Public Pension Funds and Urban Revitalization October 25, 2005 Hartford, Connecticut Tessa Hebb, Senior Research Associate Lisa 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 - NYCERS Economically 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

$42.7b NYCERS 2% ETIs Capital deployed 11,000 housing units 100% SONYMA Guarantee - P&I since 1978 total claims only $1.7 m. NYCERS no losses NYCERS commits to buy loan at lock-in interest rate CPC/JPMorgan Chase makes construction loan as permanent financing in place Public Private Partnership Partners have track record know neighborhood & developers City - tax abatements agencies - 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 - NYSLRS Common Retirement Fund Fixed Income  Affordable Housing Permanent Loans (1991) Over 6,000 units 3,148 in works Invested $205m. Committed $400m. to CPC Program  Mortgage Pass-Through Program (1981) Purchased $6.8 b. in NY state mortgages Homes 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 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 Estate Time 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 Initiative Pacific 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: