This is as of the end of FY 2012, but we had a pretty good year in the markets since then, so the total is probably higher.
Do managed investments outperform benchmarks like the S&P? Well, maybe on a risk-adjusted basis, or maybe not. But not on an absolute basis, with strict comparisons. City of Philadelphia Board of Pensions and Retirement: http://www.midatlanticplansponsors.org/City-of-Philadelphia-Board-of-Pensions-and-Retir.html
Hedge funds underperform. According to Matt Taibbi of Rolling Stone: “And underperforming is likely. Even though hedge funds can and sometimes do post incredible numbers in the short-term – Loeb's Third Point notched a 41 percent gain for Rhode Island in 2010; the following year, it earned -0.54 percent. On Wall Street, people are beginning to clue in to the fact – spikes notwithstanding – that over time, hedge funds basically suck. In 2008, Warren Buffett famously placed a million-dollar bet with the heads of a New York hedge fund called Protégé Partners that the S&P 500 index fund – a neutral bet on the entire stock market, in other words – would outperform a portfolio of five hedge funds hand-picked by the geniuses at Protégé. Five years later, Buffett's zero-effort, pin-the-tail-on-the-stock-market portfolio is up 8.69 percent total. Protégé's numbers are comical in comparison; all those superminds came up with a 0.13 percent increase over five long years, meaning Buffett is beating the hedgies by nearly nine points without lifting a finger.” http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926?2013
What does the repeated shutdown of the federal government (closed as of October 1, 2013….again) do to the ratings of Government Securities (Treasuries)? What about the impending debt ceiling October 17? Are Treasuries still really AAA or Aaa? Is anything? S&P downgraded Gov’t debt to AA in August, 2011. Moody’s has an Aaa rating.
Capital Assets are not listed since they cannot be used to fund a public bank. I don’t mean to imply that money could simply be swapped from certain investments into a public bank. However, two of the biggest categories – Treasurer’s Accounts and Restricted Assets – are often highly liquid pools of cash and short-term investments, which could be reinvested elsewhere at will, or through a simple change in the law.
Substitute “City” for “State” and add community banks in between City Bank and City Projects. Don’t forget community banks! In North Dakota, there hasn’t been a bank failure in over 20 years. Nationwide, there have been over 500 bank failures just since 2000 (FDIC). Public Banks support community banks! Which system is more risky?
Banks with low levels of loans to assets, like JPMorgan Chase & Co. (JPM - Free JPMorgan Stock Report), where loans are 31% of assets, have more diversified sources of revenue, including from investment banking and asset management. “It seems likely that larger, mostly out of state, banks were the big loan generators for the oil and gas exploration companies as they ramped up operations in the state; thus the effect on smaller, in-state banks (the BND’s target audience) was minimal.” http://www.valueline.com/Tools/Educational_Articles/Stocks/Getting_To_Know_A_Bank_With_Financial_Ratios.aspx “CSI analysis shows that banks in North Dakota reduced lending 33%-45% less than comparable states, and we believe that this is in no small part due to the stabilizing effects of its state bank.” Center for State Innovation - State Bank Legislative Guide, pg. 59
Does anyone still believe the money center banks are a safe place to store the public’s money? (A show of hands)
From the Office of the Comptroller of the Currency: Just in case you have forgotten what kinds of things the TBTF banks were speculating upon…Note the multi-trillion dollar notional value of derivatives of the top 8 banks trading in that space. Don’t forget to add 6 zeros. Source: Office of the Comptroller of the Currency, 2 qtr, 2012 report: http://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/derivatives-quarterly-report.html The TOTAL size of the Derivatives market? $1.2 Quadrillion: http://www.dailyfinance.com/2010/06/09/risk-quadrillion-derivatives-market-gdp/ Think about this the next time a large commercial bank says there’s no need for a Public Bank because they have “everything under control.” Where do you think the state’s money is safer?
Philadelphia cafr presentation
No More Detroits: The Philadelphia Public Bank
Saturday, October 12 / 8:30 AM
The Arch Street United Methodist Church
50 North Broad St.
Using Existing Government Funding to create a Public Bank in Philadelphia
What is a Comprehensive Annual Financial
It is not the “Budget.”
A "Budget Report" is a selective funding of x accounts from y resources - set up to be primarily funded with
taxation and done for the year.
An ”Comprehensive Annual Financial Report" is the showing of all income: Investment, Taxation, and
Enterprise, plus the accumulated wealth over decades . Budgets are for the year, a CAFR is for it all since
creation of the government entity.
There is a big difference between the two. A correct analogy would be: The annual budget to operate your house vs.
your statement of net worth.
