Crypto fall is a cautionary tale for public pension funds

MINNEAPOLIS (AP) — When the Houston Firefighters’ Benevolent Fund bought $25 million in cryptocurrenciesretired firefighter Captain Russell Harris was concerned as the fund’s chief investment officer voiced his potential.

Harris, 62, attended the funeral of 34 firefighters killed in the line of duty. He was already worried about his pension after an overhaul by state and city officials because they were grappling with his ability to pay benefits. He did not see unproven crypto in his eyes as an answer.

“I don’t like it,” Harris said. “There are so many pyramid schemes that everyone turns into. This is how I see this cryptocurrency right now. … It may have a place, but it’s new and no one understands it.”

Fall in Bitcoin and other cryptocurrencies prices provides a cautionary tale of recent weeks For the handful of public pension funds that have dipped their fingers into the crypto pool over the past few years. Most have done so indirectly through equities or mutual funds that serve as proxies. for the larger crypto market. The lack of transparency makes it difficult to say how much money they’ve made or lost, let alone how much money they’ve made, and often fund officials don’t say so.

But the recent crypto meltdown has raised a bigger question: Is investing in any amount of crypto too risky for pension funds that enable teachers, firefighters, police and other public employees to receive guaranteed benefits in retirement after public service?

Many public pension funds in the US are sometimes severely underfunded, leading them to take risks to try and catch up. This doesn’t always work, and the risk involves not just funds, but taxpayers who may have to bail them out through higher taxes or by diverting spending from other needs.

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

“There may come a day when cryptos are established and sufficiently understood and matured as a potential investment that public pension funds can embrace them,” Brainard said. “I’m not sure we’re there yet.”

US Department of Labor calls for “extreme diligence” in crypto investments due to high risks. The recent drop in crypto prices has caused Washington to scrutinize the free roaming industry more closely. After the collapse of the $40 billion crypto asset known as Terra, senators on both sides have proposed a law to regulate crypto for the first time, and Treasury Secretary Janet Yellen has called for greater oversight of crypto startups.

Houston Firefighters’ Relief and Pension Fund’s cryptocurrency investment wasn’t huge—just $15 million on a $5.5 billion portfolio at the time.

It is unclear how this turned out on the cryptocurrency market slide. this year. Fund and union officials did not respond to multiple requests for comment. But the fund was bought when bitcoin prices neared their peak of around $67,000 and has been on the decline ever since, dropping below $20,000 in June..

The fund’s chairman, Brett Besselman, said in its first-quarter report that it is healthy, with an overall rate of return of 33.7% in 2021. Houston Mayor Sylvester Turner earlier this year said the 2017 revision worked well, and the strong 2021 returns put his city’s pension funds well ahead of schedule to eliminate unfunded liabilities.

Houston’s experiment, which fund managers touted as the first to disclose the direct purchase of digital assets by a US pension scheme, followed a series of larger but indirect investments by two pension funds for the Fairfax County of Virginia. They have invested over $120 million in funds seeking opportunities in the crypto world, such as blockchain technology, digital tokens, and cryptocurrency derivatives. As with Houston, Virginia investments make up a tiny fraction of the funds’ $7.2 billion in assets.

Since 2018, the Fairfax County Employee 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 exploit some of the inherent volatility of the space, said manager Jeffrey Weiler. Director of Fairfax County Retirement Systems. He said the goal is to invest in the infrastructure underlying blockchain technology, which executives continue to see as a high-growth area.

Crypto-related investments are not necessarily intentional. The Minnesota State Investment Board manages a portfolio of approximately $130 billion for several government employee retirement plans and other organizations. A recent report shows that he owns small stakes in crypto exchange Coinbase Global as of December 31. and bitcoin miners Riot Blockchain and Marathon Digital Holdings, with a combined market capitalization of $5.3 million. It also listed two fixed income securities with a market cap of $2.2 million from Coinbase.

Mansco Perry, the board’s executive director and chief investment officer, said the board is heavily invested in stock indices, so these assets are likely in one of the index funds or acquired by a foreign investment manager.

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

The Minnesota board may one day look into crypto-related investments just to learn about them, Perry said, “but that’s not a high priority. … I would say we are not close to making an investment decision to move forward, but that doesn’t mean we never will be.”

The California Public Employees Pension System, the nation’s largest public pension fund, The company, known as CalPERS, acquired a small stake in Riot Blockchain in 2017 for more than $1.9 million at the end of 2020. Securities and Exchange Commission filings show that CalPERS reached $5.4 million before exiting in the second quarter of 2021. Authorities declined to provide details. , however, was a minor play in CalPERS’ total portfolio of over $400 billion.

According to SEC filings, the Wisconsin State Investment Board apparently started testing the waters with its Coinbase, Marathon, and Riot Blockchain acquisitions earlier last year. These holdings had grown 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 state pension fund appears to have started investing in some crypto-related stocks in the second quarter of 2021 from SEC filings. As of the end of March 2022, the state’s Coinbase, Riot Blockchain and Marathon. New Jersey state treasury officials said they did not comment on specific investments.

Other public funds that have bought smaller shares include Utah Pension Systems, which once owned $13.2 million in shares in Coinbase but no longer has it. The Pennsylvania Public School Employees Retirement System had $2.6 million worth of Coinbase last summer, but dropped to $681,000 at the end of the first quarter after selling most of its shares, adding about $398,000 worth of Marathon starting in the second. Half of 2021.

Harris, retired fire captain from Houston, said he sees the pension as a contract that should be honored given the risks firefighters routinely take. While he is generally happy with the pension fund’s performance, he is still uneasy about crypto. He also points out that firefighters in Houston and many other U.S. communities generally do not qualify for Social Security.

“There’s a lot of people out there, if they lose their pension, it’s over,” Harris said. “Some of these old retirees, I don’t know how they survived.”


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

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