Public Pension Funds and Urban Revitalization

October 25, 2005Hartford, Connecticut

Tessa Hebb, Senior Research AssociateLisa Hagerman, Research Fellow

Labor & Worklife Program, Harvard Law School Oxford University Centre for the Environment

Sponsored by the Rockefeller and Ford Foundations

Presentation Overview

Best practice findings from three pension fund case studies

NY City & State: fixed income focus

CalPERS: private equity and real estate

Implications drawn from this research

Urban Investment Strategies

Types of targeted investment Private equity Real estate Fixed income Infrastructure Credit enhancement

Success if measured in risk adjusted rates of return

Pension funds are not market makers

New York City - NYCERSEconomically Targeted Investment (ETI) Policy

Returns must be comparable to non-targeted investment

Guided by strategic asset allocation policy 2% across assets to date majority in fixed income

August 2005 ETI policy target allocation: 6% of fixed Income portfolio (30% of total) 2% of private equity portfolio (5% of total) 2% of real estate portfolio (6% of total)

Geographic target (5 boroughs) and to fill capital gap

$42.7bNYCERS2% ETIs

Capital deployed11,000 housing

units

100% SONYMAGuarantee - P&Isince 1978 total

claims only $1.7 m.NYCERS no losses

NYCERS commits to buy loan at

lock-in interest rate

CPC/JPMorgan Chasemakes

construction loan as permanent financing in place

Public Private Partnership

Partners have track record know neighborhood & developers

City - tax abatementsagencies - low rate second mortgages

NYCERS Fixed Income

PPAR Program (CPC/J.P. Morgan Chase CDC): 11,000 apartments 3,000 in works $208 m. invested $123.m committed

10 year net return forward-rate commitments: 9.33% Benchmark: Lehman Aggregate: 7.72%

Investments in national funds leverage fund (i.e. HIT $500m. in NYC ) to make direct investments

Investments programmatic - deflect political interference

New York State - NYSLRSCommon Retirement Fund Fixed Income

Affordable Housing Permanent Loans (1991)Over 6,000 units 3,148 in worksInvested $205m. Committed $400m. to CPC Program

Mortgage Pass-Through Program (1981)Purchased $6.8 b. in NY state mortgagesHomes to over 60,000 residents Backed by Fannie Mae and Freddie Mac

Total fixed income portfolio 5 year return 9.28%

Common Retirement Fund Private Equity & Real Estate

In-state Private Equity Program

Response to Jobs 2000 Act $364m. committed / over $250m. legislated target 12 private equity managers

Real Estate: $25m. mixed use complex

NYC - 360 rental apartments - first phase 80% market-rate 20% low-income housing Commercial - community center, supermarket

CalPERS’ Targeted Investments

Geographic targeting: underserved capital markets

Real estate – CURE Program ($1.6 b.)

Private equity – California Initiative ($500 m.)

CalPERS’ Real Estate

Thirteen vehicles in targeted real estate

Broad geographic focus

‘Location, location, location’

CURE program initiated in 1997

IRR 22.2% since inception

Targeted Investment in Urban Revitalization – Hollywood CA

Woolworth Building: Hollywood CA CIM Group

CalPERS’ Urban Real EstateTime Warner Center New York NY

Time Warner Center CUIP

CalPERS Private Equity

California Initiative started in 2000

Ten vehicles of varying types across all stages

Large and small investments - $200 m. to $10 m.

Impacts

Too early for financial results

$230m invested in 56 companies

37 in California

All investments met one or more social objective: underserved capital markets 63% of total investment women and/or minority owned businesses 57% employed low/moderate income workforce 36%

CalPERS’: California InitiativePacific Community Ventures:

Planet Organics – San Francisco

Steps in Targeting Investment Board level champion Board direction “let’s look at..” Staff get outside expert study Boards set broad targets Select appropriate asset class and

amount Issue RFP Hire top-quartile manager

Best Practice in Pension Fund Urban Investment

Success is measured first in risk-adjusted rates of return

Geographic rather than social targeting

Set broad targets

Allow top-quartile vehicles to do their job

Conclusion

Targeted investment can generate risk-adjusted rates of return and healthy vibrant communities

Pension funds are not excessive risk-takers or market makers

Best practice in targeted investing is important for success

While these cases look at some of the nation’s largest cities, what are the market-rate opportunities in urban revitalization in the smaller US cities?

For more information visit: http://urban.ouce.ox.ac.uk