State pensions sit in deep hole after a bad year

To recover from losses, future yields need to be high
2009-11-10T23:20:00Z State pensions sit in deep hole after a bad yearCHARLES S. JOHNSON Gazette State Bureau The Billings Gazette
November 10, 2009 11:20 pm  • 

HELENA — Fixing Montana’s financially unstable state government pension funds through higher investment returns alone will be extremely hard to do after they lost nearly 21 percent of their value last year, the state Board of Investments executive director said Tuesday.

Carroll South outlined just how difficult in a presentation to the Board of Investments this week.

To illustrate, South used as an example the investments of the Montana Public Employees’ System, or PERS. The board invests the PERS funds and those of the next largest pension system, the Teachers’ Retirement System, and seven other smaller pension funds for other government employees.

The PERS investments plunged by 20.69 percent in the fiscal year that ended June 30, just as other public and privately held portfolios did around the country because of the economic recession. Its rate of return was down 4.86 percent the previous year ending in mid-2008.

The losses the past two years were even worse than they appear, South said, because the pension fund expects the Board of Investments to make a rate of return averaging 8 percent annually.

So the real losses amounted to 28.86 percent in fiscal 2009 and 12.86 percent in 2008.

South offered these examples to show what it would take to get PERS fund “back on track”:

• To recover in one year, the PERS portfolio would have to see a rate of return of 52.85 percent for the year that started July 1. South said the board has never rung up an investment performance of that magnitude.

• To come back in three years, the PERS portfolio would have to see an average rate of return of 21.25 percent a year over that period. The board has come close to that a couple of times, he said.

• Over five years, the PERS portfolio would need to post an average 15.8 percent annual rate of return over the period.

• To do so in 10 years, the PERS portfolio would need to rack up annual returns of 11.82 percent over the decade.

• To put it into context, South said the PERS portfolio had averaged an 8.5 percent annual return over the past 15 years through 2008.

South said the rate of returns needed to put the investment portfolios of the other eight pension funds would be similar to those he calculated for PERS.

“I don’t think we can invest our ways out of this hole,” he said. “Compounding works both ways.”

He said so much depends on what happens to the portfolio during the economic recovery this year.

“I’m not going to say it’s hopeless,” South said. “If we have a really good recovery this year, even 35 percent will be a huge difference (in the three-year numbers).

“This year is really critical whether we can dig out of the hole or not.”

For the quarter that ended Sept. 30, the PERS fund registered a 10.82 percent gain after fees. It trailed the public employee funds’ benchmark of 11.84 percent, according to R.W. Kuhns & Associates, a Portland, Ore., firm that analyzes the board’s investment analysis.

The Montana PERS fund’s gross rate of return for the quarter was 10.90 percent. In comparison, all public pension funds with less than a $3 billion median value showed a gross 12.06 percent return, the report said. Montana ranked in the 66th percentile.

A legislative interim committee is studying ways to revise the pension funds to hold down their costs. However, the state is forbidden by law from making any changes in the pension benefits of current state employees and teachers. Any changes, if enacted, would apply only to new employees hired after that effective date.

Gov. Brian Schweitzer and the Legislature moved $175 million from the state general fund to bail out the pension funds since December 2005. TRS received all of the money except for the $25 million that went to PERS.

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