MARCH 20, 2009 -- Good news, bad news and really bad news emerged at a Thursday meeting of the state’s Retirement System Investment Commission (RISC).
The good news was the state’s pension fund was named the nation’s best-run large public plan for 2009 by an influential institutional investing magazine.
The bad news was that the state’s pension fund had dropped from a high last year of $29 billion, to just around $19.5 billion this week, according to RISC chief investment officer Robert Borden.
That’s nearly a $10 billion collapse and more than a one-third reduction in total value of the award-winning fund in less than year.
Late last September, when the nation’s economic bubble first felt the pin-prick of reality and the Dow Jones fell an all-time record 777 points in a single day, Statehouse Report reported exclusively that the fund had lost $2 billion in a single day.
The really bad news that emerged Thursday was that none of the commissioners, or the bevy of fund managers brought in for performance reviews and presentations, had any exact idea of just how bad the world’s economy was going to get in the next year to year and a half.
What it all means
Two messages seemed to emerge from the experts who spoke to the commission.
One, we might be doomed to a financial depression unseen since the Great Depression.
Two, there will still be profit-making opportunities if the state’s investment team can move quickly enough with enough cash reserves and make the right decisions, thanks to the suffering of others.
“Distressed markets create motivated sellers” was the sermon, as it also being preached by commission members last fall, back when the market was still well above 10,000.
State retirees, at least in the short-run, won’t suffer, as their retirement benefits are protected by contract and by state law.
Currently, there are close to 225,000 state pension fund members, which include current and former state employees, as well as local police, teachers and other municipal employees who are in the state's retirement system.
But as the economic tumult and the march of retiring Baby Boomers move forward, the fund could become increasingly insolvent. Currently, the fund pays out somewhere between $750,000,000 and $1 billion more than it takes in every year because more and more people are hitting retirement age, according to Borden.
He also said that number may spike a bit this year, as more state employees and pension fund members are laid off.
Changes since October
Back in October, Borden and commissioner Allen Gillespie preached that now was not the time for panic. Much of the losses the fund had suffered were on paper, and the horizon for when the bulk of the money needed to be paid out was sufficiently far enough out that the market downturn could be overcome.
One of the experts, Paul Podolsky from Bridgewater Associates, who spoke to the commission really caught the ear of commissioner Blaine Ewing. Podolsky told the commission that the time for panic had passed, as “panics” were containable and reversible, usually through manipulating the supply of credit.
The current situation was far more dire, according to the financial researcher, as the federal government’s attempts to drop interest rates had spurred little interest in the market.
Podolsky handed out a graph that showed the nation’s credit to gross domestic product ratio looking like the tick-tick-tick lead-up to a rollercoaster drop.
Ewing, an investment professional in his 11th year on the commission, said the most provocative message Podolsky presented was that the state, as well as individuals, needed to do was to put safety ahead of return on investments in the current economic climate.
Ewing said the state’s pension fund had several things going for it as it headed into uncertain financial waters. One, he said, was the way the legislature designed the RSIC structure so that qualified members would serve instead of political appointees.
The second was Borden, its chief investment officer. The RSIC took on criticism late last year when it gave Borden a bonus roughly equal to half his salary. Even commissioner and state Treasurer Converse Chellis said the $176,000 was out of step with the economic times the state was facing.
But Ewing, who grilled Borden Thursday with questions about the fund’s exposure to risk given its current asset allocation, defended him the next day.
“If it weren’t for Bob Borden, we’d have lost a lot more money,” said Ewing, who pointed out that compared to the market as a whole and other similar plans, the state’s fund outperformed all of them.
Crystal ball: A sinking economy isn’t all the trouble facing the pension fund. It’s feared in Columbia that Gov. Mark Sanford is planning to focus on the state’s retirement system at the April meeting of the Budget and Control Board. Sanford has long harped on the emerging unfunded liabilities facing the fund, and a $10-billion drop will serves as ample and appropriate fodder for his budget-hawk fire. Sanford may use the budget meeting as an opportunity to ramp up his support for converting the state into a “defined contribution” retirement fund from its current “defined benefit” plan. It will be interesting to see if Borden and the commissioners can stay clear of the political vacuum and maintain their fiduciary objectiveness.