Local Pension Funds Research Articles

Trends in State and Local Pension Funds

Unfunded public pension obligations represent the largest liability for state and local governments in the United States. As of fiscal year 2021, the total reported unfunded liabilities of these plans are $1.076 trillion. In contrast, the market value of the unfunded liability is approximately $6.501 trillion. As a result, the reported funding ratio of 82.5% falls to 43.8% under a market-based valuation. The market values reflect the fact that accrued pension promises are a form of government debt with strong statutory and contractual rights. The assumed discount rates are based on expected returns and remain elevated relative to risk-free rates, despite a decline since 2014. As a result, not only is the unfunded pension liability understated, but the yearly pension cost for newly accruing liabilities is also understated. In order to achieve high returns, pension funds have accumulated large exposure to risky assets, in particular alternative investments, which results in highly uncertain investment returns.

State and Local Pension Funds 2022

State and Local Pension Funds 2022

Yet it Endures: The Persistence of Original Sin

Notwithstanding announcements of progress, “international original sin” (the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. Although some middle-income countries have succeeded in developing markets in local-currency sovereign debt and attracting foreign investors, they continue to hedge their currency exposures through transactions with local pension funds and other resident investors. The result is to shift the locus of currency mismatches within emerging economies but not to eliminate them. Other countries have limited original sin by limiting external borrowing, passing up valuable investment opportunities in pursuit of stability. We document these trends, analyzing regional and global aggregates and national case studies. Our conclusion is that there remains a case for an international initiative to address currency risk in low- and middle-income economies so they can more fully exploit economic development opportunities.

Pandemic Recovery and State and Local Pension Reform

In 2019, few could have predicted that state and local pension funds would be faced with a pandemic that would slash state and local tax revenues and harm investment returns. Nevertheless, fund managers should have spent the past decade preparing for an inevitable market downturn. Instead, just as when the 2008 financial crisis hit, policymakers have spent the previous decade valuing their pension liabilities and assets as if investments always go up. This policy brief explores the deep-seated problems in US state and local pension finance, including underfunding, poor investment choices, and potential avenues for reform.

Predictors for Loneliness Perceived by the Interviewer or the Individual: Findings from Limited Disability Pensioners and Medical Rehabilitation Patients

Loneliness can be seen as indicator of social participation which is a major concern of the UN Convention on the Rights of Persons with Disabilities. Temporary disability pensioners and medical rehabilitants are persons with disabilities, whose rights should be empowered. Moreover, loneliness is a major burden for the individual and finding ways to overcome loneliness are accordingly required. Previous research has shown that different socio-demographic characteristics, life-satisfaction and social support interrelate with loneliness. The aim of the present study was to replicate findings with two computer-assisted telephone interview studies with individuals insured with a local pension fund. While study 1 recruited N = 453 disability pensioners (mean age=50.4 years, 53.5 % female) and assessed their loneliness with the typical self-report measured by directly asking, study 2 recruited N = 1,044 patients in a medical rehabilitation (mean age=49.5 years, 36 % female) and used the reports of their interviewers without asking the study participants directly about their loneliness. In both studies, more life-satisfaction was significantly associated with less loneliness (beta=-.41 and -.23). However, only in the interviewer-rated study, higher social support was related to less loneliness (beta=-.16). Sex differences were found in the interviewer-rated study (women were rated as lonelier, beta=.11), while an interrelation with age was only found if self-reports were used in terms of younger disability pensioners reported more loneliness (beta=-.24). The findings open options for counseling to also improve self-reported life-satisfaction. While interviewers rate female interviewees as lonelier than men, interventions should not forget about men as they report equal loneliness if controlled for other variables. The results replicate that health and life-satisfaction are imperative and addressable to decrease loneliness. This should be researched further and used for interventions.