Every Government entity has a CAFR – there are ~184,000* of them,
totaling 10s of trillions of dollars, almost all online.
CAFRs describe the assets of government agencies and pensions.
Note, due to GAAP, and especially due to some recent “standardizing” rule changes, CAFRs tend to project future
liabilities years, even decades, out, while offsetting them only with current assets and revenue projections based on
current receipts. This leads to a false deficit projection. It’s as if you were expected to pay your entire 30-year
mortgage with only the assets you have now and the income you will have based on your current level of income
(…and sometimes not even that!)
* As of 2007: http://cafr1.com
How is money raised for Philadelphia currently, besides taxes and
investments? The city issues Bonds.
Types of City Issued Debt (http://www.phila.gov/investor/Homepage.html)
The debt program managed by the City includes general obligation debt, lease and contract debt
issued by related authorities,* debt of the Water and Sewer and Aviation Departments, and debt
of the Philadelphia Gas Works (PGW). Debt of the Pennsylvania Intergovernmental Cooperation
Authority (PICA), School District of Philadelphia (SDP), and the Philadelphia Parking Authority
(PPA) is managed independently. Types of debt managed by the City include the following:
General Obligation Debt
The City can issue general obligation debt, backed by the full faith, credit and taxing
power of the City, subject to voter approval and subject to adherence to the
Contract and Lease Debt
In addition to general obligation debt, the City issues tax-supported obligations
through the use of its related authorities….
The City oversees the issuance of revenue bonds for the Water and Sewer
Department, the Aviation Department, and Philadelphia Gas Works (PGW).
* Related authorities include 8 separate entities we will discuss later
Philadelphia Bonds, rated by Moody’s, Standard &
Poor’s, and Fitch (page 23):
General Obligation Bonds
Water Revenue Bonds
Aviation Revenue Bonds
The City is subject to a statutory limitation established by the Commonwealth of Pennsylvania as to the
amount of tax supported general obligation debt it may issue. The limitation is equal to 13% of the
average assessed valuations of properties over the past ten years. As of June 30, 2012 the legal
debt limit was $1.622b. There is $1.543b of outstanding tax supported debt leaving a legal debt
margin of $79.8m.
Philadelphia is paying 2% to 5% interest on bonds for credit it could create
itself from a Public Bank that pays the city dividends.
If the city can issue debt (bonds), why can’t it
deposit tax dollars in a public bank?
We are NOT interested in changing fund uses, we are interested in
changing fund investments.
In fact, we are trying to preserve the ability for government
agencies and pensions to cover their expenses in the future.
Can investments in a Public Bank be more:
Prudent and safe?
Able to provide consistent returns?
Supportive of the local community/job-creation?
Note: Although money will be used throughout the year, this usage is
predictable and the remainder can form the deposit base for making loans
from a Public Bank until then. (this is how North Dakota does it with the
Bank of North Dakota).
The real question is: Is this strategy safer and better, for reasons listed
above, than current investment strategies?
Philadelphia CAFR Investment holdings – as of June, 2012
(not including 8 separately reporting agencies)
Breakdown by investment type on CAFR – page 47: (amounts in thousands)
% of Total
U.S. Government Agency Securities
Miscellaneous - Limited Partnership
U.S. Government Securities
Other Bonds and Investments
Short-Term Investment Pools
Collateralized Mortgage Obligations
Certificate of Deposit
Partial Breakdown of Pension Fund Investments. What
kinds of risks are there?
Equity Securities subject to Foreign Currency Risk (in thousands of USD) – page 49
Broker-Dealer Repayment Risk: “Statutes permit the Municipal Pension Fund to lend its
securities to broker-dealers and other entities with a simultaneous agreement to return the
collateral for the same securities in the future. The Pension Fund has contracted with a thirdparty securities lending agent to lend the Pension fund’s securities portfolio. The agent lends
securities of the type on loan at June 30, 2012 for collateral in the form of cash or other
securities at 102% of the loaned securities market value plus accrued interest. The collateral for
the loans is maintained at greater than 100%. Securities on loan as of June 30 are unclassified
with regards to custodial credit risk.” Securities of securities – it’s risk, squared!
What about hedge funds?
Is investing in hedge funds safe and prudent?
Discussion from the minutes of a June 27, 2013 meeting of the Board of Pensions and Retirement Investment Committee (emphasis added):
Agenda Item #2 – Additional Capital Recommendation – Mason Capital Management (the pension's chief investment officer) Mr.
