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A New Trend in Pension Funding?
Oklahoma Gov. Mary Fallin signed a bill into law this week that establishes a rainy day fund for the state’s pension system. Called the Pension Improvement Act, the law creates a fund that the state can use to help with its annual pension costs. There are no rules for when to put money in the fund, but the law does say money can only come out via legislative appropriation. It also says that money can only be used to help the state pay its full pension bill in tough economic years or to help fund cost-of-living increases for public employees.
Oklahoma isn’t the only state this year to create a separate fund to help with pension costs. Last month, Kentucky lawmakers started a $125 million permanent fund, which is similarly expected to help the state afford its annual pension payment. The state has asked for independent audits to help determine when the fund should be tapped.
The takeaway: Many states have rainy day funds to help supplement their budgets in years when revenues fall short. Theoretically, those funds could also help with paying a state’s pension bill. But the reality is that pension payments are often the target of cuts in tough economic times. What's more, pensions also lose money from investment losses during economic contractions. To be truly helpful, a pension rainy day fund needs to be more substantial than a few hundred million dollars when states’ pension payments are often more than $1 billion annually. How Oklahoma and Kentucky manage these funds and their funding policies will be key in the coming years.
Cities Go After Lenders
The foreclosure crisis certainly hurt the millions of homeowners who lost their houses during the Great Recession. But it hurt localities, too. They lost tax revenue. And in a case of cause and effect, they watched as the suddenly vacant houses led to blight, which in turn led to spikes in crime because governments at the time couldn’t afford to invest more in their police forces.
So now cities are testing whether they can sue banks for damages under the Fair Housing Act. Los Angeles; Miami; Oakland, Calif.; and Providence, R.I.; have all filed lawsuits against lenders seeking reparations. The lenders are arguing that the act applies to people, not governments. The question of whether cities have the standing to sue is before the U.S. Supreme Court.
The takeaway: If the court rules that cities don’t have standing to sue, it would add to the view that financial institutions are not being held accountable for their role in the 2008 crisis. As The Atlantic noted this week, the people who were most damaged by the foreclosure crisis -- those who lost their homes -- typically don’t have the resources to bring lawsuits. Most of the civil suits have been brought by investors who bought bad home loans. In their quest, cities likely represent the last group to try to punish lenders for their practices during the mid-2000s.
Pensions Collect Tolls
The California Public Employees Retirement System, or CalPERS, now owns a 10 percent stake in Indiana’s privately operated toll road. The nation’s largest public pension fund already invests in other infrastructure properties -- like Heathrow Airport in London -- but the toll road is its first U.S.-based investment.
IFM Global Infrastructure Fund, which purchased the Indiana Toll Road in 2015, announced the deal with CalPERS Wednesday. The concession company runs the 157-mile highway under a multi-decade contract with the state.
The takeaway: Pension funds outside of the U.S. commonly make direct investments in infrastructure. Australian and Canadian pension funds tend to be leaders in this area. But it’s an investment category that has yet to really take off here. Infrastructure investments tend to be attractive to institutional investors because they have a long lifespan, which is something long-term funds like to have in their portfolios. CalPERS has already distinguished itself for its direct investments in infrastructure abroad. Perhaps now it will look to do the same at home, spurring other plans to follow.