connecticut that prohibit the owning of shares in companies that “do business with Iran or (or Iraq in the 1980s), and potentially, today, some firms in China, are the only permissible addition to fiduciary duty.

If we allow a political bill to prohibit Texas public pension funds from hiring managers that have used the heat shield of “ESG” to strip out fossil fuel companies–where does that political slippery slope stop? It matters not whether the advocacy is from the right or left, Democrat or Republican–any effort to inject a political agenda into public pension fund management is wrong, a violation of fiduciary duty, and SB-13, as drafted, clearly falls into that category. “ESG” in money management is an appropriate risk management tool along with all the other “top down-bottom up” screening criteria a money manager may use in the course of building a portfolio. It must always, however, be a tool that is balance sheet positive or neutral, and adds positively to free cash flow and “EBIDA”. “Activism” in portfolio management may be appropriate for your personal investments if that is your choice, but never for a fiduciary.

I strongly encourage you to ensure the fiduciary language in the legislation (SB-13) is strong enough to provide the public pension fund managers in Texas the ability to continue to make investment decisions based on duty to perform with the highest return on a risk adjusted basis. The state’s retired employees, teachers, police officers, firefighters and current employees deserve to have only this criteria used to manage their hard-earned retirement monies, and that fund managers will continue to choose investments based on a strict loyalty to fiduciary duty, and never on political preference, opinions, or pressure.


The Honorable Christopher B. Burnham
President, Institute for Pension Fund Integrity


Read the letter here:

Letter to Comptroller Hager from IPFI

A New Pension Model in Florida

On April 8, 2021, Florida Senate Bill 84 passed along party lines, with all Republicans voting for it and all Democrats voting against it.


Florida Senate Bill 84 essentially requires new state employees, with the exception of the Special Risk Class (police and firefighters), to join a defined contribution investment plan instead of the traditional defined benefit plan. Any new public employees, such as teachers, hired after July 1, 2022 would have to  choose how to invest their account balance in the Florida Retirement System (FRS) investment plan, and they would be offered payments according to how well the plan performs.


So why are Republican members of Florida’s Senate moving away from a “gold-standard” pension plan that is considered to be one of the best in the nation? Senator Ray Rodrigues (R-Estero), the creator of FL SB-84, said, “It is our duty to ensure Florida’s employees have retirement plans they can count on, and that requires us to ensure we maintain long-term solvency. Also, as policymakers we must recognize that the rising costs of pension obligations crowd out funding for other priority issues such as education, transportation, security, and assistance to the most vulnerable among us. Traditional pension plans place investment risk for changes in economic conditions that impact the retirement plan’s funded status squarely on the taxpayers, and provide little benefit to employees who do not spend their entire career in government.  Our goal is to provide a solution that is affordable for Florida taxpayers, reliable for government employees, and attractive to the newer workforce.”


Similarly, Florida Republicans are concerned about the state’s ability to provide for its retirees in future years, citing the $36 billion in unfunded actuarial liabilities. Florida is able to pay off these liabilities, but choosing to pay off the liabilities comes with an opportunity cost of an inability to spend tax dollars on other public projects.


However, not everyone in the state is swayed by these arguments. Democrats, union members, and public employees in professions which would no longer be eligible for the defined benefit plan expressed major concerns. Their concerns are reasonable and founded; the new plan would reduce the flow of income to the pension fund and tie the fund’s health to Wall Street. In addition, changing away from the “gold standard” model Florida currently has may turn young professionals away from working in public jobs because they value the financial security the current model provides. This could spell a disaster for Florida; there is already a national shortage of teachers and removing the attractive benefit of being a teacher in Florida could lead to future schools unable to properly function and educate their students. Naturally, this concern would apply to other public professions in Florida affected by FL SB-84, making it harder for these essential jobs to compete and be filled. 


Florida is walking into perhaps what might be uncharted territory and the bill has to pass through the Florida House. Other states have made similar changes before, but the results are not consistent. Pension policy and a state’s fiduciary duty should not be wrapped up in political-ideological lines, but rather, a state should ask itself how it well can it currently guarantee a safe retirement for current and future employees and what methods would actually properly cover their constituents and ensure they have enough money in retirement. 