Investment Practices of State and Local Pension Funds: Implications for Social Security Reform

The investment practices of public pension funds have become a topic of major interest in the wake of President Clinton's 1999 proposal to invest a portion of the Social Security Trust Funds in equities. This study explores four possible avenues through which social or political considerations could enter the investment decisions of state and local pension funds. The first section focuses on economically targeted investments (ETIs), those investments that are designed to meet some special need within the state. The second section looks at instances of pension fund activism, whereby the fund managers attempt to influence corporate behavior to improve profitability or other aspects of corporate performance. The third section investigates the extent to which state and local pension plans have avoided or divested certain holdings in order to make a political or ethical statement. The fourth section investigates the extent to which states and localities have used pension funds as an escape valve for general budget pressures.

Puerto Rico Debt Crisis: Trying to Reconcile Sanchez-Valle with the Puerto Rico Bankruptcy SCOTUS Opinions: Some Preliminary Thoughts

Puerto Rico Debt Crisis: Trying to Reconcile Sanchez-Valle with the Puerto Rico Bankruptcy SCOTUS Opinions: Some Preliminary Thoughts

State Pension Plans for Public Employees: A Rough Road Ahead

Many public pension funds face serious funding shortfalls. In fact, more than half of the states currently have public pension funds with funded ratios that are less than 80 percent, a level many prefer. In this paper we examine factors important in explaining the funded ratios of state and local pension funds for public employees. We extend the study of Munnell et al. (2011) by (1) considering additional factors that may affect the funded ratio, (2) using panel data from 2001 to 2013, and (3) using different statistical methods. We demonstrate the importance of using the lagged funded ratio in our regressions to explain the current level of the funded ratio and its impact on the statistical significance of other coefficients.

Dutch Pensions Paving the Way for Infrastructure Development

A confluence of related macroeconomic, political, and regulatory trends has led to a widening infrastructure-financing gap and increased pressure on governments globally to identify new sources of capital for infrastructure development. Since the global financial crisis, public-sector balance sheets, which are the traditional source of funding for infrastructure development, have been extremely constrained. Even for privately financed infrastructure projects, the traditional providers of capital have withdrawn in response to new banking regulations. This gap creates an opportunity for institutional investors, such as pension funds, to step in and fill the void. And yet, although institutional investor allocations for infrastructure continue to increase, much of this capital is not directed toward the types of projects most in need of new investment. In this article, the authors examine the conditions that can enable pension funds to make direct investments in greenfield and growth-stage infrastructure. To clarify this issue, they examine the recent N33 project in the Netherlands, which has seen Dutch pensions PGGM and APG provide, respectively, the equity and a majority of the takeout debt financing for the growth-stage project. The lessons learned from this case are relevant to project sponsors and policymakers wondering about the conditions under which local pension funds can invest in local infrastructure.

The role of South African property in balanced portfolios

The overriding objective of this paper is to establish the features that South African property brings to a balanced portfolio – and importantly to give insight into a strategic investment weight for this asset class. We acknowledge that listed and unlisted property are potentially two different asset classes and we conduct analysis on both listed and unlisted property. Using a mean-variance approach we find that listed property elevates the efficient frontier across the entire spectrum of risks having allocation weights in excess of 20% across typical risk mandates. Our non-parametric optimisation approach yields an optimal allocation to listed property of 23%, significantly higher than found in local pension funds. Using a non-parametric approach for tactical allocation considerations in differing economic regimes, we find there is indeed scope for tactical asset allocation to the listed property asset class. Considering the role of unlisted property separately in a balanced portfolio setting we find that unlisted property plays a diversification role in low-risk portfolios. However we find its role in optimal portfolios is less clear as it tends to be substituted by listed property.

