The Looming Public Pension Fund Crisis

By:


The United States’ public pension funds are in a terrible predicament. As of August 2017, Bloomberg reported that 43 out of 50 States have had a disturbing increase in their funding ratio gaps, with only District of Columbia being overfunded out of all 50 states. The PEW Charitable Trusts reports that overall, the public pension fund system is underfunded by more than US$1 trillion, with a record number of Baby Boomers going into retirement. These events spur not only financial, but social crises. If retirees have learnt no wealth creation and preservation techniques other than a dependence on pensions, the U.S. may face a widening of socioeconomic strata en masse.

Initially we blame local and state governments for failing to meet tax dollar fund contributions, and rightly so. Wayne Winegarden, Sr. Fellow at the Pacific Research Institute, states that from 2001 to 2015 total state contributions only met 88% of total nationwide contribution requirements. Full contribution is not expected in the short term, due to increased pension liabilities. States such as Oregon, Minnesota and Colorado have funding ratios gaps of more than 10%; Minnesota’s funding ratio worsened by a whopping 26.6% for FY 2016. That is terrifying from an economic standpoint, filled with nationwide implications reminiscent of Detroit’s 2013 bankruptcy filing. As Winegarden clearly points out, there are three fiscal policies that can mitigate worsening funding gaps:

  1. Cut promised pensions;
  2. Levy future tax increases;
  3. Reduce future government spending.

In addition to these fiscal mitigating policies, public pension funds need to adjust fund return expectations. From the late 1990s to 2000 both private and public pension funds had similar return projections approximating 8%. However, while private pension funds have adjusted fund expectations to consider the tech crash and Great Recession repercussions, public pension funds by and large have not. Indeed, private pension funds now have an adjusted return of approximately 5%, while public pension funds still have expected returns of 8%. Yet, the funding ratio gap widens for 86% the United States’ public pension system.

Second to consider is the change in asset allocation within public pension funds over the past decade. Public pension funds have made a marked shift to alternative investments for portfolio diversification, which have heightened risk and reward implications. The Pew Charitable Trusts (PEW) April 2017 report, State Public Pension Funds Increase Use of Complex Investments, give a thorough overview of issues and challenges regarding the state pension fund system. According to the PEW report, public pension funds have undertaken a stronger portion of alternative investments within fund portfolios that require customized expertise, different from stock and bond management. From a governance perspective, the PEW report states that overall most public pension fund boards may have been lacking in expertise to be part of investment decisions of such complex caliber.

The PEW Charitable Trusts report does not purport that alternative asset allocation is the reason behind our failing public pension system. The PEW report relates that there was no solid correlation between the use of alternative investments and fund performance. However, the PEW report found that pension funds with “long-standing alternative investment programs” outperformed similar funds that made trigger decisions to add alternative investments to the portfolio, where the original strategy consisted of mainly conservative investment vehicles. For instance, the Washington Department of Retirement Systems (WDRS) has one of the strongest track records in fund performance, and has had an alternative investment strategy since 1981, with 36% alternative asset allocation. Conversely, the South Carolina Retirement System (SCRS) quickly changed its fund portfolio to 31% of high yield alternative investments based on a 2007 state stipulation, with 10 year returns decreasing from 8% to 5%, even with a higher risk/reward objective. In addition, public pension fund valuation reporting for both fixed-income, public equity, and alternative investment portfolios has led to confusion in fund performance evaluations.

Third and the most insidious issue is the gargantuan rise in investment fees which public pension funds have faced. The PEW Charitable Trusts clearly delineates that public pension fund allocation to alternative investment vehicles has increased fund investment fees to aggregate US$10 billion as of 2014. Reported fees as a percentage of total assets have increased by 30% to date. And, these figures pertain to reported fees. Unreported performance fees carve a hefty portion of gross fund returns and can remain undisclosed depending on state fee disclosure requirements. According to the PEW report, unreported fees may amount to US$4 billion per annum. Public pension funds need to invest in higher yielding assets, since on the fiscal side contributions are sorely lacking. However, if total investment fees outweigh net returns, we have a further exacerbated public pension liability position.

The PEW Charitable Trusts give specific recommendations to begin the process of effective internal governance within the public pension fund system. Highlights of these recommendations are as follows:

  1. Public pension investments now have higher risk in portfolios comprising bond, stocks and alternative investments. Investment policy statements must be made fully accessible online for all stakeholders. All statements must fully disclose investment strategies.
    1. Include performance results by asset class, to highlight the performance and cost of all utilized investment strategies.
  2. Performance reporting is extremely inconsistent within state public pension funds. Some states report gross of fees, while others report net of fees. All public pension funds should report both net and gross of fees regardless of positive or negative returns.
  3. Public pension funds do not report comprehensive undisclosed fees such as carried interest. Include line itemization of fees paid to individual investment managers in comprehensive fee reporting.
  4. Most public pension funds report returns in a 5 to 10 year window. It is recommended to increase fund performance reporting to a 20 year horizon to get a fuller understanding of long-term strategies.

