This interim report estimates the financial impact of oil and gas company stocks to thereturns achieved by the major public pension plans in Michigan, Missouri, Ohio andPennsylvania over the five year period from 2005 to 2009. A subsequent report will examine 13additional states. For each state, we selected the two largest state pension funds, covering publicschool employees and state employees. In Michigan, these two public pension plans account for60 percent of the total assets and 75 percent of the total membership of all of the public pensionplans in the states. The public pension plans within each state generally follow broadly similarinvestment strategies. Therefore, we also apply the energy holdings as a share of the total assets
and annual returns of the two largest pension plans to the aggregate holdings of all of a state’s
public pension assets to estimate the financial contribution of oil and gas company stock pricesto all public pension funds in that state.For each state, we collected five years of investment data from the ComprehensiveAnnual Financial Reports (CAFRs) of the two largest public pension funds, including their totalassets, asset allocations across classes of financial instruments, holdings by sector (includingenergy), and annual returns by financial class and sector. The asset allocations are reported forU.S. equities, international equities, fixed income securities, and other asset classes (cash, short-term instruments, real estate and alternative investments), in dollar amounts and as percentagesof total assets. When a fund did not report its investments in the oil and natural gas sector (fiveof the eight funds in this interim report), we use
the energy sector’s share in the S&P 500 toestimate the pension fund’s holdings of oil and natural gas stocks. For example, energy
companies accounted for 9.3 percent of the value of the S&P 500 index in 2005, 9.8 percent in2006, 12.9 percent in 2007, 13.3 percent in 2008, and 11.5 percent in 2009.
We also use each
fund’s reported exposure to the oil and natural gas sector and the S&
P 500 Energy Sector as a
proxy for oil and gas company holdings and the return of the funds’ oil and gas company
holdings. The data reported by the funds does not include all individual company holdings,making it impossible to isolate oil and gas companies. However, the S&P 500 Energy Sector iscomprised almost entirely of oil and gas companies, with oil and gas companies accounting for98.1 percent of the current S&P Energy Sector.
To estimate the holdings and returns for all public employee pension plans in a state, weuse aggregate data reported by the U.S. Census Bureau on each state, including total assets, assetallocations, memberships, and benefits. Since the Census Bureau does not report oil and naturalgas sector holdings by state, we apply the share of total holdings in oil and natural gas stocks for
the state’s largest pension plan in each year to the state
wide level. If a state’s two largest public
pension plans do not report their oil and natural gas sector holdings, we apply the share of oil andnatural gas stocks in the S&P 500 and the returns of the S&P 500 Energy Sector.
The domestic equity benchmark for public pension fund systems is typically based on a blend of several indexbenchmarks, such as the S&P 500, the Russell 3000, and the Wilshire 5000. Since the returns of financial indicesare highly correlated over time, our results are not biased by our reliance on
the S&P’s index.
The breakdown of the current S&P Energy Index: 60.3 percent integrated oil & gas companies; 17.75 percent oil &gas exploration and production; 14.11 percent oil and gas equipment and services; 2.66 percent oil and gas storageand transportation; 1.96 percent oil and gas drilling; and 1.29 percent oil & gas refining & marketing, Coal andconsumable fuels account for 1.92 percent of the Index.