Building highways with public pensions

As of 2010, the State of Texas had a public pension liability of $163,417,834,000.  Approximately 83% of this total liability has been funded (See The Widening Gap Update by The Pew Center on the States that was recently released June 2012).  Texas is in much better shape than most states as we enter the Era of Pension Tension.  In fiscal year 2010, the gap between states' assets and their obligations for public sector retirement benefits was $1.38 trillion, up nearly 9% for fiscal year 2009.  Of that figure, $757 billion was for pension promises, and $627 billion was for retiree health care.

What if you could combine potential fixes for problems in the Era of Pension Tension with additional funding for the Era of Infrastructure Renewal?  In short, you would require public pension funds to invest a set amount of their portfolios in public-private partnerships for infrastructure projects.  What if 10% of the Texas public pension liability was mandated for investments in highway public-private partnership projects?  You could recycle public funds back into the infrastructure matrix.

This is basically one of the ideas put forth in the excellent Infrastructure 2012 - A Spotlight on Leadership by the Urban Land Institute and Ernst & Young.  The infrastructure funding crunch arrives at a critically difficult time for the United States.  It is the time when our obligations to pay for the past have run into our desires to invest in the infrastructure matrix.  As outlined in the report, under the sub-heading "Pension Plan Sponsors" - -

"Pension funds have been "slow to get their act together - still only one-half of 1 percent of their total assets' get allocated to infrastructure, but that could change, especially among public plan sponsors.  Infrastructure's modest but steady investment  yields can appeal to pension funds interested in reliable income returns to match their long-terms liabilities.  Governors and mayors, meanwhile, hold more conversations with public fund officials about investing in infrastructure projects, which could produce jobs for their future beneficiaries and lift local economies.


On balance "It's gotten easier to raise money from pension funds, but there are headwinds," say fund managers, "and despite growing allocations, commitments, and interest, the pace of growth isn't as high as the need."  Investors look for low volatility, predictable investment returns that meed actuarial rates of return in the 7 to 8 percent range, or inflation-adjusted returns plus 4 to 5 percent, which infrastructure can provide.  But they remain concerned and distracted about "putting out fires in various portfolios," whether investment in Europe is safe, and "political partisanship in the U.S.," which stifles problem solving.  The absence of available debt also steals away any change to leverage up returns.  "Overall uncertainty offsets general enthusiasm for asset class."


For the United States, "a great deal of capital remains interested - all it will take is the government becoming more constructive in approaching procurement of private capital and PPPs."  The ideal contribution for there risk-adverse investors is a franchise with an identifiable long-term income stream, backed by government support through availability payments or guarantees, and a strong private operating partner.  So far, investment activity has been relatively "minuscule."