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Don't make risky investments with Florida's pension fund

Ash Williams wants to put more of Florida’s pension money in hedge funds and unregulated investments.

Colin Hackley photo

Ash Williams wants to put more of Florida’s pension money in hedge funds and unregulated investments.

Florida's public employee pension fund, facing an unfunded liability after losses in the market downturn, now wants to gamble more in hedge funds and other unregulated investments. More incredibly, the State Board of Administration's trustees bought the pitch that such a strategy will produce higher returns at lower risk. But lawmakers should not embrace such wishful thinking. The Legislature should acknowledge that Florida cannot gamble its way out of this mess and that it needs to modernize public employees' retirement benefits so they are sustainable.

Earlier this month, executive director Ash Williams told the SBA trustees — Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink — that he wants to "invest more smartly" in alternative assets, including unregulated hedge funds. He claimed it would increase returns and lower risks. But economic experts, as St. Petersburg Times reporter Kris Hundley documented, are nearly unanimous that such a claim is wishful thinking that ignores basic market economics. By design, hedge funds are high-risk instruments due to their unregulated nature. Even if the state searches out the most conservative ones, it is not guaranteed nearly the same transparency or control it has with public equities.

Driving Williams' plan are unfunded liabilities. Florida's pension fund, like pension funds across the country, is trying to recover from the recent market collapse in which assets plummeted as liabilities kept growing for 1 million retirees and state and local government workers. Many other states, following the lead of private businesses, have reacted by modernizing their retirement plans, for example by putting all new hires into a 401(k)-style plan. But Florida, where public safety unions have enjoyed gains in pension benefits under Republican leadership in the past dozen years, has resisted.

Crist, McCollum and Sink know that covering the liability by asking member agencies — from local school boards to state agencies — for higher contributions isn't politically palatable in a down economy. So Williams has seized on the other option, increasing investment gains.

Williams wants to triple the SBA's current 5 percent play in alternative assets, including hedge funds, to roughly 16 percent. State law caps alternative investments at 10 percent of the fund's $114 billion in assets. Under hedge fund deals, the SBA would hand over millions or potentially billions to firms that attempt to make money in all sorts of ways, from playing the market — such as shorting stocks — to investing in private companies. Hedge funds are not regulated by the Securities and Exchange Commission, as mutual funds are, and traditionally command higher fees.

Williams assured trustees the SBA would only do business with "fundamentally-oriented funds," not black-box funds like Bernie Madoff's that refuse to disclose their strategies. But that's a promise Williams may not be able to keep. It will be the hedge funds, not the SBA, that will control the investments. What's more, economists say historical analysis of hedge fund performance is decidedly mixed. Even the SBA's consultant, Ennis Knupp, concluded the new approach would do little to improve the chances of getting the return the pension plan needs to be fully funded.

Williams' shortsighted plan is the unfortunate result of more than a decade of denial by decisionmakers. When the stock market was rising, it was easy for trustees and the Legislature to avoid the hard reality that Florida's pension plan would be too expensive when times got tough. Instead, lawmakers actually cut employers' contribution rates and increased benefits. But flush times aren't expected again anytime soon. Williams is trying to balance the books with wishful thinking. Lawmakers must not buy into it.

Don't make risky investments with Florida's pension fund 06/26/10 [Last modified: Friday, June 25, 2010 6:23pm]

    

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