Crypto Plunge Proves a Cautionary Tale for Public Pension Funds

Retired fire captain Russell Harris expressed his concerns when the Houston Firefighters Relief and Retirement Fund invested $25 million in cryptocurrencies despite the fund’s chief investment officer praising their potential.

The funerals of 34 firemen who died in the line of duty were attended by Harris, 62. After a restructuring by state and local officials decreased payments as they struggled to provide benefits, he was already concerned about his pension. Cryptography wasn’t a solution in his opinion because it was untested.

Harris remarked, “I don’t like it. There are too many pyramid scams out there, and everyone gets caught up in them. That is how I now perceive this coin. Though it’s still fresh and untested, there could be a place for it.

For the few public pension funds that have dabbled in cryptocurrencies over the last several years, the sharp decline in the price of Bitcoin and other cryptocurrencies in recent weeks serves as a sobering lesson. Most people have done so in an indirect manner by using equities or investment funds as proxies for the wider cryptocurrency market. It is impossible to determine if they have gained or lost money, let alone how much, and for the most part fund administrators won’t reveal. This is due to a lack of transparency.

The bigger query raised by the recent crypto crash is whether any amount of cryptocurrency investment is too hazardous for pension funds that provide benefits for teachers, firemen, police, and other public employees in retirement after performing their public duties.

Due to their underfunding, which may be severe, many public pension funds in the United States take risks in an effort to catch up. That doesn’t always work out, and the danger extends not just to the funds but also to taxpayers who may need to bail them out through either increased taxes or money that would otherwise be allocated to other needs.

The National Association of State Retirement Administrators’ research director, Keith Brainard, claimed he was only aware of a small number of public pension funds that have made cryptocurrency investments.

“Public pension funds could adopt cryptocurrencies at some point when they have stabilized, are sufficiently understood, and have grown up as a prospective investment,” said Brainard. Simply said, “I’m not convinced we’re there yet.”

Due to the substantial dangers, the U.S. Department of Labor advises “extreme prudence” while investing in cryptocurrencies. The recent collapse in cryptocurrency values has prompted Washington to examine the rogue sector more carefully. Treasury Secretary Janet Yellen has urged for greater regulation of cryptocurrency projects in the wake of the $40 billion cryptocurrency asset Terra’s collapse. Senators from both parties have also suggested legislation that would regulate cryptocurrency for the first time.

The Houston Firefighters Relief and Retirement Fund only invested a meager $15 million in cryptocurrencies at the time, out of a total portfolio value of $5.5 billion.
How that played out in the year’s market decline for cryptocurrencies is unclear.

Multiple efforts for comment from fund and union representatives went unanswered. However, the fund invested when bitcoin values were almost at their all-time high of around $67,000; since then, they have been falling, falling as low as $20,000 in June.

In a first-quarter report, the fund’s head, Brett Besselman, stated that it was doing well, with an overall rate of return of 33.7 percent in 2021. The 2017 change, according to Houston Mayor Sylvester Turner, is functioning well and has placed his city’s pension funds far ahead of schedule in erasing their outstanding liabilities owing to good returns in 2021.

The experiment conducted by Houston, which fund management hailed as the first publicly disclosed direct acquisition of digital assets by a U.S. pension plan, came after a number of larger but indirect purchases made by two pension funds for the Virginian county of Fairfax. They invested more than $120 million in funds that look for possibilities in the cryptocurrency sector, including blockchain technology, virtual currencies, and derivatives. Similar to Houston, just a small portion of the funds’ $7.2 billion in assets are invested in Virginia.

According to Jeffrey Weiler, executive director of Fairfax County Retirement Systems, the Fairfax County Employees’ Retirement System and the Fairfax County Police Officers Retirement System have invested money in blockchain venture capital funds and a hedge fund since 2018. The hedge fund aims to take advantage of some of the volatility present in the market. He stated that the objective was to invest in the foundational elements of blockchain technology, which management continue to see as a sector with great development potential.

Investments in the cryptocurrency sector aren’t always planned. A portfolio worth around $130 billion is managed by the Minnesota State Board of Investment on behalf of several public employee pension systems and other organizations. According to a recent report, it had tiny holdings as of December 31 in the bitcoin miners Riot Blockchain and Marathon Digital Holdings, whose combined market worth was $5.3 million, as well as the cryptocurrency exchange Coinbase Global. Additionally, it revealed two assets from Coinbase with fixed-income securities with a market value of $2.2 million.

The board invests substantially in stock indexes, therefore such positions were probably bought by an outside investment manager or one of its index funds, according to Mansco Perry, executive director and chief investment officer of the board.

“We don’t own cryptocurrencies, but we most certainly own a firm if it’s significant enough to be in an index,” Perry said.

According to Perry, “it’s not a high priority, but the Minnesota board may look into cryptocurrency-related assets sometime simply to learn about them. We have a long way to go before we decide to move forward with investments, but it doesn’t imply we never will.

The California Public Employees’ Retirement System, or CalPERS, the largest public pension fund in the nation, acquired a small interest in Riot Blockchain in 2017 that increased to nearly $1.9 million by late 2020. It reportedly hit $5.4 million before CalPERS exited sometime in the second quarter of 2021, according to Securities and Exchange Commission filings. It was a small bet in the far over $400 billion portfolio held by CalPERS, according to officials who declined to provide any information.

The State of Wisconsin Investment Board appears to have started testing the waters early last year by purchasing Coinbase, Marathon, and Riot Blockchain, according to SEC filings. By the end of the first quarter of this year, their holdings had increased to at least $19.3 million, out of a total portfolio value of $48.2 billion. Officials from the board did not reply to inquiries for comment.

According to SEC filings, the largest state pension fund for New Jersey began purchasing equities with a connection to cryptocurrencies in the second quarter of 2021. The state had a total of roughly $9.5 million in Coinbase, Riot Blockchain, and Marathon as of the end of March 2022. Officials from the state treasury of New Jersey stated they don’t comment on particular investments.

The Utah Retirement Systems, which had owned a $13.2 million holding in Coinbase but no longer does, is one of the several public funds that have purchased smaller stakes in Coinbase. The Pennsylvania Public School Employees’ Retirement System owned up to $2.6 million worth of Coinbase as of last summer, but after selling the majority of those shares, it had reduced its holding to just $681,000 by the end of the first quarter. It will begin purchasing Marathon in the second half of 2021 for about $398,000.

Given the dangers that firefighters frequently incur, Harris, a former captain of the Houston fire department, said he saw his pension as a contract that should be upheld. He’s generally pleased with how his pension fund has done, but he’s still wary about cryptocurrency. He also emphasizes the fact that most firemen in Houston and many other American cities are not entitled to Social Security benefits.

There are so many folks out there, Harris added, “once they lose their pension it’s over.” “I honestly don’t know how some of these elderly retirees are living,” the speaker said.

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