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The Financial Contribution of Oil and Natural Gas Company Investments To Major Public Pension Plans in Four States

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This report examines the financial impact of investments in oil and natural gas companies on the overall performance of the two largest public employee pension funds in each of four states – Michigan, Missouri, Ohio and Pennsylvania. The data show these investments sharply out-performed the funds’ other assets. From 2005 to 2009, spanning both vigorous expansion and deep recession, the share of the funds’ returns attributable to oil and natural gas investments was 2.5 times to 2.8 times greater than their share of those funds’ assets, highlighting the oil and natural gas industry’s role in American retirement security.
Transcript
    The Financial Contribution of Oil and Natural Gas CompanyInvestments To Major Public Pension Plans in Four States,2005 – 2009 Robert J. Shapiro and Nam D. PhamApril 2011  1 The Financial Contribution of Oil and Natural Gas Company InvestmentsTo Major Public Employee Pension Plans in Four States, 2005 – 2009 1  Executive Summary This report examines the financial impact of investments in oil and natural gas companies on theoverall performance of the two largest public employee pension funds in each of four states – Michigan,Missouri, Ohio and Pennsylvania. 2 Total Assets, Oil and Natural Gas Assets, and Returns on Those Assets, The data show these investments sharply out-performed the funds’other assets. From 2005 to 2009, spanning both vigorous expansion and deep recession, the share of thefunds’ returns attributable to oil and natural gas investments was 2.5 times to 2.8 times greater than theirshare of those funds’ assets. Two Largest Pension Funds in Four States, 2005 – 2009 3   StateTotal Assets(billions)Oil andNatural GasAssets(billions)Oil and NaturalGas Assets As aShare of TotalAssetsReturns from Oiland Gas Assetsas a Share of AllReturnsRatio of Oil andNatural Gas AssetReturns to TheirShare of Total AssetsMI $52.8 $2.5 4.8% 12.2% 2.5 to 1MO $32.6 $1.1 3.3% 9.2% 2.8 to 1OH $138.3 $6.1 4.4% 11.6% 2.6 to 1PA $86.2 $2.9 3.4% 8.6% 2.5 to 1 ã   In all four states, the two largest public pension funds account for between 50% and 89% of thetotal membership and assets of all public employee pension programs in the state. The totalmembership of these programs ranges between 229,120 in Missouri to 1,378,179 in Ohio. ã   The level and extent of these funds’ investments in oil and natural gas vary across the four statesfrom $1.1 billion and 3.3% of the total assets of the two largest plans in Missouri, to $6.1 billionand 4.4% of the assets of the two largest plans in Ohio. ã   The oil and natural gas investments by Michigan’s two largest public pension plans accounted for4.8% of those funds’ total assets while contributing 12.2% of those funds’ total gains, for a ratioof 2.5 to 1. Similarly, the oil and natural gas investments by Missouri’s two largest publicpension plans accounted for 3.3% of those funds’ total assets while contributing 9.2% of thosefunds’ total gains, for a ratio of 2.8 to 1. ã   The oil and natural gas investments by Ohio’s two largest public pension plans accounted for4.4% of those funds’ total assets while contributing 11.6% of those funds’ total gains, for a ratioof 2.6 to 1. The oil and natural gas investments by Pennsylvania’s two largest public pensionplans accounted for 3.4% of those funds’ total assets while contributing 8.6% of those funds’ totalgains, for a ratio of 2.5 to 1. 1   The authors wish to acknowledge research support from the American Petroleum Institute. The analysis and conclusions are solely those of theauthors.   2   We use “oil and gas company holdings” synonymously with “energy sector holdings” in this report, as oil and gas companies comprise 98percent of the value of the S&P Energy Sector Index and the vast majority of energy sector holdings in the public employee pension fundsexamined here. The current S&P 500 Energy Sector Index is comprised of 60 percent integrated oil & gas companies; 18 percent oil & gasexploration and production enterprises; 14 percent oil and gas equipment and services firms; 3 percent oil and gas storage and transportationcompanies; 2 percent oil and gas drilling firms; and 1 percent oil & gas refining & marketing. Coal and consumable fuels account for theremaining 2 percent of the Index.   3   Comprehensive Annual Financial Reports of different retirement systems. For details of sources, see footnotes for Tables MI-1, MO-1, OH-1,and PA-1.    2 The Financial Contribution of Oil and Natural Gas Company InvestmentsTo Major Public Pension Plans in Four States, 2005 – 2009 4  Robert J. Shapiro and Nam D. PhamI.   Introduction and Summary of Results This report examines the financial impact of investments in oil and natural gas companiesto the overall performance of state public employee pension funds.  