Monthly Archives: August 2017

Pension Investing: Goldilocks vs. Chicken Little

By Barry Rascovar

Aug. 14, 2017–Separating fact from fiction, headline-screaming hype from on-the-ground reality isn’t easy in this 24/7/365 media-frenzied world, especially when it comes to reporting on government and politics.

Take, for example, the world of state pension fund performance. Returns on these investments have been pretty meager in recent years and the nation’s governors and legislatures have resisted pumping hundreds of billions of dollars to achieve “full funding” for these pension accounts.

In Maryland, it has become an annual rite of August for critics to lambast state pension trustees when they fall short on their investments. The biggest lament is the state’s huge “unfunded liability,” which stands a bit below $20 billion.MD Pension System: Goldilocks vs. Chicken Little

Wow. That’s a mighty hefty number. Is the pension program for 387,000 state workers, teachers and retirees going broke as doom-and-gloomers insist?

Or are we being fed “fake news” in which the “sky-is-falling” screams are based on a false premise?

It’s more the latter than the former. The $20 billion number is based on a scenario that will never happen. It assumes every eligible state worker and teacher retires tomorrow. In other words, government virtually shuts down and everyone starts collecting retirement benefits.

Future Gap in Payouts

It is true the state’s retirement agency pays out more in benefits each year than it takes in from employee contributions and state and local governments. In good years, that gap is closed by investment income. In bad years, the agency withdraws funds from its $49 billion in assets.

This past fiscal year was a very good one for Maryland’s retirement fund. Investments yielded a 10% return – a $3.6 billion increase in net assets. Over the past 10 years assets have grown by $10 billion.

Still, critics assert Maryland’s pension trustees should be far more aggressive. Instead of middle-of-the-road investing compared to other states, they also insist the trustees could make billions more by shifting investments into static index funds.

That would achieve two things. Management fees would be markedly lower, since index funds require very little work for fund managers once they are set up. Second, index funds perform exceptionally well in flush economic times since they reflect overall stock market booms.

Maryland pension officials have resisted this shift and here’s why. In bad times, index funds are hit much harder than actively managed funds.

State officials have been cautious over the years in an attempt to reduce extreme highs and lows by diversifying their portfolio. Only half the agency’s money is tied up in equity funds. The rest goes into much safer, and thus lower paying, investments such as government bonds, real estate and cash.

Over the past 30 years that approach has returned an 8% return per year.

To Index or Not to Index?

Still, critics are pounding the retirement agency for not fully indexing its accounts to lower management fees.

Those critics are ignoring worrisome storm clouds many economists see on the horizon. T. Rowe Price, for the first time in 17 years, is pulling back on its stock investments and increasing investments in bonds – a sign the company sees a downturn coming our way.

T. Rowe Price actively manages its funds so that if the economy starts to tank, it can shift out of stocks and increase its cash reserves. That shelters shareholders from the worst of bad times.

But if you are fully invested in index funds, there’s no way of avoiding a direct hit when the stock market plunges 20% or more.

Comptroller Peter Franchot has warned trustees against taking too many risks to achieve higher returns by buying stocks when their valuations are sky-high. His caution reflects the consensus of the retirement fund’s trustees.

At the moment, Maryland’s pension program is 70% fully funded and the board has instituted a 25-year-plan to close the remaining gap. But this liability is more an academic concern than something to lose sleep over.

Maryland state pension fund trustees continue to ignore the Chicken Littles screaming that “the sky is falling.” Instead, the trustees are following the tried-and-true Goldilocks formula: “Not too hot, not too cold, j-u-s-t right.”

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John Delaney for . . . President??

By Barry Rascovar

Donald Trump may have started an unwelcome trend. An outsider who started as a joke rather than a serious contender in the wide-open GOP presidential primaries last year, Trump pulled off America’s biggest upset. Today he’s president and now just about anyone thinks he, or she, can do the same thing.

