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COMMUNITY INVESTING FOR PENSION FUNDS

COMMUNITY INVESTING FOR PENSION FUNDS. Presentation to Canadian Pension Funds on Community Investing/ETIs Coro Strandberg, Strandberg Consulting 2006 Sponsored by: Canadian CED Network. Overview. Context and Background Definition and Rationale US and Canadian Experience Lessons Learned

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COMMUNITY INVESTING FOR PENSION FUNDS

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  1. COMMUNITY INVESTING FOR PENSION FUNDS Presentation to Canadian Pension Funds on Community Investing/ETIs Coro Strandberg, Strandberg Consulting 2006 Sponsored by: Canadian CED Network

  2. Overview • Context and Background • Definition and Rationale • US and Canadian Experience • Lessons Learned • Future Opportunities

  3. Context and Background • Capital gap • Canadian Community Economic Development Network (CCEDNet) project • Funded by WD and Vancity

  4. Community Investment Defined • Market grade investments • Collateral social returns: • Jobs • Affordable housing • Community economic restructuring • Urban revitalization • Community services • Environmental regeneration • Social economy enterprises

  5. Under-Served Capital Markets • Exist because: • Information gaps • Capital provider preferences for other sectors • Few Canadian precedents

  6. Rationale for CI • Emerging asset class • Enhances long term assets

  7. US ETI Experience • Public: • CalPERS • New York State Pension Funds • New York City Pension Funds • Church: • United Methodist Church General Board of Pensions and Health Benefits • The Church Pension Group (Episcopal Church of America) • Private: • AFL-CIO Housing Investment Trust

  8. Current Research • Mapping US public sector pension funds to assess urban revitalization interest • Policies and programs: • CalPERS • CalSTERS • NY State Commons • NY City Retirement • 6 considering urban revitalization • 10 inner-city investments part of asset allocation - no stated goal

  9. Legal Framework • ERISA governs private pension funds • May pursue ETIs • Standard prudent investment guidelines • Appropriate risk/return characteristics • Many states cite ERISA standards

  10. CalPERS • $200 B in assets • 2005 ETI Policy (updated): collateral intent to stimulate economy: job creation, development and savings, business creation, increases to or improved affordable housing stock and improved infrastructure • Competitive risk-adjusted rates of return • Target: 2% of fund assets • Provides collateral benefits to targeted geographic areas, groups of people or sectors of the economy while providing pension funds with prudent investments

  11. CalPERS cont’d • California Emerging Market Investment Program: • Investment opportunities in traditionally underserved markets in California while providing competitive risk-adjusted rates of return • Investments included with similar investments in assets classes (fixed income, private equity and real estate)

  12. CalPERS Case Study • Pacific Community Ventures Investment Partners: • Invest in businesses such as Ever Green Lodge: • San Francisco lodging business • Goal of helping at-risk Bay Area youth/low income to develop stable careers and lives • Employs 10 Bay Area youth and 60 low income adults a year in seasonal and year-round positions • And Timbuk2 Designs

  13. New York City Pension Funds • 5 pension funds; $85 B • 1982 program • ETI assets: $700 M • Affordable housing, community facilities, small business • Average 5 year returns: 8% • Use intermediaries • Government-guarantees

  14. General Board of Pensions and Health Benefits of the United Methodist Church • $13.5 B • 1990 program; 10% cap • ETI assets: $600 M • Affordable Housing 85% • Community Facilities Lending 10% • Other 5% • Community Reinvestment Fund • Average 5-year returns: 8.4% • Use intermediaries

  15. The Church Pension Group(Episcopal Church of America) • $7.5 B in assets • 2000 program • ETI assets: $152 M • $117 M in urban development equity real estate • $20 M in low income housing mortgages • $15 M in international micro-finance • Returns comparable to asset class on a risk-adjusted basis

  16. Analysis of US ETI Experience • 5 – 24 years • Under-invested markets • affordable housing • community facilities • small business • international micro-finance • Allocation caps • Comparable returns • Intermediaries

  17. US ETI Product Example Community Reinvestment Act Qualified Investment Fund • Supports community and economic development • 5.04% 5-year returns (12/31/05); 5.60% since inception (8/30/99) • $660 M, 300 institutional shareholders (Dec. 05) • Portfolio: • Affordable Multi-Family Housing 54.6% • Affordable Home Ownership 35.1 • Enterprise Development 7.4 • Economic Development 1.9 • Affordable Health Care 1.0

  18. US Community Development Lenders (Intermediaries) • 800 – 1,000; $8 B • Serve under-served • Rural, urban and reservation-based • Risk management: • adequate capital • loan loss reserve • close monitoring • technical assistance • .7% charge-off ratio (Banks .97%)

  19. Failed ETIs • High profile losses in 80s • Standard investment rules were not practiced • Social benefits drove investments; market rates were secondary

  20. Canadian Experience • Caisse de Depot • Concert Properties • Quebec

  21. Caisse de Depot • New Act states the Caisse de Depot mission: • “To achieve an optimal return on capital • …while at the same time contributing to Quebec’s economic development”

  22. Concert Properties • Over $800 M in assets • Established in 1989 • 100% of fund in ETI projects: • Assured rental housing • Mandate to employ unionized trades people on job sites

  23. Quebec • Chantier – social economy enterprises ($58.5M) • Fonds de Solidarite de la FTQ $12.0 M • Fondaction de la CSN 8.0 M • Federal Government 28.5M • Provincial Government 10.0M • 6% return to pension funds after 15 years (flexible if prime goes up) • 1 rep. each on a 5 person board • Enterprises are charged a fee to create guarantee fund

  24. Analysis • Limited experience in Canada

  25. Canadian ETI Product Example CMHC: Canada Mortgage Bonds (CMB) Program (March 2005) • Mortgage loan financing for social housing • Principal guaranteed • Most current bond, maturing 03/11, is yielding 12 bp over GOC; range from 8 – 15 bp • 33% of investors are Cdn. pension and fund managers/advisors • $78.05B in pool

  26. Canadian CI Sector • Over 150 organizations • $546 M; $387.5 M in Quebec • Includes: • Small loans to micro-businesses • Risk capital to SMEs • Loans and equity for non-profits, co-ops and businesses meeting community needs • Aboriginal Capital Corporations • Mortgages or construction loans for low income housing • No performance data

  27. Canadian Experience: Case Study • Ecotrust financed tuna fishing vessel • $175,000 loan for 60 months • Rate: Prime (5.25%) + 4% • Difficulty qualifying for traditional credit: • high risk industry • inconsistent historical cash flow • Benefits: • increased jobs • sustainable fishery

  28. Lessons Learned • Trustee board level champions • External feasibility study • Due diligence • Effective partnerships

  29. Next Steps • Conduct research • Incorporate practices into SIPP • Risk mitigation • Benchmarks • Communicate

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