Tuesday, November 23, 2010

on high risk investments

So in reading the WDUQ snippet on the otherwise boring and esoteric machinations of public finance: 2 Votes move Bond Plan Forward, is a awfully important factoid.  In it there is a mention of the size and scale of the 'illiquid assets' held by the City of Pittsburgh combined municipal pension fund.  The line I note is " some $50 million already in the pension fund in high risk investments that the PMRS did not use in previous calculations".

So we have a $50 million number in the record now.  Progress is progress.

So the pension fund which is as woefully underfunded as a pension fund can be, that is at risk to need all of its remaining cash in the very near future, somehow has roughly a fifth of it's assets invested in what are as kindly as possible characterized as "high risk".   Can anyone think of a justification for that?  Can anyone figure why these assets are not being identified?  Can anyone verify that these $50 million in assets are actually worth $50 million currently?? 

So let's be clear.  High risk and illiquid investments are not only not illegal, they are common enough that the GFOA has guidance on their use in pension fund investments.  So the existance of illiquid assets is not the issue, yet the magnitude of these investments in such a vastly underfunded pension fund is arguably malfeasance and I would be glad to argue the point.  That roughly $50 million of such assets exist in a pension fund holding give or take $270 million is a huge proportion for a fund as distressed as it is. 

The GFOA guidance has what may be the most understated advice for these assets.  Footnote 5 in the previous linked reference is:

Due to the increased risk of misstatement inherent with these investments resulting from incorrect valuation, part of the increased due diligence could be to obtain a reasonable understanding of the procedures that may be applied to them during the independent audit of the financial statements.
There it all is in a nutshell.  "risk of misstatement"...  "incorrect valuation"... anyone have a warm fuzzy that the numbers being cited represent valid valutions of the assets involved?   If you read through to the end you get GFOA's admittedly broad guidance on use of such investments which is that they should: "exercise extreme prudence and appropriate due diligenge."  You can read the document to see the specifics of what that appropriate due dilligence should involve.  Since we have no idea the details, do we know what due dilligence has actually been implemented.

What is a bit scary in the context of all of this.  All I have been able to glean on this personally are some comments made to me that the pension fund has in recent years been bringing down their investments in these high risk, or illiquid, assets. I can neither verify or dispute that. If true,and if it still has $50 million invested this way, then it begs the question of how big big a percentage these high risk investments made up of the pension fund in the past?

and I know I am a broken record..... but will someone please please do a follow up of this story:  City acts to curb further pension losses.  I'll stand on my head if it helps.  Do I need to wander around Downtown aimlessly wearing those big dual placards over my shoulders you used to see folks wearing... Are any of those folks still around?  Problem is that the placards would have to have messages written in tiny type to explain it all.  People would think I was walking around with the Rosetta Stone or something. 


Anonymous Alphabet Soup said...

GFOA - Government Finance Officers Association

Tuesday, November 23, 2010 4:57:00 PM  
Blogger Bram Reichbaum said...

Are you positive this high-risk $50 million is the same animal as the illiquid assets? The illiquidity as it was explained to me was presented as anything BUT "high risk", that being that it merely takes a longer time to bear fruit. If PMRS is suddenly calling them high risk that's a pretty significant rhetorical shift.

Also I was under the impression that the illiquidities HAD been included in their previous calculations, unlike these apparent high-riskies.

You could try using a giant inflatable pig. There wouldn't be any particular connection or pun in this case, but we all missed the Peter Pan reference entirely and that was widely reported.

Tuesday, November 23, 2010 5:12:00 PM  
Blogger C. Briem said...

The point is nobody seems to know, inside or outside of the fence.

But the concept of a low-risk illiquid asset is, if not an oxymoron, a really dumb investment vehicle in any circumstance. Plenty of low risk and fully liquid assets to invest in.. like say a t-bill.

Illiquidity in itself makes most anything into a risky asset by most definitions. Hence the term "liquidty risk".. So I am not sure there has been any change in semantics. I take the verbiage as valid use of synonyms for the most part.

Tuesday, November 23, 2010 5:48:00 PM  

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