Curiously, the Office of the Oregon State Treasurer and the Oregon Investment Council in their management of the investment portfolio of the Oregon Public Employee Retirement System (OPERS) haven’t seemed to have learned a lesson in the past few years from the dramatic swings and sharp declines in the OPERS portfolio value; the culmination of acceptance of a high risk investment philosophy in pursuit of unrealistically high investment returns necessary to support generous employee benefits. Correlating closely with the recent FDIC effort to encourage pension funds to buy stakes or assets of distressed bank holding companies (here), the Oregon Investment Council has approved an investment of a $100 Million from the Oregon Public Retirement System into such a bank holding company, Community Bancorp, which would in turn buy from one to five banks from the FDIC’s troubled bank list; restructure, re-capitalize and sell the banks in hopes of making a significant return over the next several years. FDIC provides such problem banks to investors in hopes that they will turn them around. FDIC is willing to negotiate coverage of some portion of the acquired banks loan risks and restructuring costs.Here.
While this investment is small relative to overall OPERS portfolio, is it emblematic a prevailing Council investment philosophy which is impervious to potential losses stemming from high risk investments and inappropriate for the more challenging economic environment we face today?From its peak of $66.8 Billion in October 2007 the portfolio’s value had fallen to $43.8 Billion by December 31, 2008 (here).
Declines in valuation of the fund were likely far greater than this given the presence of large relatively illiquid investments in equity and real estate partnerships in the portfolio which were difficult to value due to poorly functioning capital markets. While the value of the portfolio had reputedly rebounded to $51.5 Billion in January 2010, it still retains asset values sufficient to cover only 80% of future promised public employee benefits (Here). While the Oregon ‘s results are reputedly better than its peers, they still are significantly under funded.
The historical volatility in the portfolio’s values and the high percentage of illiquid equity and real estate partnerships investments suggests an excessive risk profile of the retirement plan. Is the latest investment foray into failed banks just another example of the prevailing portfolio management attitude accepting excessive risk in search unrealistic, elusive high returns? Since the only source of funds for payouts includes contributions of state/municipal employers (ultimately taxpayer dollars) coupled with anticipated portfolio returns, will such acceptance high risk and expectations of unrealistic returns result in increasing dependence upon taxpayer funds to pay future guaranteed public employee benefits?
The answers to the above questions were pointedly addressed by CNBC recently,
“But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.”
CNBC went on to observe that a “growing number of experts say that governments need to lower the assumptions they make about rates of return, to reflect today’s market conditions.”
Tell ’em where you saw it. Http://www.victoriataft.com