Are Teacher Pensions Safe? A Look At the NMERB Portfolio

NOB HILL--I looked at the TV screen yesterday afternoon while the DOW settled into a stunning decline of 777 points. The S&P alone suffered a paper loss of around $700 billion. $700,000,000,000!! That number may sound familiar--it is the same figure for the total of the so-called bailout that was defeated by Congress yesterday. Gone in one day. Not scared yet? How about this: if you had $500,000 in your 401K yesterday you lost about $35,000 in an afternoon...and around $100,000 in the last couple of months. Only a fool would be unconcerned.

I decided to check up on the health of my own pension fund, that of the New Mexico Educational Retirement Board. You just might be interested because there are around 16,000 educational employees in Albuquerque including not only APS teachers, but janitors, cooks, secretaries, all charter school employees, all UNM employees, CNM staff, and any other employee of an educational institution funded by the state. This number does not include the educational retirees who live in Albuquerque...and there are around 8000 of us.

The Fund
The NMERB fund is large. It had assets of about $8.3 billion last Friday. By this morning I would guess it had shrunk to maybe $8.0 billion. This would be about a 3% loss despite the market going down 7%. Why did the fund go down less than the market? In a word, diversification. More on this later.

The fund is 100% funded until the year 2026 given two assumptions: an average annual earnings rate of 8% and increases to the employer and employee contributions scheduled to go into effect. The fund has maintained the 8% return even considering the down years earlier in this decade. The future might be a little harder to predict in the short run, but there are 18 more years to go to get back to that 8% average.

The Portfolio
The portfolio is a little like a can't be turned around on a dime. It takes time to change positions. And a lot of the assets are managed by firms contracted to work within a certain allocation of the assets. Take WAMCO, for instance, a firm which manages about $570 million of fixed income investments. Much of this part of the portfolio has lost some of its value. Yet, according to a conversation I had with the ERB's Chief Investment Officer Bob Jacksha, the ERB is "not going to force them to sell when the price is low," but rather wait and give those assets time to appreciate again. This, of course, is the same philosophy expressed in the rescue package voted down by Congress yesterday.

The time lag between what the fund currently owns and where it wants to be is expressed by two pie charts on the NMERB web site. Click on the "flash report" for June. Let's look at how the fund hopes to allocate its assets at this time.

Large Cap Domestic Equity 23%
Small Cap Domestic Equity 2%
International Equities 8%
Emerging Markets Equities 10%
International Small Cap 2%
Global Asset Allocation 5%
Real Assets 5%
Absolute Return 10%
Private Equity 10%
Real Estate 5%
Domestic Bonds 15%
Bank Debt 5%

It is interesting to note that the U.S. stock market accounts for only 25% of the fund. International equities are a substantial 20%. The 'Global Asset Allocation' segment sounds like a currency play. 'Real Assets' would seem to be gold and other precious metals. 'Absolute Return' refers to the firm managing the hedge funds used by the ERB. As of last July, Absolute Return Strategies controlled 7 different hedge fund investments totaling $765 million. These are important for managing risk and are one of the reasons for outperforming the overall market. 'Private Equity' of course means capital investments in companies held privately, that is not on public stock exchanges. If the Flying Star wanted to go national, for instance, it might seek investment capital without issuing public stock in the company.

The 'Real Estate' allocation refers to both mortgages and REITS (Real Estate Investment Trusts). The REITS went up about 3% last year. They seem to be located both here and in Europe. The large 'Domestic Bonds' segment not only contains some inflation risks, but business risks as well. The high yield part of the bond allocation went down by 3% last year, but it is a small fraction of the total portfolio. Jacksha told me that mortgage backed securities comprised 2.6% of the total fund. I am not sure what the 5% 'Bank Debt' refers to...but it doesn't sound too good right now.

The Future
My take on the current economic situation is that inflation is going to be a big part of the mix. Estimates that I hear are for around 8% for the next 5 years. It is hard to isolate the dollar from other world currencies, but nevertheless I am glad to see international and global investments totaling about one fourth of the portfolio. The dollar has been going down for a while and it is hard to see it rebounding if we print a few hundred billion more dollars to fix the domestic credit markets. The alternative investments of the fund, such as hedge funds, real assets, real estate, and private equity might help to mitigate some of the downward pressure the markets are feeling. To the downside, these are not as liquid as common stock, so I think they would tend to be longer term investments.

Benefits and the Next Generation
The Educational Retirement Act is a wonderful reason to stay teaching in New Mexico. After 25 years one can retire with almost 60% of the average salary of your five highest earning years. Working longer means even more money.

In her letter addressing the current economic situation, NMERB Executive Director Jan Goodwin states that retirees receive everything they have ever contributed to the program in the first three years. So long and prosper! The ERA, by its very nature, is an intergenerational program, with younger employees paying some of the benefits for today's retired members.

Is It Safe? Really Safe?
Rest easy tonight. Bob Jacksha left me with an important comment, that my retirement benefit is absolutely "guaranteed" by the State of New Mexico. A later conversation with Paul Swanson of the Albuquerque office of the NMERB offered the following, "There is not even a remote thought that the retiree benefits would disappear."

Free Advice
You know what it's generally worth. However, if you don't participate in a retirement program already, start one NOW. Time and money are interchangeable in the world of investing. The earlier you start, the more money on the other end. Pushing back the day you start regularly contributing to a 401K by five years can give you half the money you might have had. Remember the Rule of 72: 72 divided by the annual rate of return gives you the number of years it takes to double your money. So an earnings rate of 15% would mean your money doubles every five years (72/15 = 4.8). And that extra five years might mean the difference between $200K in your account and $400K. So despite the current chaotic financial situation, start now. You won't regret it.

Views: 152

Comment by Brendan on September 30, 2008 at 9:45am
Great write-up Johnny! If you can spare the money, now is an especially good time to start investing. This is particularly true if you're young and won't be retiring for 2 or 3 decades. Prices are down based on fear instead of hard numbers- stocks and funds are undervalued. If you can buy and ignore the roller coaster, you're going to come out much further ahead once things stabilize. And if your employer has a 401k option- jump in even if you don't think you can afford it. Start at 1%. You'll never miss it.
Comment by Carrie on September 30, 2008 at 1:40pm
Great post -- it's nice to see this personalized.
Comment by geofizx on September 30, 2008 at 1:44pm
Thank you, Johnny Mango. I pay into this fund - it was never explained to me what I was paying into by the HR dept where I work.


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