5 The four states examined here are Michigan (MI), Missouri (MO), Ohio (OH), andPennsylvania (PA). In each case, we analyze the portfolio and performance of the two largestpublic pension systems in the state, which in all cases are the pension program for publicteachers and other public school employees, and the fund for state government employees. In allfour states, these two funds account for between 50 percent and 89 percent of the totalmembership and total assets of all public employee pension programs in the state. The level andextent of these funds’ investments in oil and natural gas, however, vary across the four states,from $1.1 billion and 3.3 percent of the total assets of the two largest plans in Missouri, to $6.1billion and 4.4 percent of the assets of the two largest plans in Ohio. (Table 1, below)Many pension funds willface daunting challenges in meeting their future obligations. In this study, we analyze an aspectof a traditional investment approach for meeting this challenge by charting the impact over fiveyears of investments in oil and natural gas companies by the two largest public pension funds infour states. We found that over the period from 2005 to 2009, spanning years of vigorousexpansion and deep recession, the share of the funds’ returns attributable to oil and natural gas assetswas 2.5 times to 2.8 times greater than their share of those funds’ assets. This analysis of publicemployee pension systems is an interim report. In coming months, we will expand it to 17 statesand so cover a majority of the nation’s state public employee pension members and assets. Table 1. Membership, Assets, and Oil and Natural Gas Holdingsof the Two Largest Pension Funds In Four States, Annual Average, 2005 – 2009 6   State MembershipTotal Assets(Billions)Oil and Natural GasAssets (Billions)Oil and Natural Gas Assetsas a Share of Total AssetsMI 555,050 $52.8 $2.5 4.8% MO 229,120 $32.6 $1.1 3.3% OH 1,378,179 $138.3 $6.1 4.4% PA 650,556 $86.2 $2.9 3.4% 4 The authors wish to acknowledge research support from the American Petroleum Institute. The analysis andconclusions are solely those of the authors. 5 We use “oil and gas company holdings” synonymously with “energy sector holdings” in this report, as oil and gascompanies comprise 98 percent of the value of the S&P Energy Sector Index and the vast majority of energy sectorholdings in the public employee pension funds examined here. The current S&P 500 Energy Sector Index iscomprised of 60 percent integrated oil & gas companies; 18 percent oil & gas exploration and productionenterprises; 14 percent oil and gas equipment and services firms; 3 percent oil and gas storage and transportationcompanies; 2 percent oil and gas drilling firms; and 1 percent oil & gas refining & marketing. Coal and consumablefuels account for the remaining 2 percent of the Index. 6 Comprehensive Annual Financial Reports of different retirement systems. For details of sources, see footnotes forTables MI-1, MO-1, OH-1, and PA-1.  3Our analysis found that the public pension funds examined here achieved returns of 41percent to 49 percent on their oil and natural gas investments over the five-year period, comparedto returns of 10 percent to 17 percent for the same funds’ non-oil and natural gas investments.(Table 2, below) Table 2. Returns on All Assets and Oil and Natural Gas Assetsof theTwo Largest Pension Funds in Four States, 2005 – 2009 7   StateReturn on $1Invested in USOil and NaturalGas StocksReturn on $1Invested in AllOther AssetsReturns from Oiland Natural GasInvestments as aShare of All ReturnsRatio of Oil and NaturalGas Assets’ Share of AllReturns and their Shareof All AssetsMI $1.49 $1.17 12.2% 2.5 to 1 MO $1.41 $1.10 9.2% 2.8 to 1 OH $1.48 $1.11 11.6% 2.6 to 1 PA $1.48 $1.15 8.6% 2.5 to 1 Table 2, above, provides a summary measure of the relative performance of the oil andnatural gas assets held by these public pension funds from 2005 to 2009, relative to otherinvestments. This measure is the ratio of the oil and natural gas assets’ share of all gains, relativeto their share of all assets. We found that the share of these funds’ gains attributable to their oiland natural gas investments was between 2.5 times and 2.8 times greater than these oil andnatural gas investments’ share of the funds’ total assets. So, for example, the oil and natural gasinvestments by Michigan’s two largest public pension plans accounted for 4.8 percent of thosefunds’ total assets (Table 1, above) while contributing 12.2 percent of those funds’ total gains,for a ratio of 2.5 to 1. (Table 2, above)We also estimate the impact of oil and natural gas investments on the returns of all publicemployee pension programs in each state, using aggregate data collected by the Census Bureau.This analysis of state-wide public pension systems is not as complete as the prior analysis basedon the two largest plans in each state. In particular, the Census Bureau has not issued 2009 dataon statewide public pension systems. Since oil and natural gas shares declined in 2009, as didoverall markets, the 2005-2008 data provide a less complete picture of the performance of oiland natural gas stocks, compared to other sectors and other classes of investments, over abusiness cycle.With this caveat, the analysis of the Census Bureau data reinforces the more detailedexamination of the major public pension funds in these states. (Table 3, below) Based on thestatewide data, oil and natural gas investments significantly out-performed the rest of theportfolios of the statewide public employee pension systems of these four states, over the years2005 to 2008. 7 Comprehensive Annual Financial Report of different retirement systems, and authors’ calculations. For details of sources, see Tables MI-2, MO-2, OH-2, PA-2..
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