NYC Pension Funds Eye Infrastructure Investment

From Bond Buyer:

New York City Comptroller William Thompson Jr. is looking at infrastructure as an investment for the city’s pension funds, he said yesterday. “Such an investment could help further diversify our portfolio and fulfill our fiduciary goals in terms of return on investment, while addressing the urgent need to repair and expand our roads, bridges, power plants, and schools,” Thompson said at a breakfast forum in Manhattan sponsored by Crain’s New York Business. Thompson oversees five pension funds for city employees with assets of approximately $105 billion. He said he is in discussions with the pensions’ trustees about the idea. “There is real money in infrastructure,” he said. “It’s one of those instances where looking at it as fiduciaries we believe it will generate a real return for our pension funds.” The comptroller’s office has yet to develop a comprehensive strategy for infrastructure investments and does not yet have a timeline for investment or a target amount that it would invest. A decision has not been made whether the investment would include public-private partnerships. The pension funds would probably not invest directly in specific projects or in municipal bonds but in infrastructure funds that invest in projects in the city, state, and the whole country, Thompson said.

This is a key point that merits further elaboration. Pension funds are not going to be very interested in investing in traditional projects that involve traditional tax-exempt municipal financing, as my colleague Bob discussed here:

When state-owned toll roads, water systems, seaports, and airports seek investment capital, they cannot go to the equity markets-because they are 100% government-owned. As for the debt markets, they can and do issue revenue bonds, but those bonds are almost always tax-exempt bonds. And if a pension fund is already tax-exempt (as are all public employee pension funds), there is no point in them investing in tax-exempt debt, since they don’t pay taxes in the first place. By purchasing a tax-exempt bond, the pension fund would be getting a lower rate of interest than it would from a taxable bond of comparable risk level. And that is contrary to its fiduciary duty to its pensioners.

Further, as Thompson confirms, by and large pension funds are going to be less interested in becoming equity players at the project level, and more interested in investing in infrastructure investment funds which are in turn investing in a bundle of projects of differing risk levels, different infrastructure classes, different time horizons, different rates of return, etc. The analogy in personal finance would be investing in mutual funds to capture a broad market segment instead of purchasing individual stocks. By investing in diversified funds that manage risk, pension funds capture the upside of steady, predictable returns while avoiding overexposure on individual projects. This issue came up recently in Texas when PPP-averse state legislators pitched the idea of having state public pension funds invest directly in toll roads and other infrastructure projects. The idea was clearly to have “Texas public employees investing in Texas infrastructure,” which is a convenient populist theme but completely unrealistic given the discussion above. I’d expect the funds would indeed be interested in investing in infrastructure, but their fiduciary responsibility to their investors dictates that they’d remain agnostic on where the infrastructure project is located. Rather, they’d want to invest in a bundle of good projects managed by an infrastructure fund. The logic is simple. Infrastructure funds give pension funds a vehicle to maximize returns on investment, gain exposure to a diverse asset portfolio, and mitigate risk. Those infra funds don’t care where a project is located, just that it’s solid project worth investing in. So the “Texans investing in Texas” argument doesn’t hold water. If Texas legislators really wanted to ensure an opportunity for public pension dollars to flow to state projects, they’d stop thwarting public-private partnerships and get back to encouraging private investment in infrastructure projects. If you had a flow of PPP projects to invest in, the infrastructure funds would be tripping over themselves to compete for projects, and any of their pension fund investors would stand to benefit by default. Back to the Bond Buyer piece, Thompson lends tacit encouragement to PPPs:

Thompson also said the city should consider public-private partnerships to meet its infrastructure needs but said that at the moment it is focused on the investment side of things rather than looking at assets the city could privatize. New York Gov. David Paterson formed a task force last month to study public-private partnerships, including the possibility of a P3 to finance the construction of a new $16 billion Tappan Zee Bridge. The state’s needs are vast. New York’s transportation assets alone need $175 billion of investment over 20 years, transportation commissioner Astrid Glynn said last year.

IMO, Gov. Paterson’s on the right track—see my recent NY Post op-ed on Paterson’s PPP task force here. Reason’s Annual Privatization Report 2008 Reason’s Transportation Research and Commentary