JOI: There’s been a lot of talk about different municipalities filing for bankruptcy, and it looks like it’s happening more often. Does this affect the way you do your job, or what your concerns are when you’re thinking about meeting your goals and how the portfolio is invested?
Shah: We think of it in terms of risk factors: Every investment has its inherent risk. But we do believe that it’s part of the risk we expect our fixed-income managers to take into account. In our reviews with the managers, nothing major has come up as a discussion point as far as a poor performance attributed to some bankruptcy. We believe it’s being properly managed, and it’s a risk factor we expect to be accounted for.
JOI: How do you interpret Warren Buffett’s recent decision to stop insuring several billion dollars’ worth of municipal debt? Does that seem like a bearish or a bullish move as far as municipalities are concerned?
Shah: I’m not really changing anything in the portfolio based on that. I didn’t think in terms of compartmentalizing it as a bullish/bearish move. Our active managers may use that information and work on the portfolio slightly differently within their investment guidelines. It’s really the macro environment you have to keep an eye on.
JOI: IMRF is well-funded, especially compared with some other Illinois pension funds. Can you talk about how your strategies or how your structure may have made that possible?
Shah: Our members and employers have contributed the required contributions when they were due, and I think there’s no substitute for that. If you don’t pay your bills today, it’s just more expensive tomorrow. And if you look across the country, the public pension plans that are in stronger positions are the ones that are getting their contributions on an annual basis. I came from New York State Teachers before I joined IMRF, and they are also in a similar position with strong funding for that very reason.
Why is that important? It comes back to the investment program itself. You asked earlier if we had to change our allocation in a major way in recent years. No. If you’re in a strong funding position, you can then be thoughtful about your strategic plan and your asset allocations, and spend time executing on that plan, the strategies, all that work that’s involved in managing a portfolio. You can spend all your energy doing that. I think that a strong investment program, without the foundation of strong funding, is hard to execute.
If you’re not getting that contribution, that means you’re basically borrowing from the fund to pay a payment, and the fund is short. Now you have less to invest, because the fund is smaller. You have to have a much higher return than your actuarial rate of return because you have a smaller base than what you should have had. It just compounds that problem.
JOI: If by some chance, IMRF becomes underfunded, how would the difference be made up?
Shah: Every employer has a unique contribution rate. Every employer has their own separate account, so we know what their assets and liabilities are. Our actuaries calculate what they need to contribute, and then IMRF collects the payment from the employers. Our employees also contribute a fixed percentage of their pay each month to help cover the cost of their benefit.
The way a defined benefit pension works is when someone retires, we have every single dollar we need to pay that person their benefits for the rest of their life. We also have a separate reserve for retired members, and that’s always 100 percent funded. That’s sort of unique to IMRF.