In early June of 2020, the National Science Foundation (NSF) awarded a $225,000 research grant to KRNC. The purpose of the grant was to make a new system or protocol that combines our US fiat currency, the dollar, and features of cryptocurrency

As the popularity of cryptocurrency is on the rise and some desire to push the idea of cryptocurrency becoming the universal currency, it is natural that the US government and other groups would be a little concerned. For institutions such as the US Government or Central bank, cryptocurrency is a volatile and potentially dangerous currency because it cannot be regulated. If regular people hold a large amount of cryptocurrency and some type of crash or disaster occurs, the efficiency and efficacy of the government to aid and guide these situations is greatly diminished.

In  the eyes of KRNC, cryptocurrencies have major barriers for adoption which in turn have major network effects. For a member of the public to join, they have to use their fiat currency, e.g dollars, to buy cryptocurrency. But is this not what we do when we engage in currency exchange– e.g using our dollars to buy euros for a trip to Paris? Yes, in principle it is the same, however, when we exchange our dollars for another fiat currency such as euros, we are giving ourselves a stable, reputable currency to use in trade when we travel to Europe and at the  same time give a European the American dollars to use on American goods and services. Trading dollars for Bitcoin differs because cryptocurrency is incredibly volatile and there is no formal institution which monitors it. The power lies in the hands of the early adopters of it who own 85% of all available Bitcoin; if they can get everyone to buy from them, they will be able to amass a large amount of valued, stable currency while everyone else is thrown into the pit with a dangerous currency. 

While the cryptocurrency game can be unfair to those who are joining the bandwagon late, the dollar is not perfect either. If you are familiar with the principles of inflation and deflation, then you have a basic understanding that the dollar’s value rests on the amount of it that is available in the economy for trade. The scientists behind the NSF funded crypto protocol project called Key Retroactivity Network Consensus (KRNC) want to “upgrade fiat money with scarce digital gold”. In principle, it is similar to returning to the gold standard, but in a digital form.

To do this, scientists will allocate the scarce Bitcoin to fiat currency via blockchain and then distribute a finite amount of KRNC to everyone for free. Therefore, everyone who has ledgers of dollars can engage in the crypto markets, proportional to the value of someone’s existing wealth. What keeps everything in this system secure and working is KRNC Chief Scientist Clint Ehrlich’s Proof-of-Balance. It eliminates the need to buy and complete math problems to mine cryptocurrency and allows a blockchain to remain secure even if an adversary outspends all honest protocol participants

What implications does this have for markets and pensions? It is hard to say. It is too early to anticipate how well KRNC will take off and decide if this splash will have major ripple effects on the markets. In the case of pensions, state pension managers may see an opportunity in the fact that these KRNC improved crypto-dollar hybrids will be safer from government malfeasance, but there may not be enough growth and returns for pension holders to justify involvement. After all, pension managers’ primary duty is their fiduciary obligation they owe to the public employees. Besides, this project is a  test, and according to Anna Brady-Estevez, the National Science Foundation program manager for the grant, “Our funding of this protocol shouldn’t be misconstrued as an endorsement of any initiative to upgrade the U.S. dollar or make it more like bitcoin or any other cryptocurrency for that matter”.

Multiemployer Pensions in Trouble Receive Relief in Newest Stimulus Bill

Earlier this month, President Biden signed the American Rescue Plan Act (ARPA), a $1.9 trillion COVID-19 stimulus measure. Of that amount, $86 billion will provide substantial financial assistance for about 185 to 300 underfunded pension plans. 

The bill provides relief for single-employer pensions, but more significantly targets multiemployer pensions. Multiemployer pensions are union-managed pensions that bring groups of companies within an industry together, so that a single plan covers many employers. Multiemployer plans exist for construction, trucking, entertainment, mining, and more. Benefits follow workers from job to job within the same industry. Across the country, there are about 1,400 multiemployer defined benefit pension plans, covering about 10 million participants. 

In the last two decades, many of those plans have been struggling, although through no fault of their own. To try to remedy things, multiemployer plans have cut benefits and increased contributions, but factors out of their control have continued to cause financial stress. Quite simply, the decline in the number of union workers, and thus contributions, has meant significant investment losses for the plans. Additionally, decline in industry means that many companies are no longer active and are thus not around to pay anymore, but their employees are still in the plan. The remaining companies struggle to cover everyone under the pension.

Without the government relief, many of these pension funds would have become insolvent within five years. At least in the short term, the relief will provide direct benefits to 1.5 million people.

Interestingly, this particular bill marks the first time that major pension legislation has not been bipartisan. While Democrats and union officials view the relief provision as necessary to ensure that workers receive the benefits they were promised, GOP lawmakers have criticized it as a “bailout” that doesn’t address the processes that allowed the plans to become massively underfunded in the first place. 

