Kryptostup is a warning for public pension funds

MEMORY POLICY (AP) – When Houston Firefighters Relief and Retirement Fund bought $ 25 million in cryptocurrencywith the fund’s chief investment officer claiming their potential, retired fire chief Russell Harris was concerned.

Harris, 62, attended the funeral of 34 firefighters who were killed during the service. He was already worried about his pension after an overhaul by state and city authorities cut payments as they struggled with the possibility of paying benefits. He did not see crypto, unproven in his eyes, as an answer.

“I do not like it,” Harris said. “There are too many pyramid schemes that everyone is wrapped up in. That’s how I see this cryptocurrency at this point. … There may be a place for it, but it is still new and no one understands it. “

The fall in prices for Bitcoin and other cryptocurrencies the last few weeks give a warning story for the handful of public pension funds that have dipped their toes into the cryptocurrency pool in recent years. Most have done so indirectly through equities or investment funds that act as proxies for the larger crypto market. Lack of transparency makes it difficult to say whether they have earned or lost money, let alone how much, and for the most part, fund officials will not say so.

But the recent cryptocurrency meltdown has created a bigger question: For pension funds that ensure that teachers, firefighters, police and other public employees receive guaranteed benefits when retiring after public service, is any amount of cryptocurrency investment too risky?

Many government pension funds across the United States are underfunded, sometimes severely, leading to the risk of trying to catch up. It does not always work, and the risk extends not only to the funds, but to taxpayers who may have to save them, either through higher taxes or to divert expenses away from other needs.

Keith Brainard, research director for the National Association of State Retirement Administrators, said he was not aware of more than a handful of public pension funds investing in crypto.

“There may come a day when cryptocurrencies settle down and become sufficiently understood and mature as a potential investment that public pension funds can embrace,” Brainard said. “I’m just not sure we’re there yet.”

The US Department of Labor calls for “extreme care” in crypto investments due to the high risk. The recent drop in crypto prices has led Washington to investigate the freewheel industry more closely. Following the collapse of $ 40 billion in cryptocurrencies known as Terra, senators in both parties have proposed legislation that will regulate crypto for the first time, and Finance Minister Janet Yellen has called for more oversight of cryptocurrencies.

The Houston Firefighters Relief and Retirement Fund’s cryptocurrency investment was not very large – only $ 15 million in what was then a portfolio of $ 5.5 billion.

It is not clear how it turned out in the avalanche in the cryptocurrency market this year. Officials from the fund and the union did not respond to further requests for comment. But the fund bought in when bitcoin prices were near the top of almost $ 67,000, and they have been declining since then, falling below $ 20,000 in June.

The fund’s board chairman, Brett Besselman, said in a report for the first quarter that it was healthy to have an overall return of 33.7% in 2021. Houston Mayor Sylvester Turner said earlier this year that the 2017 overhaul is working well, and thanks to strong returns in 2021, has put the city’s pension fund well ahead of schedule to eliminate their unfunded liabilities.

The Houston experiment, which fund managers were the first to directly announce the purchase of digital assets of a U.S. retirement plan, followed a series of larger but indirect investments from two Fairfax County of Virginia pension funds. They invest over $ 120 million in funds that seek opportunities in the cryptocurrency world, such as blockchain technology, digital tokens and cryptocurrency derivatives. As in Houston, Virginia investments make up a small portion of the funds’ $ 7.2 billion in assets.

Since 2018, Fairfax County Employees ‘Retirement System and Fairfax County Police Officers’ Retirement System have invested in venture capital funds that invest in blockchain and a hedge fund that seeks to leverage some of the volatility inherent in the room, said Jeffrey Weiler, executive. Director of Fairfax County Retirement Systems. He said the goal was to invest in infrastructure that underpins blockchain technology, which leaders continue to see as a high-growth area.

Crypto-related investments are not necessarily conscious. The Minnesota State Board of Investment manages a portfolio worth around $ 130 billion for several government employees’ retirement plans and other entities. A recent report shows that it had small holdings as of December 31 in the crypto exchange Coinbase Global and bitcoin miners Riot Blockchain and Marathon Digital Holdings with a total market value of $ 5.3 million. It also listed two holdings of interest-bearing securities from Coinbase with a market value of $ 2.2 million.

Mansco Perry, the board’s CEO and chief investment officer, said the board invests heavily in equity indices, so these holdings were most likely in one of the index funds or were bought by an external investment manager.

“We do not own cryptocurrency, but if a company is large enough to be in an index, we are more than likely to own it,” Perry said.

The Minnesota board may look at crypto-related investments one day just to learn about them, Perry said, “but that’s not a high priority. … I would say we are nowhere near making an investment decision to go ahead, but that does not mean we will never do it. “

The country’s largest public pension fund, California Public Employees’ Retirement System, known as CalPERS, took a small stake in 2017 in Riot Blockchain which grew to over $ 1.9 million at the end of 2020. Securities and Exchange Commission documents show that it reached $ 5.4 million before CalPERS came out once again in the second quarter 2021. Officials declined to provide details, but it was a small game in CalPERS ‘total portfolio of well over $ 400 billion.

According to SEC records, the state-owned Wisconsin Investment Board apparently began testing the waters early last year with the acquisition of Coinbase, Marathon and Riot Blockchain. These holdings grew to at least $ 19.3 million, against a total portfolio of $ 48.2 billion, at the end of the first quarter of this year. Board officials did not respond to requests for comment.

New Jersey’s main government pension fund appears to have begun investing in some crypto-related stocks in the second quarter of 2021. At the end of March 2022, the state had around $ 9.5 million in combined stake in Coinbase, Riot Blockchain and Marathon. New Jersey officials said they did not comment on specific investments.

Other public funds that have taken smaller stakes include Utah Retirement Systems, which once had a $ 13.2 million stake in Coinbase but no longer has it. The Pennsylvania Public School Employees’ Retirement System had as much as $ 2.6 million in Coinbase last summer, but was down to $ 681,000 at the end of the first quarter, after selling most of its stake, while adding Marathon worth around $ 398 million. $ 000 from the second quarter. half of 2021.

Harris, the retired fire captain in Houston, said he views his retirement as a contract that should be respected, given the risk firefighters routinely take. Although he is generally satisfied with how his pension fund has performed, he is still worried about crypto. He also points out that firefighters in Houston and many other American communities are generally not eligible for Social Security.

“There are just a lot of people out there, if they lose that pension it’s over,” Harris said. “Some of these older retirees, I just do not know how they survive.”

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Associated Press writers Ken Sweet in New York and Geoff Mulvihill in Cherry Hill, New Jersey, contributed to this report.