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At One West Adams Street in downtown Jacksonville, Florida, John Keane, the director of the city’s Police & Fire Pension Fund—with roughly $1 billion in assets—sits in a large office crowded with high piles of papers. Photos of himself with every Mayor since 1968 signing a piece of pension legislation line the walls. “I’ve been here a while,” the city native says, explaining the clutter.
He is a large man with rosy cheeks. “This is a public duty—it’s a service I enjoy,” says Keane, who has been working for the city for 49 years, first as a police officer, then as a firefighter, and eventually in the pension world. When asked how his day is going, he is known to repeat the same line in his slow Southern drawl: “Oh, it’s a tough day, but we’ll get through it.” With a comparatively greater conservative tilt—less small-cap equities and a lower allocation to alternatives—the fund got through the 2008 financial crisis better than most public pensions, losing 12% of its market value during fiscal year 2008, compared to the average of nearly 15% among U.S. public schemes.
Despite the scheme’s dogged persistence in successfully weathering market volatility, the financial crisis undoubtedly has taken its toll on Jacksonville, a quaint and friendly city with a melancholy undertone. Downtown Jacksonville lacks a movie theater. There’s no department store, or upscale clothing stores, which all followed the flight of people to the suburbs. Yet, despite the looming risks of real estate in a city still reeling from the pain of the financial crisis, Keane’s Police & Fire Pension Fund is pursuing an innovative investment approach that has been oft-embraced by the private sector yet hardly considered by the public world: in-kind contributions.
Industry observers say that, among private pension funds, in-kind contributions—a contribution of an investment asset such as real estate in lieu of cash, paid directly by a plan sponsor to a pension fund—have been a creative partial response for dealing with their severe funding pressures, and that their success with this approach may inspire their public counterparts to follow suit. The public arena, weighing the risks, has been fearfully reluctant to investigate the benefits of this funding strategy, with Jacksonville’s scheme being an exception. The risks of the approach, according to Keane, are acquiring the wrong types of properties in the wrong parts of town without sufficient forethought to long-term usage and return.
Since 2001, the City Council has given the city’s Police & Fire Pension Fund dilapidated buildings—of which there are many—to refurbish and then lease back to the city or to other creditworthy tenants. In 2000, the fund’s office moved from about three miles outside the city hub to downtown Jacksonville to have a stronger community presence, marking their commitment to in-kind contributions of real estate. “The stronger the city is, the stronger our fund is,” says Richard Cohee, the scheme’s assistant administrator.
With the pension’s first in-kind project, the fund contributed to the redevelopment of the Laura Trio, a series of rundown buildings in downtown Jacksonville. The City Council gave the scheme the buildings, worth $3 million in actuarial credit, thereby reducing the fund’s unfunded liability by that amount. The pension repaired them and sold them for $6 million to a developer. The fund has refurbished two other buildings in the neighborhood along with a parking garage, leasing the assets back to the city as part of their real estate portfolio. In the past five years, in-kind transactions of real estate investments have delivered annual returns of 10%.
Past returns, of course, are no guarantee of future success, but Keane and the pension system have instituted what they view as safeguards to protect against losses. When asked how the pension would fare if, theoretically, the scheme acquired and refurbished an office building yet failed to lease it, Keane replied: “We won’t take a piece of real estate speculatively, simply because the city is giving it to us. We need to know there’s an identified tenant and that it has a specific use,” adding that the fund’s entire real estate allocation totals 13%, with only 2% of that coming from in-kind contributions. Risk is therefore relatively minimal, and the scheme is able to use its cash power to invest back in the local community to rebuild and repair.
“The move back to downtown Jacksonville is like waiting for the circus to start,” says a hopeful Keane. “We want to be in the parade.” Nevertheless, downtown Jacksonville has a vacancy rate of about 26%—the highest it’s ever been, according to Jacksonville’s City Council President Stephen Joost. “There’s so much potential to put the property in this city to better use,” he says. Yet, regardless of Joost’s optimism, the city of Jacksonville suffers from lagging economic growth as people disperse into the surrounding suburbs, similar to many struggling downtown cores in the United States. With real estate in such dire straits, the embrace of this strategy in Florida portrays a dichotomy of desperation—as both Jacksonville’s City Council and its pension seek solutions to their funding pressures—and optimism that the city will flourish once more. The concern for the pension system, however, is that it won’t, leaving the scheme not only with empty coffers—but also empty buildings.
—Paula Vasan
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