On either side, though, no one disagrees that there’s certainly an immense and immediate crisis facing multiemployer pension plans.


Insights and Implications of the GameStop Short

On January 27, 2021, members of a subreddit called r/WallStreetBets– an online forum group of over 2 million amateur investors, initiated a historic and unusual event in the marketplace: a short squeeze that caused major losses for short sellers and hedge funds. One of the hedge funds most impacted and was bailed out by Point72 and Citadel was Melvin Capital. Founded and owned by Gabriel Plotkin, Melvin Capital is a major hedge fund that reportedly had $8 billion in assets under management in January 2021 and primarily invests in tech and consumer stocks. 

Shorting, an investment strategy that speculates on the decline in a stock or security’s price, is a riskier strategy used by advanced traders that can either be quite rewarding or detrimental. The process involves an investor borrowing shares of stock they believe will decline in value in the future and then turning around to sell them at market price to someone else. Eventually, the borrowed stocks must be returned, and the investor hopes to repurchase the stocks at a lower price to generate a profit. However, if the price of the shorted stock rises, short sellers are forced to cover their shorts by buying more shorts to attempt to suppress the stock price. When a stock or other asset jumps sharply higher and forces short sellers to buy stock to cover losses, this is called a short squeeze. 

In the case of Melvin Capital, Citron, other hedge funds, and short sellers, GameStop (GME) was prime shorting material. The company had already been in decline and the COVID-19 pandemic was not helping. In fact, Citron even planned a livestream to explain why investing in GME was a terrible idea. However, despite the generally negative perception of the GameStop and its stock, there was a potential that certain investors and the members of r/WallStreetBets saw. 

First, Chewy Founder Andrew Cohen and two other Chewy executives were announced to be joining GameStop’s board of directors. This was particularly exciting news considering the capital and e-commerce experience Cohen would bring to GameStop as the company needs to up their online retailing work in light of the pandemic and already declining in-store sales. Secondly, a new console cycle was announced at the end of 2020; this always translated into an increase in sales for GameStop. Third, Microsoft and GameStop signed a lucrative deal in which Microsoft agreed to give GameStop a share of XBox’s digital revenue. These factors all moved in GameStop’s favor and led to an increase in stock price. 

Members of the r/WallStreetBets– who generally like GameStop due to its ties to gaming and meme culture– saw these developments and the fact that GME was one of the most shorted stocks as an opportunity. The sheer number of retail investors in the community rivaled the power of major hedge funds on Wall Street, and they realized that if they organized themselves to collectively buy GME and cause a short squeeze. Most importantly, it would send a message to the institutions and hedge funds capitalizing and betting on a business’ downfall: do not mess with us and the market as if we are your toys. Many of the r/WallStreetBets members are of the younger generations and have memories of the financial and market disaster of 2007 and 2008 caused by the institutions on Wall Street.

r/WallStreetBets bought up the GME shares and drove the stock price from opening at $88.56 on the morning of January 26th, to a high of $483 at some point on January 28th. This sudden surge in price forced the short sellers to buy to cover losses. Melvin Capital, which held many short positions, lost an incredible amount of money and absorbed a 53% loss for the month of January. Citron also suffered great losses and after this experience decided to end a 20 year practice of releasing their ”short reports.” In the midst of the frenzy, Robinhood and other trading platforms restricted purchases of GME on January 28th, citing potential problems with clearing firms and capital requirements. This sparked outrage as the platform is meant to be a democratic, “free,” and easy-to-use trading platform for investors of all levels.

Following this, billionaires and executives of the short seller groups came to plead for regulations and denounced the event as a product of cruel market manipulation and insufficient market regulation that would lead to market volatility. Given the unusual event, the SEC has gotten involved and is investigating the actions of the Reddit investors, Robinhood, and the GameStop surge itself. Most recently, the House Financial Services Committee has held a hearing for Robhinhood Co-CEO Vladimir Tenev and Keith Gill, the investor who popularized the GameStop trade on Reddit testified on February 18th. 

In reflection of these events, we must understand that the actions of the amateur Reddit investors were not illegal. In fact, their work is a mirror of what happens behind closed doors at large firms with lots of capital, except it was on a public internet forum and the amateur investors had no secret information that guided their decision-making (unless further investigation shows otherwise). Whether this can be deemed as a case of “market manipulation” is currently under investigation by the SEC and if it is so, the fault lies in the few orchestrators and not in the larger group.