Reaction of Institutional Investors and Insiders Following Adoption of IFRS and Fair Value Measurement: Chilean Evidence

Our study investigates whether there is any connection between institutional investors fund flows and IFRS adoption in Chile. Our sample consists for 366 firm years between the years 2007-2012. Our results suggest that, during a period of economic crisis, the local pension funds were prone to “herding” behavior. Our study shows that during an economic crisis local pension funds seem to follow the investment behavior of mutual funds that are able to invest globally. Moreover, the mutual funds reaction is likely to be greater in companies not adopting IAS early; hence, the reaction to fair value measurement in company annual reports is confounded by many economic factors and during an economic crisis, and early adoption is more likely to help than hurt in less developed capital markets. Insiders seem to take advantage of this situation to increase their ownership concentration levels, which is exacerbated in companies that do not have an independent board.

State and Local Pension Fund Governance and the Process of Contracting for Investment Services: The Scope of Diversity and the Problem of Embeddedness

US state and local public employee retirement systems (PERS) utilise various models of contract with distinctive features in their form and substantive content in relation to industry norms. These models differ between states, within states, and even between PERS within major metropolitan areas. Diversity goes against expectations to the effect that the sector relies upon commonly accepted investment management agreements (IMAs), given the similarities between state and local PERS as to the nature of pension benefits. One goal of this paper is to account for apparent commonalities and differences. Another goal of the paper is to explain the nature and significance of the pre-contract screening of potential suppliers to the sector, suggesting that requests for proposals tend to ‘sterilise’ contracts for investment management services. We provide a comparison of the categories and items evident in model IMAs with reference to selected states, in particular Illinois and the Chicago-area PERS. We also briefly note relevant provisions of pending legislation establishing the Oregon Investment Corporation, emphasising provisions which would enable the fund to make contracts like its private sector peers. The paper concludes that it is important to focus on the process of contracting in the US state and local PERS as well as the form of contract.

State and Local Pension Fund Governance and the Process of Contracting for Investment Services

US state and local public employee retirement systems (PERS) utilise various models of contract with distinctive features in their form and substantive content in relation to industry norms. These models differ between states, within states, and even between PERS within major metropolitan areas. Diversity goes against expectations to the effect that the sector relies upon commonly accepted investment management agreements (IMAs), given the similarities between state and local PERS as to their governance and the nature of pension benefits. One goal of this paper is to account for apparent commonalities and differences. Another goal of the paper is to explain the nature and significance of the pre-contract screening of potential suppliers to the sector, suggesting that requests for proposals tend to “sterilise” contracts for investment management services. We provide a comparison of the categories and items evident in the model IMAs with reference to selected states, in particular Illinois and the Chicago-area PERS. We also briefly note relevant provisions of pending legislation establishing the Oregon Investment Corporation, emphasizing provisions which would enable the fund to make contracts like its private sector peers. The paper concludes that it is important to focus on the process of contracting in US state and local PERS as well as the form of contract.

Brazil's Pension Fund Developmentalism

Lula's government in Brazil fostered an engagement with local pension funds that have become key state levers for long-term investment, particularly in large and politically salient infrastructure projects. This process, here called pension fund developmentalism, describes more than specific investment choices; it grounds Brazil's current growth strategy on relationships between the government and a particular set of prominent players, shedding light on the state's more forceful re-engagement as a promoter of development at a time when aspirations for global economic integration have been matched by the commitment to growth through the expansion of local sources of funding.

What Explains Movements in the Peso/Dollar Exchange Rate?

This paper examines the factors affecting the weekly peso/dollar exchange rate movements between 1999 and 2013 using an error correction model. The model fits the historical data well. While copper price is the most important determinant of the peso exchange rate over the long run, other factors including interest rate differential, global financial distress, local pension funds’ derivative position, as well as the Federal Reserve’s quantitative easing also affect the peso in the short run. The Central Bank of Chile’s foreign exchange interventions in 2008 and 2011 had a small impact on the peso.

