Monday, December 10, 2018

#TXLEGE: How badly do Municipal Pensions underperform?!?

"Likewise the soldiers asked him, saying, 'And what shall we do?'"

So he said to them, 'Do not intimidate anyone or accuse falsely, and be content with your wages.' ”
Luke 3:14

Wow; via the DMN:
All but a handful of the local public pension funds in Texas have the same problem. They picked the wrong monkeys to manage their money. The result is underperformance. In many cases it means serious underfunding of workers' retirements.

That's the sorry story for most of the pension plans created to serve public employees for our cities, counties, police and fire departments. The data comes from the public pension search tool on the website for the Texas comptroller. That's where you can find a database of all the funds in Texas.

The data plainly says that the police need to police their funds more actively and the fire departments have a three-alarm pension fire to attend.

Am I indulging in cheap, journalistic hyperbole? I wish I were.

My measuring stick was a simple, utterly conventional and low-cost index fund, the Vanguard Balanced Index fund Admiral shares, a fund that invests 60 percent of its money in the total domestic stock market and 40 percent in the total domestic bond market.

That's pretty vanilla. It's also dirt cheap. The Admiral shares, which require a minimum investment of $3,000, have an annual expense ratio of 0.07 percent. That means it would cost $7 to manage $10,000 for a year. It's a fraction of what it costs for individuals and most institutions to have "active" money management.

This is the most basic, one-stop shopping form of Couch Potato investing possible. Commit the money. Forget about it.

Our pension funds, on the other hand, invest in a variety of ways, pay higher fees and make direct investments in real estate. Many also make "alternative investments," which are expensive to manage and hard to measure. What they most certainly do is provide compensation levels for their managers that few police officers or firefighters will ever see.

So, how did the 86 managers do?

I can't tell you about six of them because they don't yet have 10-year track records. But of the remaining 80 funds, a whopping 76 failed to beat the cheap and simple index fund. Four beat it, but the real number is probably lower.
Bottom Line: This is astonishing. Even if appeals to abstract notions of fiscal sustainability didn't work, one would think appeals to self-interest would. Yet here we are....

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