At a recent meeting of Colorado PERA officials with members of the Colorado Legislative Audit Committee, a Colorado PERA official stated that approximately eight percent of the Colorado PERA portfolio (trust funds) is currently invested in "alternative investments," including private equity investments. What investment fees have been paid on this portion of the Colorado PERA portfolio that is invested in alternative investments in the last fifteen years? What percentage of total Colorado PERA portfolio investment fees have been paid each year on alternative investments? What percentage of total portfolio growth can be attributed to PERA's alternative investments in the last fifteen years? Colorado PERA officials noted, at the Legislative Audit Committee meeting (recording available on-line) that the PERA Board is currently "researching" potential Colorado PERA portfolio investments in hedge funds (recently banned in California by the public pension fund CALPERS.) If the nation's largest pension fund has recently banned investments in hedge funds, why are Colorado PERA officials currently "researching" potential investments in hedge funds?
"CALPERS Dumps Hedge Funds Citing Cost, To Pull $4 Billion Stake."
"The California Public Employees' Retirement System, the largest U.S. pension fund, said on Monday that it will pull all $4 billion it has invested in hedge funds because it finds them too costly and complicated."
"The $300 billion fund, known as Calpers, invests with firms including Och-Ziff Capital Management, Deepak Narula's Metacapital Management and Bain Capital's Brookside Capital and plans to pull the money out over the next year. The fund will also exit from fund-of-funds Pacific Alternative Asset Management Co and Rock Creek Group."
"(Former CALPERS Chief Investment Officer Joe) Dear, who joined Calpers in 2009, embraced riskier assets including hedge funds and private equity funds, to help recover losses suffered during the financial crisis when its investments lost 23.6 percent during the fiscal year that ended on June 30, 2009."
"But in the last years, most hedge funds have not delivered the out-sized returns the industry became famous for, prompting many pension funds and other large institutional investors to question hedge funds' fees which often include a 2 percent management fee and 20 percent of the gains achieved. Hedge funds returned 4.10 percent this year through August, according to Hedge Fund Research, lagging the Standard & Poor's 500 9.87 percent gain."
"The fund's alternative asset program has had its ups and downs in recent years. Former Calpers Chief Executive Officer Fred Buenrostro pleaded guilty earlier this year to bribery and fraud in a federal conspiracy case."
Is the Colorado PERA Board "researching" potential investments in hedge funds as a means of increasing the funded ratio of the Colorado PERA pension system from the low 60's? If the PERA Board believes that the funded ratio of the PERA pension system is too low, then why did PERA General Manager Greg Smith recently testify to the Joint Budget Committee that the pension system does not need additional contributions? How can a public pension system with this level of taxpayer liabilities not need additional contributions? Since the pension system's actuarially required contributions (ARC) have not been paid for twelve consecutive years, investment returns on the missing (ARC) funds are lost, and compound each year. Why would the PERA Board not simply endorse a prospective reduction of the 2.5 percent PERA "multiplier" as a means of addressing system unfunded liabilities? (A public pension system's "multiplier" is the percentage of employee salary that accrues for each year worked as the ultimate retirement benefit.) How does the Colorado PERA 2.5% "multiplier" compare with "multipliers" of other major US public pension systems?
"No Vested Right in Pension Multiplier, Supreme Court Majority Says."
"This is done in the name of saving taxpayer money, even though these 'alternative investments' involve fees paid to billionaire money managers that are often nearly as high as the cuts to public worker benefits."
"In more than a dozen states, legislators have enacted exemptions for hedge funds and other alternative investments to laws such as the Freedom of Information Act."
From a recent Colorado PERA CAFR:
"The Total Fund underperformed the policy benchmark return by approximately 53 basis points (0.53 percentage points) for the year ended December 31, 2012."
"Alternative Investments was the primary contributor to the underperformance . . ."
What has been the performance of PERA's investment staff historically? In what years have they missed their peer benchmarks? What has been the cost to the PERA trust funds of these missed benchmarks?
Colorado PERA Executive Director Meredith Williams, February 23, 2012, on the Colorado PERA Board’s historical investing mistakes, and the impact of these mistakes on the Colorado PERA Trust Funds:
“Ten years ago we were pretty aggressive in real estate, very aggressive might be a better characterization. We were very aggressive in what I’ll call private equity or alternatives. At the board’s direction we’ve pulled in our horns substantially, about seven and a half of the portfolio in each of those two, used to be fifteen in each. I think that the portfolio as we headed into the dotcom bust was far riskier than it is today. We paid the price for that.”
(My comment: Meredith Williams tells us here that PERA “paid the price” for its past investing mistakes. Here he admits that the Colorado PERA Board of Trustees has historically made mistakes in setting the asset allocation of the Colorado PERA trust funds. Colorado taxpayers bear the burden of these investment mistakes.)
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