In the Wall Street Journal this week, Andrew Biggs of the American Enterprise Institute argued that state pension funds are violating basic rules of investing by placing too much of their investments in highly-risky investments. The article, “Public Pensions Need Gamblers Anonymous” noted that New Mexico’s pension system was the worst offender in the nation with fully 85% of its money invested in “risky assets.” According to the article:
Many individuals follow a rough “100 minus your age” rule to determine how much risk to take with their retirement savings. A 25-year-old might put 75% of his savings in stocks or other risky assets, the remaining 25% in bonds and other safer investments. A 45-year-old would hold 55% in stocks, and a 65-year-old 35%. Individuals take this risk knowing that the end balance of their IRA or 401(k) account will vary with market returns.
Now consider the California Public Employees’ Retirement System (Calpers), the largest U.S. public plan and a trendsetter for others. The typical participant is around age 62, so a “100 minus age” rule would recommend that Calpers hold about 38% risky assets. In reality, Calpers holds about 75% of its portfolio in stocks and other risky assets, such as real estate, private equity and, until recently, hedge funds, despite offering benefits that, unlike IRAs or 401(k)s, it guarantees against market risk. Most other states are little different: Illinois holds 75% in risky assets; the Texas teachers’ plan holds 81%; the New York state and local plan 72%; Pennsylvania 82%; New Mexico 85%.
In another unfortunate bit of news for the Land of Enchantment, the website 24/7 Wall Street ranked New Mexico the “2nd-worst-run state in America.”
As the site noted:
New Mexico struggles with poverty and low incomes. Nearly 22% of New Mexico residents lived in poverty last year, the second highest rate after Mississippi. A typical household in New Mexico earned less than $44,000 in 2013, below all but a handful of states. The state’s crime rate was also higher than in all but one other state, with 613 violent crimes reported per 100,000 residents in 2013. Like several other states at the bottom of the list, people left New Mexico faster than they moved into the state. Between the middle of 2010 and July 2013, the state lost 9,750 residents to migration alone. S&P recently revised its outlook on New Mexico’s credit rating to negative from stable. The revision was based on New Mexico’s weak economic recovery from the recession and over-reliance on government aid and the energy sector.
Notably, as this article points out, most of the worst-run states (including New Mexico) happen to be governed by liberal policymakers.
Clearly, New Mexico’s elected leaders face some very thorny issues. The question is whether policymakers in Santa Fe, specifically in New Mexico’s Democratically-controlled Senate, make needed changes or follow the status-quo path to failure?
HT: Charles Sullivan