Handa stated that Staff and Cliffwater are recommending additional allocation to Mason Capital, to bring the total allocation up
to $50,000,000. Mr. Handa said they believe it is between $26,000,000 and $27,000,000 million will be added but are not sure
and that is why the recommendation is up to $50,000,000. They have invested with Mason Capital almost four years and the
returns over that period of time have been very good. The performance from 2013 has been extraordinary. The hedge fund has
made money on both sides, long and short. At the end of May they were up 13%. In 2012 they were down when
the market went up.
(Chairman & Director of Finance) Mr. Dubow asked Mr. Handa how they were doing this month.
Mr. Handa said he spoke with Michael Martino on Tuesday. Mr. Martino said they were doing fine and
would not give specific numbers. Over a four year period they’ve done very well for us. Over the last six
plus months the results have been fairly consistent.
Mr. Dubow asked Mr. Handa how does this fit in our asset allocation.
Mr. Dubow wanted to know where the funding would come from.
Mr. Handa said the funding would come from domestic equity, where we are currently over allocated at 28%. Mr. Handa said it
would come from the S & P 500. We have approximately a little fewer than 6.9% of our portfolio in the S & P 500. One of the
reasons why the plan has done well is because of our over allocation to domestic equity.
Mr. Albert made a motion to allocate up to $50 million to Mason Capital. (Trustee) Mr. Stagliano seconded it.
There was no discussion. All were in favor. There were no oppositions or abstentions. The motion passed.
1. Invest in funds based on past performance, even though this is no guarantee of future performance.
Invest in hedge funds that go both long and short, even though most of them never beat the S&P,
and they charge high fees. (During the FY 2012 being discussed, the pension fund returned 12.8%,
while the S&P was up over 20%).
Assent to motions without discussion to remain “team players.” (Groupthink)
Above all, don’t invest in anything that might help the local community!
Swell. I feel safer already, don't you?
From the Philadelphia Inquirer:
Philly Deals: Hedge fund loses money for Pa.*
“A hedge fund based on New York's Park Avenue that
failed to deliver the profits that Pennsylvania's state pension
system had been counting on has decided to cut its losses
and shut down - even after the state begged it to try again.
The Pennsylvania State Employees' Retirement System
(SERS) gave New York-based Tiger Management $250
million in 2012, expecting Tiger's genius investors would
generate 8 to 12 percent annual profits. That would be $20
million to $30 million a year, without the usual up-and-down
volatility of stock investments.
But instead of performing to hype, Tiger's custom-built Tiger Keystone Partners portfolio lost
$1 million in its first year. One of Tiger's managers bet on gold, which fell, more than wiping out
the profits its other managers made from the rising stock market…The system has about $26
billion invested, more than $17 billion short of its target if it is to keep paying all the pensions it
owes. It can't afford losses.”
Tiger lost money in a year (2012) when the S&P rose by 13%. Most S&P index funds charge <0.2%
What about the safest kinds of investments?
Breakdown of Non-Pension City Fund Investments
City investments in U.S. Government Securities or Corporate Bonds
<1 year: $ 159,819
1-3 years: $1,705,906
“The City’s policy to limit credit risks is to invest in US Government securities
(11.26%) or US Government Agency obligations (13.50%). The US Government
Agency obligations must be rated AAA by Standard & Poor’s Corp or Aaa by
Moody’s Investor Services.” – page 48
Question: Could an investment of some of these funds in a Public Bank meet the
city’s ratings policy for safety?
Standard & Poor's (S&P) maintained Bank of North Dakota's (BND) credit ratings in its latest
review of the Bank released July 23, 2013. Its long-term issuer credit rating remained "AA-"
and its short-term issuer credit rating to "A-1+” http://banknd.nd.gov/financials_and_compliance/credit_rating.html
Proper risk analysis should include more than that for the BND and should account for the
community banks. North Dakota has not had a bank failure in over 20 years, while
nationwide, there have been 517 through the end of Sept, 2013, since 2000, says the cashstrapped FDIC which has to pick up the pieces:
The 2012 Philadelphia CAFR lists 8 Philadelphia Agencies With
Separate Investment Portfolios, reported apart from the financial
information presented for the primary government (page 12), in
thousands (page 36):
Total assets, excluding
Philadelphia Gas Works
Philadelphia Redevelopment Authority
Philadelphia Parking Authority
School District of Philadelphia
Community College of Philadelphia
Community Behavioral Health, Inc.
