Pension Fund Crisis? Calstrs Seeks $30 Billion In Leverage Amid CRE Turmoil
Pension Fund Crisis? Calstrs Seeks $30 Billion In Leverage Amid
Commercial Real Estate (CRE) Turmoil
BY TYLER DURDEN SUNDAY, JAN 07,2024-08:05 AM
One of the biggest public pension plans “Retirement Systems” in the US plans to borrow tens of billions of dollars to maintain liquidity instead of triggering a fire-sale of its assets.
Bloomberg reports the roughly $318 billion California State Teachers’ Retirement System (CalSTRS) plans to borrow $30 billion, or about 10% of its portfolio, instead of raising funds through an asset sale that might trigger fire sales.
There is a big difference between a pension and a retirement system according to Chriss Street which this article fails to let the reader know. CalPers, California Public Employees pension system is a pension system and CalStrs is a “retirement” system. Its important to note that decisions made about investments for the CalStrs retirement system are made by the state legislature. This makes anyone who votes or who has input into the system personally liable for fraud if there is fraud found in the handling of these CalStrs funds.
In a defined benefit plan, the employer bears the investment risk and manages the plan’s investments. This means that employees do not have to worry about making investment decisions or monitoring the performance of their retirement funds. The employer is responsible for ensuring there are sufficient funds to pay the promised benefits. Recently, however, there’s reason to believe that pension funds are being funneled into private equity assets, which could result in the collapse of the value of many Americans’ pension plans.
Calstrs board members will review the first draft of the policy next Thursday. If approved, the leverage would be used “on a temporary basis to fulfill cash flow needs in circumstances when it is disadvantageous to sell assets,” a CalSTRS policy document stated.
According to Calstrs consultant Meketa Investment Group, the public pension fund “Retirement Systems” already deploys leverage upwards of 4% of its portfolio, adding the proposed increased leverage won’t be used for a new asset allocation policy but rather used to smooth cash flow and as an “intermittent tool” to manage the portfolio.
The need to increase leverage comes after a report from the Financial Times last April explained that CalSTRS was planning to write down the value of its $52 billion commercial real estate portfolio after high interest rates crushed the values of office towers.
At the time of the FT report, CalSTRS Chief Investment Officer Christopher Ailman told the media outlet that:
“Office real estate is probably down about 20 percent in value, just based on the rise of
interest rates,” adding, “Our real estate consultants spoke to the board last month and
said that they felt that real estate was going to have a negative year or two.”
For Calstrs, CRE (Commercial Real Estate) was one of the best-performing asset classes until Covid and the Fed embarked on the most aggressive interest rate hiking cycle in a generation. Real estate had delivered double-digit returns over a 10-year period for its million-member plan, according to an update last March.
FT noted real estate makes up about 17% of Calstrs’ overall assets.
We’re sure Calstrs is one of many pension plans “Retirement Systems” under pressure from the CRE downturn. Also, regional banks have high exposure to CRE and are still not out of the woods.