Market Liquidity and Ownership Structure with Weak Protection for Minority Shareholders: Evidence from Brazil and Chile

This project focuses on the effects of ownership structures on the liquidity of the stock market in a context of low protection for minority shareholders and large ownership concentration. The ultimate defense strategy of an expropriated investor is to exit the position, provided that a market liquid enough exists. In principle, this should not be a problem for a stock in the local index. However, a run by blockholders may hurt minority shareholders more than the consumption of private benefits by dominant shareholders. Moreover, to the extent that blockholders such as local pension funds have few diversification opportunities and their funds increase overtime, they are themselves locked into their positions and they would prefer increasing their monitoring than exiting large positions. Large stakes by blockholders reduce the availability of floating shares. Therefore, the monitoring roles of institutional investors seem to have a high cost in terms of market liquidity. I show that a number of corporate governance mechanisms including ownership concentrations by dominant shareholders have stabilizing effects and converge to reduce asymmetric information and increase market transparency. Providers of liquidity are thus encouraged to post smaller spreads.

Nghe An Voluntary Pension Fund: Transition to the National Scheme Policy Options

This study was realized in 2007 after the approval of the Social Insurance Law approved in 2006 and in preparation of its implementation. The law foresees the creation of a new voluntary pension fund so that all the persons who have not access to the compulsory system in Vietnam have access to the pension system. The creation of a national voluntary fund in 2008 raised questions about the possibility and conditions for the member of the local pension fund of the province of Nghe An to participate in the new system. For that purpose the Labor Institute of Social Science Affairs (ILSSA) realized in October 2007 a survey among the members of the Nghe An pension fund to investigate: Under what conditions the members of the Nghe An fund will be willing to participate in the new system? Do they need financial support to participate? Are they interested in other options? This study presents the survey, its results and policy implications.

Effects of Governance Practices and Investment Strategies on State and Local Government Pension Fund Financial Performance

Recent statistical studies concerning state and local government pension funds’ boards of trustees have focused on two complementary issues. First is the influence governance practices have on administration of fund assets. Second is the impact of investment strategy choices on funds’ total rates of return. Reported results indicate that the primary effects of governance practices on pension outcomes are indirect via asset allocation decisions. This study re-examined these issues using abnormal return as an inherently valued measure of risk adjusted financial performance. An innovation of the investigation is that “process analysis” was used to decompose the direct and indirect effects of governance practices on financial performance. Results suggest that while both types of effects exist, direct impacts dominate relative to mediating processes.

Public Funds and Private Capital Markets: The Investment Practices and Performance of State and Local Pension Funds

This paper addresses the question of whether a government entity can invest money on behalf of employees or constituents in a manner comparable to the private sector. We focus on the experience of pension funds operated by state and local governments on behalf of their employees. Using data from a sample of public plans, we find some evidence that after controlling for differences in asset allocation certain types of political interference lead to a sacrifice of returns on plan assets. Combining data from public and private plans, it appears that public plans earned a significantly lower rate of return than private plans in 1998, the year for which data was available for both types of plans.

State and Local Budgets the Day after it Rained: Why is the Surplus So High?

READERS of the financial press will be shocked to find that, in the aggregate, the 78,000 state and local governments in this country are running a hefty budget surplus. These governments had a combined budget surplus of $29.2 billion in 1977, by far the largest ever recorded, and in part offsetting the impact of the one government most noticeably not in surplus (the federal deficit was $49.6 billion in that year). The rise in the state and local surplus has been exceedingly dramatic: at its recession low in the first quarter of 1975 it was $3.7 billion; by the third quarter of 1977 it had risen to $32.9 billion, accounting for over one-third of the national rise in gross saving over this two-year period. Such large changes in the saving behavior of any sector are interesting in their own right, and they have important macroeconomic implications for short-run stabilization policies and long-run growth. In this report I examine both matters. I first disaggregate the budgetary numbers to explore separately movements in the surplus of state and local pension funds and general governments on both current and capital accounts. I then estimate some time-series equations explaining state and local budgetary magnitudes up to 1974, making out-of-sample extrapolations of these