Like all events, this comes with lessons for us. The first lesson: shorting is a dangerous strategy and should not be used by beginners or those thinking to generate long-term, stable returns. State pension funds fall into the latter group and have a fiduciary responsibility to make the right decision with their constituents’ retirement funds. The events of January 27th and 28th should serve as a reminder to never hold all of your eggs in one basket. Though it may have a potential for high reward, it is too risky of a strategy to be betting retirement savings on. 

Some of the big investors in hedge funds are the public sector pension funds. The public sector funds allocate some of their funds to other hedge funds to seek returns from alternative strategies or long-shorts. For instance, Melvin Capital’s clients are generally institutions, pension plans, high net worth individuals, and other sophisticated investors. When these hedge funds engage in risky strategies or underperform, this is a direct blow to the hard-working public servants who need the money they were promised. But if the money is not there, then it is not there. It may be wiser for State Pension funds to continue to manage their own portfolios in part due to fiduciary responsibility and to the fact the hedge funds do not really outperform the average investor. 

As Melvin Capital sustained great losses, they must find a way to pay their investors back. But how? This dilemma is not unfamiliar for states with pension deficits as they scramble to find ways to close their gaps. It may do them well to watch Melvin Capital work to pay back their investors while also staying away from shorts and keeping a broad and diversified portfolio. 

A final lesson from this experience is in looking at what fueled the r/WallStreetBets investors to want to short squeeze the short sellers. The main sentiment was “stick it to the man,” and this comes from a place of pain for the Reddit investors who grew up during the 2007-2008 financial crisis. State pension funds should take note that all generations of a family will remember any failure to act as responsible guardians and deliver the pension funds to their constituents.

South Dakota Continues to Lead the Nation in Public Pension Returns, Without the Need for Proxy Advisors

As 2020 drew to a close, new research from the Institute for Pension Fund Integrity provided an overview of the current state of public pension funding and returns across the board. By providing a state-by-state analysis, we hoped to demonstrate just what specific factors have led to the success and failure of state funds, with the hope that policymakers and elected officials could learn by example and make better decisions in the future.

The new whitepaper draws data from the Vanguard Total Stock Market and Bond Market Indices to build two passive index investment portfolios for comparison: one portfolio was 60% stocks, 40% bonds, and one was 50% stocks and 50% bonds. Unfortunately, but not unexpectedly, most states continue to struggle. Only five out of the fifty-two pension funds that were analyzed outperformed the 60/40 passive index fund. Across the board, it seems that unfunded liabilities remain the norm, with fund managers continuing to make politicized but underperforming investment decisions rather than prioritizing returns for beneficiaries.

Although the current state of public pensions in the United States remains a disappointment, there is one bright spot that is worth highlighting. South Dakota is a shining example, with a funding ratio of over 100 percent and investment returns that are 71 basis points stronger than the 60/40 index portfolio. These promising metrics have been consistent for the past several years.

One has to wonder – what policies and efforts have led to this success, and why haven’t more states followed suit given their own financial distress? Many factors come into play. For one, the state’s investment officials have maintained a commitment to straightforward value-based investment choices consistent with their fiduciary responsibilities. South Dakota has also made an effort to retain top financial talent in the state, incentivizing up-and-coming investors to stay and help shore up their home state pensions rather than immediately going to cash out on Wall Street.

However, one key factor which stood out is that unlike many of the severely underperforming state pensions, South Dakota does not rely on advice from proxy advisory firms for its investment guidance.

As the IPFI board has written, previously, advice from proxy advisory firms is often misguided and intended to shore up their own business interests rather that serving the needs of their clients (and, ultimately, pension beneficiaries). Unlike public pension fund managers, they have no obligation to fiduciary responsibility, and limited transparency. The proxy advisory world is dominated by two firms; together, they control approximately 95% of the proxy advice market, creating an effective duopoly and undermining shareholder rights. Furthermore, through the practice of automatic voting, many proxy firm clients have effectively forgone their obligation to evaluate proposals and ceded decision making to these firms, often with detrimental results.

Fortunately, in recent months there has been an increased awareness of these inherent issues in proxy advisory decisions at the federal level, and both the SEC and U.S. Department of Labor have taken steps to implement regulatory reforms. It is now our hope that given the evidence shown through South Dakota’s tremendous success in pension management, we will see changes at the state level driven not by federal intervention but by straightforward fiscal analysis.

Cryptocurrency: The Future of Pension Funds?

In a break from usual conservative investment patterns, pension funds are now considering cryptocurrency as an asset class. Interest in digital assets is growing among institutional investors––with the crypto market maturing in the previous two years, it would seem that interest is at a peak. 

