Illinois' Teacher Retirement System's risky investments in private equity.
Note: As the end of summer approaches it is the time for our annual family gathering on beautiful Block Island. Posting will be intermittent for the next ten days.
SPRINGFIELD, IL – The Teachers’ Retirement System Board of Trustees made $275 million in investment commitments from mid-May to mid-July 2023.
The System committed $175 million to three private equity opportunities and $100 million to an opportunity in the Diversifying Strategies Portfolio. The following specific investment actions were presented to the trustees during its regularly scheduled August meeting:
Within the System’s $11 billion Private Equity Portfolio:
A total commitment of $100 million to TA Associates, of Boston. TA Associates currently manages $350 million in TRS assets.
The commitment of $50 million to Foundation Capital, of Palo Alto, California. One commitment of $40 million is for Foundation Capital XI, L.P. and $10 million is designated for Foundation Leadership IV, L.P. This is a new relationship for TRS.
A commitment of $25 million to 3 Boomerang Capital of Greenwich, Conn. This is a new investment relationship for TRS.
Why is this announcement a concern to me, a retired teacher who depends on his TRS pension as my primary source of income?
Because of the failure of the state of Illinois to meet its obligation to adequately fund the pensions systems, those systems are 60% underfunded.
In order to deal with the underfunding the TRS board of trustees has authorized investments in high risk, alternative investments in private equity. This is a dangerous practice. as I have pointed out for years.
In an article in the August 4th edition of the New York Times called The Risks Hidden in Public Pension Funds, financial columnist Jeff Sommer discusses the dangers and risks of underfunded pension systems relying on private equity to make up for the lack of funding.
…in 2022, public pension plans nationwide had only about 71 percent of the money needed to fulfill their long-term promises for retiree benefits, David Draine, an analyst at the Pew Charitable Trusts, told me in an email. In a report for the Center for Retirement Research at Boston College, Jean-Pierre Aubry and Yimeng Yin estimated that the funding percentage in 2023 was higher, by about 78 percent, but pointed out that these figures are based on actuarial assumptions about investment returns that may not be realistic. The real funding shortfalls may be vastly greater.
Most public pension plans haven’t been fully funded for years. The politicians who make decisions about employee benefits and state and local budgets are rarely in office when the retirement bills come due. That leaves pension funds with holes to fill.
They have only a few options, and most are unpalatable: cutting benefits, imposing increases on the money paid by workers and increasing employer contributions. Consider that the employers are state and municipal governments with tight budgets. Increasing employer contributions could mean cuts in services and tax increases.
So cash-strapped public pension funds have been reaching for higher investment returns, diverting assets from publicly traded stocks and bonds and pouring money into so-called alternatives, including real estate, hedge funds, commodities and, especially, private equity funds.
By now, private equity funds account for roughly 13 percent of the total holdings of all public pension funds across the United States. Oregon’s fund in June contained 27.8 percent private equity, more than most public funds.
Many public pension funds have portrayed these investments as high-return, low-risk ventures, an enticing combination, if you can count on it. Yet anyone who has studied finance — or has experience in investing — knows that you can’t consistently get high returns without taking on risk.
Another way of saying this is that if something looks too good to be true, I’d start with the assumption that it probably isn’t true.