Exhibit A is Maryland Congressman John Delaney. He thinks he should be president. He is giving up his seat in Congress to run for Trump’s job – though his odds at this point are slim and none – and Slim just left town.

Delaney’s credentials are exceptionally modest. Yes, he’s serving his third term in the House of Representatives as a Democrat from a district encompassing Western Maryland and parts of Montgomery County. That’s his only fling at public office. Previously he started, ran and then sold two financial service companies, making him super-rich.

John Delaney President??

U.S. Rep. John Delaney of Maryland

But given Trump’s even more meager political resume, Delaney apparently thinks experience no longer counts.

The difference is that Trump is an exceptional reality TV personality, a charismatic, loud-mouthed know-it-all who captivated America’s heartland with his unconventional sales pitch and aggressive, unapologetic rhetoric.

Delaney, by contrast, is more phlegmatic than charismatic. He’s been in office over five years yet still is unknown in most of Maryland.

Congressional record

He’s also got little to show for his three terms in Congress.

His claim to fame is a proposal to rebuild U.S. infrastructure by encouraging corporations to re-patriate, tax-free, billions of profits stashed overseas in exchange for buying special infrastructure bonds that support a giant public works agenda.

Great idea but that’s all it is after five-plus years. Delaney’s brainchild hasn’t matured into a viable plan of action in the Republican Congress.

All Delaney offers Democratic voters at this point is a more moderate, pro-business view of the world than any of the likely presidential candidates in the 2020 primaries.

He does have two advantages: 1) He’s the first to jump in, giving Delaney oodles of time to romance caucus delegates in Iowa and voters in New Hampshire and South Carolina – the early primary states; 2) he can self-fund the next few years of his campaign while building a fund-raising operation.

Even then, it is hard to imagine  Delaney making much headway. He has all the makings of Maryland’s last presidential wannabe, former Gov. Martin O’Malley, who performed so miserably he got just 0.6% of the Iowa caucus vote – and dropped out. It was a huge humiliation for O’Malley, an end to a once-promising political career.

Now Delaney seems headed in the same direction. With a few more terms in the House of Representatives, he might have been an influential congressman. Or he might have used his wealth to become the Democrats’ gubernatorial nominee next year.

Instead, he could end up a footnote – an also-ran in the 2020 Democratic presidential primary season.

That’s insane, but holding public office, or wishing to hold public office, does strange things to an individual’s ego.

Gubernatorial Wannabes

How, for instance, does a Washington lobbyist like Maya Rockeymoore think she is qualified or has the electability skills to become Maryland’s next governor?

How does a little-known “technology policy expert,” Alec Ross, who wrote a best-selling book (“The Industries of the Future”) and advised Secretary of State Hillary Clinton on matters of technology, believe his background is sufficient to persuade voters he’s the most qualified person to fix problems bedeviling Maryland?

And how in the world does a 37-year-old former policy staffer to Michelle Obama and Hillary Clinton, Krishanti Vignarajah – with no prior experience whatsoever in Maryland – believe her modest resume (she ran Michelle Obama’s “Let Girls Learn Initiative”) proves she is capable of running a complex state government?

If Trump can pull off a miracle electoral victory, then just about anyone else can, too. That seems to be the mindset.

It’s as though relevant experience no longer counts. Some captivating sound bites, colorful ads and outrageously out-of-the-box ideas and, voila, the presidency, or the governorship, is mine.

All these contenders see is opportunity – even though they lack the background traditionally expected of elected chief executives in this country.

The last time John Delaney faced a tough electoral fight, in 2014, he won reelection (in a gerrymandered, pro-Democratic district) by a slim 2,774 votes. That’s not an encouraging sign for his uphill battles in Iowa and New Hampshire.

The other wannabes have zero prior experience in running for public office, much less any measure of success. That’s a discouraging sign for their gubernatorial hopes and dreams.

But it’s also a discouraging sign for voters, who must separate the lighter-than-air candidates from the legitimate contenders.

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