As the NY Times reported, the $26.3 billion Pennsylvania State Employees' Retirement System (PSERS) has more than 46 percent of its assets in what analysts describe as "riskier" alternatives, including hundreds of private equity, venture capital and real estate funds. PSERS paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent.
"That is below the target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.
"By contrast, Georgia's $14.4 billion municipal retirement system, which is prohibited by state law from investing in the alternative investments favored in Pennsylvania, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees."
Even adjusting for the size of the respective funds, Pennsylvania retirees paid out thirteen times more in fees than Georgia, for a worse result.
The conservatively managed BND produced a 17 percent return on equity last year, while the PSRS reported in a press release that it had "achieved" a 2.7 percent return for 2011 -- not even meeting the previous and anemic 3.6 percent average return.
That's like boasting about a C- report card.
A far more prudent and productive policy would be to rein in risk taking fund managers, reduce their gigantic fees and shift at least twenty percent of investments from their riskier deals into the lower risk, higher return equity of a public bank.
A closer look at Pennsylvania's 2011 CAFR turns up another interesting item. At page 99, there is a discussion of how these off-budget funds manage the risk of investments in thirty-six foreign currencies.
Foreign currencies? Thirty-six? The high rolling fund managers are shifting billions of dollars out of the Pennsylvania economy, and into foreign economies and job creation, while Pennsylvanians go begging.
Even a modestly capitalized public bank can put billions of dollars of affordable credit to work in Pennsylvania, generate substantial non-tax revenue as a direct return on investment and increase local and state tax revenue in an improving economy.
A public bank has the capacity to turn a tidal wave of economic devastation into a wave of opportunity and prosperity. Pennsylvania needs to catch that wave.
1 | 2