Bitcoin continues to be the digital asset of choice, for several reasons. For one, Bitcoin is a deflationary asset; it has an inelastic supply curve, giving investors the “functionality and safety of investing in gold, [but also] an asset that guards and fights against inflation,” according to Paul Capelli, portfolio manager for Galaxy Digital Asset Management. It’s also cheap to move and store. In a 2020 survey by Fidelity, nearly 80% of institutional investors said they find something appealing about digital assets, with the three almost equally compelling characteristics being that it is uncorrelated to other asset classes; is an innovative technology play; and has a high potential for upside.

Along with other cryptocurrencies, Bitcoin is bought, stored, and traded on Blockchain. Blockchain may address pension systems’ usual lack of transparency by working on a shared, decentralized ledger––thus allowing individuals to audit the pension funds that they’re considering. Blockchain also encourages greater accountability, with reporting mechanisms that can punish funds that don’t follow through by inscribing results on the shared ledger.

There are already a few major examples of pension funds dabbling in crypto. In 2019, Hong Kong-based firm Legacy Trust launched the first digital asset-backed pension plan, whose portfolio includes cryptocurrencies and traditional investments. Also in 2019, two public pension funds from Fairfax County, Virginia, announced that they were backing Morgan Creek’s $40 million Blockchain Venture Capital Fund.

With crypto’s increasing appeal as an asset class and its ability to address pension fund weaknesses, it is likely that more funds will be following into the crypto sector soon.

Commentary: America’s Public Pension System Remains Mired in Crisis

This op-ed by Kevin O’Connor originally appeared in Morning Consult on January 28, 2021.

Thousands of Americans will lose their pension plan benefits if lawmakers fail to act. Over the past several years, we have seen pension investments shift from relatively safe holdings toward riskier assets. Although investing in assets such as hedge funds, private equity and “alternative” investments can increase returns, these investments are also hit especially hard during economic recessions. Before the pandemic, America’s pension plan system was facing many challenges; over the last year, they have only gotten worse.

The public pension system lost $1 trillion, a 21 percent loss for the fiscal year, following the COVID-19 lockdowns in March. In turn, these losses have added an overwhelming amount of stress on our public pension systems, as state and local pensions were already facing a $4.1 trillion shortfall. Public pension liabilities are on track to increase to $1.62 trillion this year, up from $1.35 trillion in 2019. These numbers are alarming as many governments now have less capacity to defer cost hikes or take mitigating actions because their non-asset cash flow has greatly declined.

Two of America’s most dire pension plan systems are in California and Illinois, two of the country’s largest states with large numbers of workers in defined contribution plans. In California, the economic effects of the virus are evident on the already strained public pension system. At the end of the first quarter, the California Public Employees’ Retirement System, reported that their asset value had dropped 10.5 percent since June 2019 — a loss of $35 billion. Matters have only gotten worse in Illinois and could soon hit a level of catastrophe if aid does not come forth. Moody’s estimates that Illinois’ pension liability will rise from $230 billion in 2019 to $261 billion in 2020.

CalPERS has recently become more involved with “notoriously risky tech stocks,” according to their SEC filing. In early November, CalPERS purchased $1.6 million shares of Nikola, $34 million of Nio, $221 million of Zoom, and $269 million of Tesla. Despite these developments, Truth in Accounting has placed California as the seventh-worst state in the country for financial transparency. This is largely in part because California claims to have a $23 billion budget surplus, but does not include its pension liabilities — adding this into account would put the state billions of dollars in debt.

Similarly, Chicago’s four main pension funds are currently underfunded and are facing a $30 billion crisis. Mayor Lori Lightfoot is planning to increase Chicago’s property taxes by $94 million beginning in 2021 in an attempt to minimize the risk faced by pension funds. She recently noted in a press conference that “our four pension funds are woefully underfunded. And some are literally selling off assets to meet their monthly obligations.” Moody’s has previously stated that Illinois will soon “pass the point of no return” on public pension debt. At the end of 2019, Illinois had the worst public pension debt in the United States, coalescing to $230 billion, which represents a debt to GDP ratio of 26 percent.

Many of the issues faced by California and Illinois are microcosms of the nation at large. States are facing difficult tradeoffs between their ability to provide essential services and their desire to reduce pension fund debt. This public pension crisis will require major investments in critical services, but public officials must be aware of the long-term consequences of reduced pension contributions. To meet requirements, pension payments must be increased in the coming years, likely resulting in reduced services for taxpayers, limited salary increases for public employees and in some cases, public sector layoffs.

