Over the past 18 months, the investments of public pension plans—the retirement security for 22 million police officers, firefighters, teachers, and their survivors—have lost a combined $1.3 trillion. But now some fund managers think they may have hit gold: the government's programs to clean up toxic assets. With a federal backstop on losses and expectations of double-digit returns on some investments, many think they're a good bet.
On Apr. 15 the $175 billion California Public Employees' Retirement System (CalPERS) said it is looking at buying troubled assets that Citigroup (C) and other financial companies are trying to offload. Two weeks earlier a group of public pension fund managers met with Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., to talk about investing in banks' toxic assets. "We had more people interested than could fit into the room," says Orin S. Kramer, chairman of the New Jersey State Investment Council.
The FDIC, along with the U.S. Treasury, is trying to solicit buyers for the holdings through a program called the Public-Private Investment Program (PPIP). Public funds also may potentially invest in the Term Asset-Backed Securities Loan Facility (TALF), created by the Federal Reserve Board in November to support investing in asset-backed securities tied to consumer and small business loans.
Offering a stake to public-sector players appeals to regulators. Washington has been criticized for structuring deals so that taxpayers shoulder much of the risk while private investors are offered handsome returns. If taxpayer-funded public pension funds can benefit from the upside as well, the programs may be less controversial. Trent May, chief investment officer of the $4.6 billion Wyoming Retirement System, says investors expect returns of 15% to 20% on TALF funds. "If this is successful, not only do we reap returns on the TALF investments, but if it gets the economy moving, that would be good for our other investments, too."
But should public pensions dabble in toxic assets? FDIC spokesman Andrew Gray says the government is interested "in getting a broad range of investors to participate." The value of these complex assets remains elusive, though. Even with the government taking on most of the risk, a worsening economy could mean more of the assets go bad, leaving investors with losses.
"A TOTAL BREACH OF DUTY"
Public pension plans are desperate to boost returns. Many increased their exposure to equities in recent years. While the value of their assets has fallen sharply, obligations are rising. A recent study of 59 state pension plans by Wilshire Associates shows a $237 billion shortfall between assets and obligations.
Even so, some remain skeptical that pension money will pour into toxic assets. Bryon T. Sheets, a partner with San Francisco-based Paul Capital Partners, argues that many state funds lack the staff to analyze complicated, illiquid investments. And taxpayer advocates such as Ted Costa, CEO of People's Advocate, a conservative group in Sacramento, say the idea is irresponsible: "To invest in anything so shaky it just brought down our country is a total breach of fiduciary duty."
For now much of the pension interest in toxic assets is what Sherry Reser calls "very exploratory." Reser, a spokeswoman for CalSTRS, California's $114 billion teachers' pension fund, says her fund is moving 5% of its portfolio from equities to mortgage loans or other assets from distressed sellers. "The PPIP may certainly meet our criteria," she says, but not without a thorough vetting. "We want to make sure the only distress is the seller's."
With Theo Francis