News that public state pension funds are $1 trillion short infunding expected retiree benefits should be rattling everyone andcome as no surprise. As they increased real estate allocationtargets to 10% or more of their total asset portfolios, many statefunds invested with wild abandon in real estate opportunity fundsand private equity accounts in vain attempts to boost returns andfill burgeoning gaps-only exacerbating their liability problem inthe ongoing crash.
In raising real estate allocations, public plan sponsors andtheir consultants rationally had talked up the benefits ofinvesting in real estate for income plus returns, which matchednicely with future retiree payouts. But instead of concentrating incore real estate, they ramped up investments in riskier value-add,opportunistic, and global funds with a keen eye on bigger paybacks.And these higher risk strategies were largely based on using moreleverage to boost returns, not part of the traditional plan sponsorconservative playbook.
Of course, real estate is just a small part of the publicpension fund crisis. Essentially, the system is untenable. Publicemployees can´t work for just 20 or 25 years and retire in their40s on full pensions without eventually bankrupting state and localgovernments. Well eventually has arrived.
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