Pensions, or defined contribution retirement plans, are still considered the gold standard and are often a major motivation for police and fire service workers on the state and local level. These services are critical components for the safety of our communities, and ensuring that emergency personnel will receive the retirement security promised following their careers of public service should be a given, not a negotiation.

This problem did not occur overnight, and both political parties are to blame. With that said, the solution should be bipartisan as well. The federal government has provided a lot of assistance over the past 10 months to a variety of sectors and individuals to help alleviate the fallout of the pandemic. Public employees have been asked to continue providing essential services throughout the pandemic, but their retirement security is still being used in a political game of chicken.

As public pension managers look for a way out, they may turn toward the federal government for help. Any federal action to rescue already underfunded pension plans could incite political backlash since it would be seen as a bailout for ill-managed funds. Despite the political consequences, the scale of the problem may require federal intervention in cases that involve a state’s insolvency. If and when a bailout is given, the federal government will have the opportunity to make demands for meaningful reforms.

America saw an uptick in COVID-19 cases late last year, causing many states to face another round of shutdowns. This will have negative effects on the economy. The prospect of a new presidential administration and the release of a vaccine will present some hope for investment returns, but hope is not the answer to the growing problem.

The Biden administration has already outlined plans for the ailing pension system. Late last year, Bridget Early of the National Public Pension Coalition noted that “there’s more information available based on what a Biden administration would want to do for retirement security” compared to the Trump administration. All in all, policymakers must keep the public pension systems in the forefront, because if they fail to do so, America’s retirees will suffer the consequences.

Kevin O’Connor is the former Trustee of the Baltimore County Employee Retirement System and an advisory board member of the Institute for Pension Fund Integrity

Near-Zero Interest Rates, In Place Since Great Recession, Will Remain in Effect

As the Biden administration works to implement a new slate of fiscal and monetary policies to counter the economic downturn of the COVID-19 pandemic, one trend that has long preceded the current crisis seems likely to continue – the intent of the Federal Reserve to set the federal interest rate at a near-zero level.

In this week’s meeting of the Federal Open Market Committee, the first under the new administration, officials committed to keeping rates at their historic lows and continuing to engage in bond purchases in order to shore up the monetary supply. With the winter months bringing an uptick in infections, and a parallel swath of closures in businesses across the country, the federal government is looking for options to provide economic relief beyond the more politically contentious fiscal stimulus packages being considered in Congress.

Jerome Powell, the Chairman of the Fed, noted that “The virus resurgence was weighing on economic activity and job creation… the economic outlook hinged on the pandemic and remains highly uncertain.”

Both the White House and Democrats in Congress are (rightly) more concerned with a stagnant recovery, driven to a large extent by long-term unemployment, than with the risk of inflation (Powell also stated “Frankly, we’d welcome slightly higher inflation”). Given the slow economic growth in the wake of the Great Recession, this mindset seems justified. At the end of 2008 and beginning of 2009, the Targeted Asset Relief Program (TARP) amounted to around $700 billion, and the Federal Reserve took action to cut rates to their current record lows. Since then, prices have remained relatively stable. President Biden has recently proposed a relief package that amounts to over double that amount.

The broader concern is that interest rates have remained at near-zero levels over the last thirteen years as well. Without the potential instrument of lowering interest rates at their disposal, monetary options in the face of economic crises are extremely limited, leading to an overwhelming reliance on fiscal stimulus. The Fed has committed to buying about $120 billion in government-backed bonds in order to stabilize markets and booster the economy, but for the average American it is unclear how much benefit can be gained through this process. In the meantime, record low interest rates have the potential to exorbitantly boost stock prices, leading to bubbles and riskier decision-making among Wall Street investors seeking higher returns – and when has that ever been problematic for the economy?

Ultimately, given the unprecedented nature of the pandemic, and the fact that the downturn has been largely outside of government or private sector control, the Fed’s move is likely the right one. Until we reach herd immunity through mass vaccination, a return to “normalcy” will remain out of reach. In the meantime, both fiscal and monetary instruments should be used to maximum effect without overt concern over inflation or the national debt. However, the question is what will happen once the economy recovers. If the last thirteen years have taught us anything, it is that we cannot expect stable growth indefinitely, and that the next crisis is always around the corner. With this in mind, the Fed should aim to eventually boost rates, regardless of whatever anguish Wall Street may express. The era of easy credit cannot and should not continue indefinitely.