napp/Crain News Service
CHICAGO -- Suburban police and fire pension funds have an addition to the list of lessons learned by stock market investors: Be careful what you wish for.
After five years of lobbying the Illinois General Assembly, the suburban funds finally won a change in state law last year that allowed them to boost their investments in the equities markets to 45% of their total portfolios from 10% as of Jan. 1. The timing couldn't have been worse.
Just as many suburban pension funds boosted their position in stocks by as much as fourfold, the market was beginning its third-quarter dive. Despite the market gains of recent weeks, many of the pension funds that reached into the hot equity market of early 1998 ended up with singed fingers.
In west suburban Carol Stream, for instance, the $12-million police fund began buying stocks in February, raising the stock portion of its portfolio to 30% from 10%. Through the end of September, the equity portion of the fund was down 13% in value.
In northwest suburban Wheeling, which boosted its stock allocation to 25% from 10%, the $18-million police pension fund has lost a more modest 5% on the year. In nearby Mt. Prospect, the equity portion of the police department's $27-million fund lost 11% in the third quarter. In Naperville, the police invested 28% of their portfolio in stocks that lost 5% between January and September.
The Dow Jones Industrial Average rose about 15% from January to mid-July, just as many pension funds were making their biggest stock buys.
But between mid-July and the end of September, the average had declined 16% in value. As of the middle of last week, the Dow was up 6.4% for the year.
"It's unfortunate," says Douglas R. Ellsworth, Mt. Prospect's finance director. "We've been lobbying for years to get this (ability to invest more in equities), and then we get it at the worst possible time."
It is important to note that because the new law limits equity exposure to 45%, all of the funds kept a majority of their money in government securities. With the market for ultra-safe bonds booming, many of the equity losses were more than countered by bond gains.
In Mt. Prospect, the police fund is up overall about 4% for the year despite the stock losses. The Wheeling fund is up 6%. In Naperville, the fund is up 4%, and similar results can be found across the region.
But the stock losses are a concern to municipalities that have to make up potential pension fund shortfalls in their annual property tax levies. A municipality's contribution to its pension funds is calculated annually based on a series of forward-looking factors, including investment gains.
Typical assumptions require maintaining overall gains in the 7% to 8% range. Smaller gains could require increased taxpayer contributions.
Municipal finance managers are quick to note that over the long term, equities have outperformed bonds. Like many municipalities, Wheeling began gradually converting some of its holdings to mutual fund investments at the beginning of the year.
A common strategy has been to hold most bond investments and move new money into equities as fresh contributions are made to the fund. The Wheeling police fund was able to make a sizable investment in mutual funds by early spring.
Some pension funds moved into stocks more aggressively. Rockford's $109-million police pension fund quickly shifted $35 million -- or 32% of its assets -- into equities by selling many of its fixed-income investments.
"We decided to get into it when we could," says Rockford Revenue Manager Ted Dutkiewicz.
The equity side of Rockford's police portfolio is down 6% in value on the year, although the fund's total return is up about 4%, says Mr. Dutkiewicz.
Pension funds that moved more slowly are feeling fortunate. North suburban Deerfield spent the first half of the year finalizing an investment plan and has yet to move more broadly into stocks.
Investment advisers note that without some equity exposure, suburban funds will have a tough time meeting their targeted gains.
Also offsetting temporary losses are the huge gains many of the funds recorded in recent years. Rockford's police fund gained 14%, north suburban Winnetka's fire fund returned 18% and west suburban Downers Grove's police fund returned 22%.
"We're all doing a reality check in this down market," says Stan W. Helgerson, Carol Stream finance director. "But we're looking forward to our October statements."