Thinking Outside the Box

This piece from Chief Investment Officer is so avocados I almost did a spit-take when I read it:

The legislative representative to the League of California Cities urged the CalPERS Investment Committee Monday to think “out of the box” in finding a way to exceed its 7% investment return projections, saying that cities won’t be able to pay their monthly contributions to the pension plan if returns are that low.

Dane Hutchings cited a CalPERS September 2017 report, which showed that 180 of the 449 cities and towns that participate in CalPERS had an individual funding ratio of between 60% and 70%. Sounding a warning alarm, Hutchings said a significant number of those communities could fall between the 50% and 60% funded when new CalPERS data come out in August.

I don’t even know where to begin on this one.

To my knowledge, cliches and business aphorisms have never saved a sinking ship like this in the history of the world. When this doesn’t work maybe they’ll say, “Now let’s get rid of the box!”

There are no points for degree of difficulty in the markets. Trying hard is pretty good advice in many endeavors. But trying harder does not guarantee you anything in the markets. In fact, trying harder typically leads to worse results when investing because you end up pressing too much at the wrong times. Charley Ellis sums this up nicely in his classic book, Winning the Loser’s Game:

In investing, losing means taking decisive action at the worst possible times — being driven by your emotions precisely when you need to be the most rational. Trying too hard to win eventually means losing. To win the Indianapolis 500, you first have to finish the Indianapolis 500 — that’s five hundred laps around and around that oval. If you try too hard on just one lap, you won’t live to finish.

Thinking outside the box as the nation’s largest pension plan will likely only compound their problems.

The way I see it, municipalities who are in trouble with their pension obligations have 3-and-a-half choices to fix their problems:

1) Increase taxes.

2) Cut down on government services to save money.

3) Cut the retirement benefits promised to employees.

3.5) Increase tax revenue through legalized drugs and sports gambling (this one is 3.5 because I’m only half kidding).

You’ll notice I didn’t include “increase investment returns” as an option. This because I don’t have faith that pensions can dig their way out of this hole through investment returns alone.

First of all, investing is hard. But it’s even harder when done in such a bureaucratic format such as this when you’re dealing with elected officials, committees, beneficiaries and investment staff.

Plus, there’s the fact that the stock market has already been up for nine years in a row and these pensions are still in dire straights! They really think the markets are going to bail them out?! If they can’t get things in order during one of the greatest runs in stock market history, how are they going to survive when things aren’t going up year after year?

When I read this piece I was immediately reminded of this Peter Bernstein quote: “The market’s not a very accommodating machine; it won’t provide high returns just because you need them.”

There’s another old Wall Street saying that goes something along the lines of, “You don’t get the returns you need in the markets, you get the returns you deserve.”

I guess the legislators in these municipalities have no choice in many ways but to try and shoot the moon. The alternative of reducing expectations and looking reality squarely in the eye doesn’t seem like it’s something they’re interested in exploring.

There will be a lot of pain in the years ahead for many state and local pension plans who over-promised, under-funded, and under-delivered. I don’t see many ways in which there are no losers in all of this.

I’m not holding my breath for a future release of the book Thinking Outside the Box: How California Solved Its Pension Crisis.

League Urges CalPERS to Find Ways to Exceed 7% Return Target (CIO)

Further Reading:
Something I’m Worried About


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