Local public pensions debate pros, cons of joining state systems

The debate over whether county and municipal pension plans should join their state systems is heating up.

Officials in Massachusetts and Rhode Island are trying to persuade smaller public plans to let the state manage their entire investment portfolios or make it easier to do, arguing the advantages of scale and the availability of greater resources.

In Wisconsin and Nebraska, some municipal pension plans are looking to be folded into their state systems as a means of solving funding problems.

Still, representatives from some local plans argue they'd rather not go all-in with the state, pointing to better returns, greater autonomy and nimbleness by managing all or part of their own money themselves.

“This trend is coming from public plans looking at what their competitive advantage is,” said Kristen Doyle, a partner and head of public funds at Aon Hewitt Investment Consulting, Chicago. “They must take a critical step back and go: What are we good at, what are not so good at?”

Most industry experts interviewed for this story noted the primary benefits of a municipal plan to join a state plan are size and skill.

The more assets a state plan has, the better the deals it can negotiate, added Jay V. Kloepfer, executive vice president and director of capital markets and alternatives research at Callan Associates Inc., San Francisco. Mr. Kloepfer said Callan works with many state plans “that encourage municipalities to cast their lot” with the larger pension fund.

The chairman of one county retirement system in Massachusetts, who asked not to be named, said the state's public pension regulatory agency, the Public Employee Retirement Administration Commission, has been subtly putting pressure on smaller pension plans to go “all-in” with the state plan, the $62 billion Boston-based Massachusetts Pension Reserves Investment Management Board. “PERAC thinks PRIM has the resources to better manage investments,” the chairman said. “And PERAC doesn't think local funds can manage their assets that can compete with the PRIM fund.”

The chairman, however, argued local governments want local control; at PRIM, asset allocation is dependent on the funded status of the pension plan. So, plans within PRIM must accept its asset allocation along with its risk factors.

Thomas J. O'Donnell, compliance officer at PERAC, Boston, denied the organization has been pushing local plans to move their assets to the state trust, but acknowledged there are significant advantages to being part of the state plan. “They (local plans) do enjoy larger economies of scale as one of the benefits” of joining PRIM, Mr. O'Donnell said. “PRIM has a large dedicated staff.”

PERAC's compliance officer added alternative investments, which often require minimum commitments of at least $100 million, are an area in which smaller plans can truly benefit from PRIM's scale.

Aon Hewitt's Ms. Doyle echoed that sentiment. “Scale becomes an advantage; (as part of a larger plan) you gain access to a broader set of alternative investments,” she said.

In Massachusetts, locally administered pension plans don't have to join PRIM unless they are deemed to be underperforming.

After several plans were ruled to be underfunded and underperforming in 2007, Massachusetts passed legislation mandating that plans that are underfunded by 65% and underperformed the PRIM fund on a 10-year annualized basis by more than 200 basis points must join PRIM.

In Rhode Island, General Treasurer Seth Magaziner proposed a bill in March designed to make it easier for cities and towns with locally administered pension systems to join the state's $1.4 billion Municipal Employees' Retirement System.

“The struggles of locally administered pension systems in Rhode Island are the state's biggest financial challenge,” Mr. Magaziner said in a phone interview. Mr. Magaziner oversees the Providence-based Rhode Island State Investment Commission, which manages the $7.9 billion Rhode Island Employees' Retirement System, Providence, which includes MERS.

Rhode Island has about 150 municipal plans, 116 of which are managed by the state through MERS. Mr. Magaziner said those managed by the state are doing well, but most of the 34 locally administered plans are critically underfunded. “Some communities would be interested in joining MERS, but the rules are unnecessarily rigid and costly,” he said. “So, we're breaking down these barriers to entry.”

Mr. Magaziner argued that municipal plans that are part of MERS see stronger investment performance and lower costs than they can achieve on their own.

The 116 municipal plans in Rhode Island's system have an average funded status of 83%. The 34 locally administered plans carry a combined $2.4 billion unfunded liability. Of the 34 locally administered plans, 19 are less than 60% funded and 12 are below 40%.

In Wisconsin, the Milwaukee County board on March 23 approved formation of a work group to study the steps needed to transfer administration of the $1.7 billion Milwaukee County Employees' Retirement System, to the $94.2 billion Wisconsin Retirement System, Madison.

Board member Sheldon A. Wasserman proposed the work group in response to the pension fund's continued administrative problems that include significant benefit overpayments and underpayments.

“We are very concerned. We're finding errors after errors after errors. We're talking millions of dollars in potential errors,” Mr. Wasserman said in a phone interview.

Mr. Wasserman added that, of the 72 counties in Wisconsin, Milwaukee County is the only one with its own pension plan.

In Nebraska, the Nebraska Investment Council took control of the $1.1 billion Omaha School Employees Retirement System on Jan. 1.

Michael W. Walden-Newman, state investment officer for the council, said in an email that assets under management increased to $24 billion with the addition of OSERS.

Mr. Walden-Newman said the move, which had been in the works since 2015, was spurred by state legislators and not a council initiative. “But we operate a "can-do' agency and were happy to help when approached by the state Legislature,” he said.

But bigger does not always mean better. Some locally managed plans in Massachusetts said they're perfectly happy having PRIM run only part of their assets.

Sheryl Trezise, administrator for the $173 million Haverhill (Mass.) Retirement System, said in an email that although the retirement system has about one-third of its investments with the state's Pension Reserves Investment Trust, the assets not in PRIT have “outperformed PRIM many years, including 2016.”

Haverhill invests through PRIT for international equity, emerging markets, core and value-added fixed income, core real estate, private equity and hedge funds.

Carolyn Russo, executive director of the $442 million Massachusetts Water Resource Authority Employees' Retirement System, Chelsea, told P&I in an email: “Because the MWRA Employees' Retirement System is nearly fully funded, our asset allocation does not need to be, and ... should not be, as aggressive as that of a system which is, for example, 60% funded.”

Ms. Russo added the independent management of the pension fund's assets allows the board to tailor asset allocation and risk to meet its funding needs.

MWRA Employees' Retirement System had allocated 9.2% of its portfolio to PRIT's core, private equity, hedge fund and real estate sleeves as of Feb. 28.