Pensions' prospects have somehow deteriorated further in the small space of just one week. The news that a hedge fund billionaire is to depart New Jersey for Florida's fetching shores has NJ state officials scrambling. Less than one percent of the Garden State's taxpayers account for one-third of its personal income taxes, which in turn comprise 40 percent of the state's revenues. Bloomberg's estimates suggest a one-percent forecasting error can equate to a $140 million gap. That's saying something considering New Jersey's pension is the most underfunded in the nation.
Is it any wonder those fences at which pension managers are batting just keep getting taller? Lucky for them, so too do the buildings backed by private equity real estate funds to which they are flocking hoping to cover those widening gaps. Or at least that's the working assumption guiding portfolio allocators whose challenges continue to mount.
Consider the fact that, on a non-seasonally-adjusted basis, the city of Seattle has seen its jobless rate increase by more than one percentage point since imposing a $15 minimum wage last April. That experience suggests that, all good intentions aside, the laws of economics cannot be repealed. It follows that entire states that impose higher minimum wages should be prepared for the future shrinkage of their own tax bases as not just billionaires, but entire companies, flee for less expensive states in which to conduct business.
Managers tasked with finding uncorrelated asset classes to protect pensions could well be forgetting one of the first things they learned back in business school - that an asset class flooded by the masses loses its ability to diversify a portfolio. It happened in commodities. Who is to say the same fate doesn't await real estate?
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