Delaware River Waterfront Corporation
Philadelphia Authority for Industrial Development
Additional Investment Sources in CAFR 2012
In thousands. Capital Assets not listed
Governmental Funds - Page 26
Governmental Activities & Business Type
Cash on Deposit and on Hand
8 Agency Component
Equity in Treasurer's Account
Due from Primary Government
Amounts Held by Fiscal Agent
Deferred Outflow - Derivative Instruments
Restricted Assets: Cash and Cash Equivalents
Restricted Assets: Other Assets
Equity in Pooled Cash and Investments
Due from Component Units
Notes Receivable - Net
Accounts Receivable - Net
Interest and Dividends Receivable
Due from Other Governments - Net
Total of Governmental Activities & Business Type Activities + Component Units = $5,500,161
Additional Investment Pools in CAFR 2012 (continued)
In thousands - Capital Assets not listed
Enterprise Funds: Water & Sewer, Aviation, Industrial & Commercial Development – page 31
Current Assets (includes $195,634 in Equity in Treasurer’s Account)
Deferred Outflow – Derivative Instruments, Non-Current Assets (Restricted) (includes
$862,766 in Treasurer’s Account)
Non-major governmental fund (Combined) – page 123
Debt Service, Capital Improvement, Permanent Funds Total
Combining Statement of Fiduciary Assets - Page 126
Gas Works Retirement Reserve Fund Total
Municipal Pension Fund Total
Enterprise Funds + Non-major Gov. Fund + Combining Statement of Fiduciary Net Assets: $6,9 41,785
Gov’t Activities/Business Type Activities + Component Units (previous page): $5,500,161
Grand Total of Governmental/Bus Activities, Enterprise Funds, and Fiduciary Assets: $12,441,946
Note: Asset classes have various restrictions, penalties, and other factors affecting reallocation
strategies using a Public Bank. What are these and how easy is it to change them?
Management fees for pension
Standard fund management fees – there are >100 investment managers
paid by the pension board! Are there too many cooks?
Broker fees or trading costs
Reporting fees to JP Morgan for “City of Philadelphia Municipal Pension
Fund Excess Return Report” that lists pension fund returns.
What other fees are there? Hedge fund 2 and 20? – 2% for “showing
up” and 20% of any profits? Fund expenses? Fees states pay for
withdrawing from certain hedge funds?
A typical Megabank like
JP Morgan has just a
31% Loan to Asset
ratio – less than ½ of
what ND’s community
banks have. Large
banks don’t make many
Learning from the example of the Bank of
Standard & Poor's (S&P) maintained Bank of North Dakota's (BND) credit ratings in its latest
review of the Bank released July 23, 2013. Its long-term issuer credit rating remained
"AA-" and its short-term issuer credit rating to "A-1+” http://banknd.nd.gov/financials_and_compliance/credit_rating.html
Proper risk analysis should include more than that for the Public Bank itself.
North Dakota has not had a bank failure in over 20 years, while there have been 517 bank
failures through the end of Sept, 2013 nationwide since 2000, says the cash-strapped FDIC
which has to pick up the pieces: http://www.fdic.gov/bank/individual/failed/banklist.html
What about “key man” risk? What is the risk of key executives leaving and what does that
portend for the safety of the bank? Maybe this is an over-rated fear. While Jamie Dimon
makes millions running JP Morgan Chase, the president of the Bank of North Dakota – a
Civil Servant - makes less than $300 thousand a year. Which is the safer, better-run bank?
Well, JP Morgan recently paid over a billion dollars in fines related to multiple government
agency Civil violations (not criminal…so far). The BND has never been found guilty of
securities or bank fraud.
What are we paying for?
Other Municipalities are Investigating
alternate CAFR Investment strategies
Detroit, MI and Stockton, CA are in bankruptcy
proceedings. Funding and outlays from pensions and
agencies will be cut, yet their CAFRs contain billions.
See Detroit is Not Broke:
22 States* are considering some form of State
Banking Legislation – and many municipalities are too.
Many of these proposals look to fund a Public Bank
with CAFR funds.
By law, all taxes from North Dakota and the
Chickasaw Indian Nation Banc2 in Oklahoma, go first
to the Public Banks.
Existing Public Banks in Green:
North Dakota: Bank of North Dakota
Oklahoma: Chickasaw-owned Bank2 of Oklahoma City.
Is it a better fiscal solution for Philadelphia to reallocate some CAFR Funds into a
* http://www.nytimes.com/roomfordebate/2013/10/01/should-states-operate-public-banks/many-states-see-the-potential-of-publicbanking - citing National Conference of State Legislatures
The biggest banks are
now even bigger than
Are they still Too Big To
Fail…or will they actually
Fail next time?
The operations of the TBTF
banks have been compared to
a Casino, but this is unfair…to
Casinos! In a Casino, you have
consistent rules, and if you go
bust, you don’t get bailed out,
you get thrown out.