The crypto slump is a cautionary tale for public pension funds

MINNEAPOLIS (AP) — When the Houston Firefighters Relief and Retirement Fund bought $25 million worth of cryptocurrencies and the fund’s chief investment officer pointed to their potential, retired fire chief Russell Harris was concerned.

Harris, 62, has attended the funerals of 34 firefighters killed on duty. He was already worried about his pension after state and city officials cut payments as they grappled with the ability to pay out benefits. He didn’t see what he saw as unproven crypto as an answer.

“I don’t like that,” Harris said. “There are too many pyramid schemes that everyone gets sucked into. This is how I currently see this cryptocurrency. … There might be a place for it, but it’s new and nobody understands it.”

The tumble for bitcoin and other cryptocurrencies over the past few weeks is a cautionary tale for the handful of public pension funds that have dipped their toes in the crypto pool in recent years. Most have done so indirectly through stocks or mutual funds that serve as proxies for the larger crypto market. A lack of transparency makes it difficult to say if they’ve made or lost money, let alone how much, and for the most part fund officials say nothing.

But the recent crypto meltdown has raised a bigger question: For pension funds, which ensure that teachers, firefighters, police officers, and other public workers receive guaranteed post-public-service retirement benefits, is a lot of crypto investing too risky?

Many public pension funds in the US are severely underfunded, leading them to take risks to catch up. That doesn’t always work, and the risk extends not only to the funds, but also to taxpayers, who may have to bail them out, either through higher taxes or diverting spending from other needs.

Keith Brainard, research director for the National Association of State Retirement Administrators, said he wasn’t aware that more than a handful of public pension funds had invested in crypto.

“There may come a day when crypto settles down and is properly understood and matured 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 warns of “extreme caution” with crypto investments because of the high risks. The recent plunge in crypto prices has prompted Washington to take a closer look at the freewheeling industry. After the collapse of $40 billion crypto asset Terra, senators from both parties have proposed legislation that would regulate crypto for the first time, and Treasury Secretary Janet Yellen has called for increased oversight of crypto ventures.

The Houston Firefighters Relief and Retirement Fund’s cryptocurrency investment wasn’t very large — just $15 million in a portfolio of $5.5 billion at the time.

It is not clear how that has impacted the cryptocurrency market this year. Fund and union officials did not respond to multiple requests for comment. But the fund bought in when bitcoin prices were near their peak near $67,000, and they’ve been down since, falling below $20,000 in June.

The fund’s chairman, Brett Besselman, said in a first-quarter report that he was healthy with a 33.7% total return in 2021. Houston Mayor Sylvester Turner said earlier this year that the 2017 overhaul is working well and, thanks to strong returns in 2021, has put his city’s pension funds well ahead of schedule to eliminate its unfunded liabilities.

Houston’s experiment, which fund managers touted as the first announced direct purchase of digital assets by a U.S. pension plan, followed a series of larger but indirect investments by two Virginia Fairfax County pension funds. They have invested over $120 million in funds looking for opportunities in the crypto world such as: B. Blockchain technology, digital tokens and cryptocurrency derivatives. Like 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 money in venture capital funds investing in blockchain and a hedge fund that is trying to take advantage of some of the volatility inherent in the space, Jeffrey Weiler said, Executive Director of Fairfax County Retirement Systems. He said the goal is to invest in the infrastructure underlying blockchain technology, which managers continue to see as a high-growth area.

Crypto-related investments are not necessarily intentional. The Minnesota State Board of Investment manages a portfolio valued at approximately $130 billion for several public employee pension plans and other entities. A recent report shows that as of Dec. 31, it held small stakes 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 holdings of Coinbase fixed income securities with a market value of $2.2 million.

Mansco Perry, the board’s executive director and chief investment officer, said the board invests heavily in stock indexes, so those holdings were most likely in one of its index funds or bought from an outside investment manager.

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

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

The country’s largest public pension fund, the California Public Employees’ Retirement System, known as CalPERS, acquired a tiny stake in Riot Blockchain in 2017 that grew to over $1.9 million by the end of 2020. Securities and Exchange Commission filings show it hit $5.4 million before CalPERS got out sometime in the second quarter of 2021. Officials declined to give specifics, but it was a tiny slice of CalPERS’ overall portfolio of well over $400 billion.

According to SEC filings, the State of Wisconsin Investment Board appears to have started testing the waters early last year with the purchase of Coinbase, Marathon, and Riot Blockchain. Those holdings grew to at least $19.3 million out of a total portfolio of $48.2 billion by 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, according to the SEC filings. At the end of March 2022, the state had about $9.5 million combined in holdings in Coinbase, Riot Blockchain, and Marathon. New Jersey Treasury Department officials said they would not comment 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 School Employees’ Retirement System held $2.6 million worth of Coinbase last summer, but was down to $681,000 by the end of the first quarter after selling most of its stake , while it added about $398,000 worth of Marathon as of the second half of 2021.

Harris, the retired Houston fire captain, said he views his retirement as a contract that should be honored given the risks firefighters routinely take. While he’s generally happy with his pension fund’s performance, he’s still concerned 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 out there that if they lose their pension, it’s over,” Harris said. “Some of these older retirees, I just don’t know how they’re surviving.”


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

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