Home Enterprise holdings Crypto’s plunge is a cautionary tale for public pension funds

Crypto’s plunge is a cautionary tale for public pension funds


MINNEAPOLIS (AP) — When the Houston Firefighters Relief and Retirement Fund bought $25 million in cryptocurrencies, the fund’s chief investment officer touting their potential, retired firefighter captain Russell Harris was worried.

Harris, 62, attended the funerals of 34 firefighters killed in the line of duty. He was already worried about his pension after an overhaul by state and city officials slashed payments as they struggled with the ability to pay benefits. He didn’t see crypto, unproven in his eyes, as an answer.

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

The plummeting prices of Bitcoin and other cryptocurrencies over the past few weeks provide a cautionary tale for the handful of public pension funds that have dipped their toes into the crypto pool over the past few years. Most have done so indirectly through stocks or investment funds that serve as a proxy for the larger crypto market. A lack of transparency makes it difficult to tell whether they have made or lost money, let alone how much, and for the most part, fund officials won’t tell.

But the recent crypto crisis has raised a larger question: For pension funds that ensure teachers, firefighters, police and other civil servants receive guaranteed benefits upon retirement from public service, an amount of is investing in crypto too risky?

Many public pension funds across the United States are underfunded, sometimes severely, causing them to take risks to try to catch up. It doesn’t always work, and the risk extends not just to the funds, but to the taxpayers who might have to bail them out, either by raising taxes or diverting spending from other needs.

Keith Brainard, director of research for the National Association of State Retirement Administrators, said he was unaware of more than a handful of public pension funds that have invested in crypto.

“There may come a day when crypto settles down and is well understood and mature as a potential investment that public pension funds could embrace,” Brainard said. “I’m just not sure we’re there yet.”

The US Department of Labor recommends “extreme caution” in crypto investments due to the high risks. The recent fall in crypto prices has caused Washington to take a closer look at the freewheeling industry. After the collapse of a $40 billion crypto asset known as Terra, senators from both parties proposed legislation that would regulate crypto for the first time, and Treasury Secretary Janet Yellen called for a greater scrutiny of crypto companies.

The Houston Firefighters Relief and Retirement Fund’s cryptocurrency investment wasn’t huge — just $25 million in what was then a $5.5 billion portfolio.

It is unclear how this has played out in the slide of the cryptocurrency market this year. Fund and union officials did not respond to multiple requests for comment. But the fund bought when bitcoin prices were near their high of nearly $67,000, and they’ve been falling ever since, dipping below $20,000 in June.

The fund’s chairman, Brett Besselman, said in a first quarter report that he was in good shape with an overall rate of return of 33.7% in 2021. Houston Mayor Sylvester Turner said earlier this year that the 2017 revamp worked well and, thanks to a strong return in 2021, put his city’s pension funds well ahead of schedule to eliminate their unfunded liabilities.

The Houston experiment, which fund managers billed as the first announced direct purchase of digital assets by a US pension plan, followed a series of larger but indirect investments by two pension funds for the county of Fairfax, Virginia. They have invested over $120 million in funds that seek opportunities in the crypto world, such as blockchain technology, digital tokens, and cryptocurrency derivatives. As in Houston, Virginia’s investments represent only a tiny fraction of the fund’s $7.2 billion in assets.

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

Crypto-related investments are not necessarily deliberate. The Minnesota State Board of Investment manages a portfolio of approximately $130 billion for several public employee retirement plans and other entities. A recent report shows he held small stakes as of December 31 in crypto exchange Coinbase Global and bitcoin miners Riot Blockchain and Marathon Digital Holdings with a combined market value of $5.3 million. It also listed two Coinbase fixed income holdings with a market value of $2.2 million.

Mansco Perry, the board’s chief executive and chief investment officer, said the board invests heavily in equity indices, so those holdings were most likely in one of its index funds or were purchased by an outside investment manager. .

“We don’t own cryptocurrency, but if a company is big enough to be in an index, we more than likely own it,” Perry said.

Minnesota’s board of directors may one day look at crypto-related investments just to learn more about them, Perry said, “but that’s not a high priority. … I would say we’re way off to make an investment decision to move forward, but that doesn’t mean we never will.

The nation’s largest public pension fund, California Public Employees Retirement System, known as CalPERS, took a small stake in Riot Blockchain in 2017 that reached over $1.9 million at the end of the year. end of 2020. Securities and Exchange Commission filings show it hit $5.4 million before CalPERS was released during the second quarter of 2021. Officials declined to elaborate, but it was a tiny play in CalPERS’ total portfolio of well over $400 billion.

According to SEC filings, the Wisconsin State Board of Investment apparently began testing the waters early last year with purchases of Coinbase, Marathon, and Riot Blockchain. Those holdings grew to at least $19.3 million, from a total portfolio of $48.2 billion, at the end of the first quarter of this year. Council officials did not respond to requests for comment.

Based on SEC filings, New Jersey’s main state pension fund appears to have started investing in certain crypto-related stocks in the second quarter of 2021. As of late March 2022, the State held approximately $9.5 million in combined holdings in Coinbase, Riot Blockchain and Marathon. New Jersey state treasury officials said they were not commenting on specific investments.

Other public funds that have taken smaller stakes include Utah Retirement Systems, which once held a $13.2 million stake in Coinbase but no longer does. The Pennsylvania Public Schools Employee Retirement System held up to $2.6 million of Coinbase last summer, but had fallen to $681,000 by the end of the first quarter, after selling most of its participation, while adding approximately $398,000 from Marathon starting in the second half of 2021.

Harris, the retired Houston Fire Captain, said he views his pension as a contract that should be honored, given the risks firefighters routinely take. Although he is generally happy with the performance of his pension fund, he is still worried about crypto. He also points out that firefighters in Houston and many other US communities are generally not eligible for Social Security.

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


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