Tag Archives: Pension

Commentary

Questions for the Treasurer

City of Hartford Treasurer Adam Cloud is scheduled to meet with the Council’s Operations, Management, Budget, and Government Accountability Committee on the evening of Monday, May 2, 2016.

The Office of the Treasurer acts as a co-issuer of the City’s debt and as the investor of the pension fund. Both the debt and the pension contributions have been cited as contributing factors to Hartford’s structural budget deficit.

As City leaders work to restructure Hartford’s finances, both closing this year’s budget gap and putting the City on a more sustainable long-term path, difficult questions need to be asked. Nothing should be exempt from scrutiny.

The Treasurer’s appearance at the Committee meeting is a rare opportunity for the community, via its Council members, to ask important questions of the Treasurer.

Questions About the General Obligation Debt

Treasurer Cloud, you have appeared before previous Councils to advocate for numerous general obligation bond sales. Some sales have been new debt to fund capital projects, while others have been restructurings of the existing debt.

We’re now being told that the City has too much general obligation debt, and that the worst is yet to come in terms of repayment.

Do you believe Hartford has too much general obligation debt? If yes, why haven’t you sounded the alarm in the same way that you have about potential decreases in pension contributions? If no, what metrics do you use to gauge the appropriate level of debt?

What do you recommend Hartford do with respect to managing the debt?

Questions About the Pension Fund

The Fourth Quarter 2015 Investment Performance Analysis report for the Municipal Employees’ Retirement Fund (MERF) stated that investment performance has been very poor over the past 5 years. The MERF’s total return was worse than 80% of the other public funds in the benchmark.

Specifically, the MERF’s return is reported as 1% behind the median fund over 5 years. The underperformance has cost the MERF an estimated $10 million per year (1% of a $1 billion fund), or $50 million over five years.

Why is the MERF ranked near the bottom of Public Funds for long term investment returns?

What have you done, and what are you planning to do, to improve performance?

Reporting

Pension Investment Performance

The Municipal Employees’ Retirement Fund (MERF) is a $972 million investment portfolio that pays the pension benefits of retired City employees.

The investment performance of the MERF has been poor in recent years. The poor performance is costing the City money, and contributing to the structural budget deficit.

The Fourth Quarter 2015 Investment Performance Analysis report, on the City Treasurer’s website, ranked the fund’s total return over different time periods. The following chart was taken from the “Investment Summary” on page 16.

2015-12-31_MERF-Performance-Return

It reported that over the past 5 years the fund was in the 81st percentile, which meant that 4 out of 5 Public Funds did better than the MERF. Over the last 3 years the fund was in the 91st percentile, so 9 out of 10 Public Funds did better than the MERF.

Underperformance in the short term is understandable. Markets fluctuate, and the MERF does not attempt to mimic the market. However, five years of very poor returns suggests there is something wrong with the MERF’s investment strategy.

It’s difficult to know exactly how much the poor investment performance has cost the MERF. It’s about a $1 billion fund, so 1% of underperformance for 1 year would result in about $10 million in missed opportunity.

The chart above states that underperformance has been 1% per year for five years. That suggests the MERF’s assets are about $50 million lower than if the fund performed at the median Public Fund level. Going a step further, if Hartford had an above average investment strategy, then MERF assets would be even more than $50 million higher than they are right now.

The investment strategy of the MERF has cost the fund tens of millions of dollars. This missed opportunity, in turn, will result in extra contributions from outside the fund.