by Bradley Parsons
Staff Writer
After struggling for two years against an eviscerated stock market, City pension plans are once again swelling, fed by the market’s year-long, 2,000-point turnaround
Accompanying a 1,000-point Dow Jones surge since April, the City’s $1.5 billion General Employee Fund returned more than 10 percent for the fiscal year’s second quarter, which closed June 30. During that same period, the Police and Fire Fund was up 12.6 percent. For the year, Police and Fire Administrator John Keane said his fund grew $90 million to its current $800 million.
The City’s general fund invests about 60 percent of its $4.5 billion into the market. The Police and Fire Pension puts about half of its assets there and another 10 percent into international investments. During the new-economy boom of the mid-1990s, record highs on Wall Street led to unprecedented gains for both funds. Keane said his fund earned almost 27 percent in 1995.
Six years later a rash of corporate frauds combined with the Sept. 11 terrorist attacks to strip Dow Jones of nearly 40 percent of its value, taking with it some of the profits built up in both funds. However, a series of rallies in the past year has pushed the Dow back over 9,000 and the funds have responded.
“We’ve taken quite a satisfaction in the recent market recovery,” said Keane. “We stuck to an established investment plan, so we were in position when the market turned around.”
The market’s recent improvements have leveled more than two years of losses for the funds. The Dow plunged from over 11,000 in 2000 to just over 7,000 a year later and the pension funds suffered.
The general fund started fiscal year 2002 with more than $1.4 billion, but lost more than $130 million over the next 12 months. More than two percent of its value disappeared in a haze of corporate scandals and bankruptcies. The police and fire fund fared proportionately worse, following 2 percent losses in 2001 with a 6.8 percent decline in 2002.
As bad as those numbers look, administrators for both funds are quick to point out their relative success. The funds performed better than three quarters of their contemporaries.
To smooth out some of the market’s volatility, both funds spread their assets across a broad range of investments. A weekly graph of the market’s performance often resembles an EKG; spastic jumps up and down representing rapid gains and devastating losses. To mitigate the risk, the fund managers balance relatively safe investments in large, stable companies with more risky start-up ventures primed for growth. Outside the stock market, the funds place money into lower-yield, lower-risk ventures like bonds.
By diversifying its investments, police and fire administrator Richard Cohee said the fund is positioned to take advantage of surges, while softening the effect of losses.
“We like to have a toe in each of these pools; it helps us hold down risk,” said Cohee.
Both funds target an 8.5 percent return on their investments. The recent market gains have restored much of the lost value to each fund and has brought recent returns closer to that number.
For the previous six years, the general fund has returned 6.2 percent. General fund administrator Peter Bellehumeur said that number would climb when July gains were applied. Keane said the recent recovery — if it holds — would wipe out the previous two years’ losses. Over 10 years the police and fire fund is returning 8.2 percent.
Bellehumeur said the 8.5 percent target reflects a 30-year strategy. If the funds are structured and managed correctly, he said losing trends will more than balance out.
Still, the recent losses will take their toll on city workers. To make up for the fund’s recent difficulties, City actuaries have set a 10 percent target rate of return for the upcoming fiscal year. The short-term increase means City workers will have to pay more to bolster the fund.