Archive for June, 2012

Obama Wins, 9% – 42%

The last jobs report was about as bad as it could have been without actually putting us back in recession.  A downward revision of April’s job creation, coupled with a May net of 69,000 wasn’t even enough to keep the unemployment rate flat.  The last 27 months of anemic growth have let the rate drift down only because massive numbers of Americans are giving up looking.

Almost everyone who was paying attention knows this was a bad report.  A Gallup poll had 9% of people calling it positive – probably people who think anything not negative is good, or people who found jobs – while 42% called it negative to some degree.  Ten percent had no opinion, and 40% called it “mixed,” which is pretty much the “no opinion” for people who don’t want to admit they weren’t paying attention.

Naturally, Postblogger Ezra Klein runs a piece headlined: “Most Americans didn’t think the last jobs report was bad news.”  It’s true that the number of people who think things are getting worse hasn’t gotten worse, and the additional 3% who think rate it “poor” is pretty much statistical noise.

But people can go a long time before realizing that changes are permanent.  In the mid-90s, I worked for a while in Johnston, Pennsylvania, and many people talked about how they were waiting “for the Mill to come back.”  The Mill had been closed for many years, and wasn’t coming back, that, or any other century.

The economy can tread water for a long time, not getting better or worse, slogging along an a Euro-stupor, or a sushi-style lost decade.  People won’t necessarily rate things as getting worse, even though they know they’re not getting any better.

But that doesn’t make losing 9-42 any less of a loss.


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PERA, the Unions, and You

One of the less-noticed points of contention at Douglas County’s open negotiations the other week was the status of school district employees who are actually on the union payroll.  Basically, union heads leave the classroom to spend their time representing teachers and the union, yet remain officially school district employees.  The district wants to end this practice, and in fact, pick-slipped the union heads a couple of weeks ago.  The union wants to retain them as district employees, and claims that this is a non-issue, as the union reimburses the district for the employees’ salaries and PERA contributions.

The problem isn’t the current costs – although there may be some conflicts of interest in having a union boss refuse supervision and evaluation by the district, while still remaining nominally an employee.  The problem is PERA, and its something that the retirement plan ought to look at.

What happens here is that the unions, the national, state, and local, pay this employee’s salary.  That salary is no longer determined by the seniority or performance measures that apply to all other teachers, but by the people actually paying the salary.  So that employee is no longer being paid on their value to the district, or to the students, but to the union.  Their PERA benefits, which, over their lifetime, are calculated based on that salary.  Which means that PERA is paying benefits to potentially hundreds of employees statewide based not on their service to the taxpayers, but on their service to the union.  And since those benefits will, as currently constituted, far exceed the amount paid into the system, they constitute a net payout to the union, which doesn’t have to cover their own employees’ retirement benefits for those year.

The union will say that it’s unfair that a teacher should have to give up earned retirement benefits when they become a union rep.  But of course, they don’t have to give up anything they’re vested in.  This is, in the end, no different from a bureaucrat or a regulator leaving to take a job as a lobbyist.  They’re no longer directly serving the state government, and should no longer be a part of the state government retirement system, except for the benefits they have earned.  The union will argue that this will make becoming a union rep a much less desirable position, but never explain why that desirability should come at the direct expense of the taxpayer rather than the union and the teachers it represents.


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PERA’s Benchmarks

Along with all my other exciting duties, I’ve taken on the role as the manager of the PERA Project for the Independence Institute’s Fiscal Policy Center.  It’s an astonishing amount of material to become acquainted with, but I’m starting with the most recent Comprehensive Annual Financial Report, from 2010 (the 2011 report won’t be ready until July, for some reason).

Most funds try to achieve some level of diversification within their target investments.  This is true even for narrow, industry-specific funds, but is clearly true for larger, broad-based funds like a retirement fund, whose primary goal needs to be capital preservation and conservative growth.

In PERA’s case, they divide their investments into five asset classes: stocks, bonds, real estate, commodities, and alternative investments. While there’s some correlation among these, they are true asset classes, meaning that they really do respond to different economic conditions and stimuli.  While a generalized, panicky flight for the exits would affect them all, for the most part, these investments don’t move in tandem.

However, the benchmarks against which PERA measures its performance are another matter, and may be setting the fund up for diminished returns.

The benchmarks themselves are not only highly correlated, in several cases, they’re just the same as each other:

Global Benchmark
DJ US Total Stock Market Index
Fixed Income Custom Benchmark
Barclays Capital Universal Bond Index
Barclays Capital Long Gov’t Credit Index
Alternative Custom Benchmark
DJ US Total Stock Market Index + 3%
Real Estate Custom Benchmark
NCREIF Open-end Core Fund Index + 1%
Opportunity Fund
DJ US Total Stock Market Index
Fixed Income Custom Benchmark

There are some questions here.  First, the “Opportunity Fund” is currently invested in timber and raw materials.  Surely there must be commodity indexes that would be more reflective of the fund’s style.  A mixture of equities and fixed income indices doesn’t seem to bear any relationship to the fund’s investments.

Second, fund managers are judged in part by how well they track or beat these benchmarks, PERA is potentially setting up incentives to invest in assets that are reflected in those indices, throwing away the benefits of diversification.  The Opportunity Fund, for instance, is being judged on what amounts to a combination of the Global and Fixed Income Benchmarks.  It may be in commodities or timber now, but it could well end up migrating to investments that track those other two funds.

The Alternative Investment Fund is the most problematic; in essence, it’s just being held to the US stock market plus 3%.  But look at its portfolio: private equity, venture capital, and distressed debt.  Those investments don’t necessarily peak at the same point in the business cycle as vanilla equities.  The difficulties and dangers of benchmarking alternative investments, which are often illiquid and lacking in direct peers, have been noted before.  But there are any number of hedge fund indexes available for them to use.  Surely some basket of those would be more reflective of the fund’s actual and intended holdings.

I’ve only just noticed this, and to be fair, I don’t have any evidence that it’s actually affecting investment decisions.  Moreover, it’s a second-order effect.  Obviously, this isn’t as bad as if the asset classes themselves were highly-correlated.  But it’s possible that PERA is creating investing incentives that could come back to bite them in bad years, and cost them valuable basis points in normal years.

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