A combination of strong fiscal and governance policies at the state and local level are immediately needed to restructure the public pension fund system, and curb the worsening funding ratios over 43 of all 50 states. Public pension funds need to fully admit the glaring issue of underfunding, and possibly look to successful funds such the Oklahoma Teachers Retirement System or the Washington Department of Retirement Systems for replication of certain investment strategies. State and local overspending on aesthetics and mismanagement needs to be curbed and channeled into the basics, such as pension fund contributions. We cannot depend solely on the U.S. federal government to prevent such a financial catastrophe as possible public pensions default. It is up to the state and local governments to take a long, hard look at current mismanagement and ineffective governance, and bring pension contributions back to positive. We cannot have a replay of Detroit’s 2013 pension fiasco pan out over 43 states.

Sources

Tagged:

The FATCA Debacle Requires Repeal

By:


In April 2017, U.S. Senator Rand Paul (R-KY) finally brought efforts to repeal the Foreign Account Tax Compliance Act (FATCA) to U.S. Congress. Senator Paul further testified before the U.S. House Oversight and Government Reform Committee’s Government Operations Subcommittee on the benefits of FATCA repeal. According to Senator Paul, “FATCA disregards the Fourth Amendment and privacy rights by requiring the bulk collection of innocent Americans’ financial records.” FATCA, enacted in March 2010 to December 2012, purportedly serves to detect, document and collect taxation on non-US financial assets of U.S. citizens and legal U.S. immigrants. According to the IRS, over nine million U.S. corporate entities and individuals fall under FATCA reporting requirements. FATCA has been supposedly introduced to provide transparency in international tax policy, especially pertaining to traditional offshore private banking activity. In 2015, the now infamous leak of Mossack Fonseca’s Panama Papers further exacerbated banking privacy laws, forcing an even more punitive FATCA enforcement regarding offshore transactions.

Good governance requires transparency. However, should transparency hold a country’s citizens to reporting ransom without taking context into play? Most U.S. citizens holding accounts abroad may have professional duties that require a foreign checking account, or that requires dual signature on guardianship accounts with parents, children and other family members. Not all offshore accounts are created to hold nameless shell companies such as was exposed via the Panama Papers fiasco. Yet, U.S. citizens under onerous FATCA reporting pay a heavy price in both documentation and in dollar amount. Since 2010 the international offshore community has found it nightmarishly difficult to handle new U.S. clients that may cause bureaucratic and legal issues with the IRS. Chapter 4 of Code Sec. 1471, FATCA, demands that IRS withholding agents garnish a whopping 30% of foreign financial institution income concerning U.S. citizen accounts, even on minor reporting errors.

The FATCA reporting process is confusing at best. The FBAR filing, also known as the Report of Foreign Bank Accounts, FinCEN Form 114 or TD F90.22-1, is not the only filing that is due to the IRS. The majority of fined U.S. taxpayers fall under this unfortunate category. All U.S. citizens with non-U.S. financial assets must also file Form 8938, which is the Statement of Specialized Foreign Financial Assets. As confirmed by Parent & Parent LLP, IRS penalties for non-filing are as follows:

  • A non-willful penalty, not to exceed US$10,000, may be imposed on any taxpayer who violates or causes any violation of the FBAR filing and record keeping requirements;
  • A willful penalty may be imposed on any taxpayer who willfully fails to file the FBAR, with the cap on the penalty being the greater of US$100,000 or 50% of the balance in the account at the time of the violation.

As we see, IRS penalties are enforced regardless of intention, and can also be implemented if the filer has all documents correctly submitted, but may be one day late.   It is noteworthy that any account in question need not be active and running over with funds to be penalized. In other words, Grandma’s account opened for her dual citizenship grandchild abroad, with no more than US$1500 in total, will be up for an IRS fine of up to US$10,000 if reporting errors are unintentionally made.

In addition, while the statute of limitations for FBAR penalties is 6 years, the statute for Form 8938 is limitless, and applies to an individual’s entire tax return. Specifically, this means the IRS can choose to conduct yearly audits on the faulted individual for an entire life span. The need for tax governance and transparency should not amount to such legal punishment, especially for individual clients.

Double taxation and or double tax reporting under FATCA have made U.S. citizens residing abroad vulnerable to legal shenanigans. And contrary to popular sentiment large corporations and multi-billionaires are not being punished as harshly as are U.S. expats, U.S. professionals abroad, and U.S. citizens who have foreign families with regular accounts abroad. As Parent & Parent LLP satirically stated, a foreign drug lord with stacks of cash parked offshore is safe tax-wise in comparison the average U.S. citizen affected by FATCA’s punitive international tax dictates. Senator Rand Paul and Congressman Mark Meadows (R-NC) have recommended the following steps to U.S. Treasury Secretary Steve Mnuchin regarding FATCA repeal:

  • To introduce the issuance of a Statement of Administration that welcomes the FATCA repeal not only as a stand-alone tax problem, but as an integral part of the total tax reform package to be drafted and enacted by the Trump Administration.
  • To cease and desist the signing of any new intergovernmental agreements (IGAs) enforcing FATCA reporting until the U.S. House can review and act on the FATCA repeal bill.
  • To review existing IGAs under the U.S. Treasury’s jurisdiction, and to declare invalid ab initio any IGA that the U.S. Treasury deem unfit upon examination.
  • To grant temporary compliance to foreign financial institutions that have been found unfairly impacted by FATCA dictates until full review by the U.S. Treasury.
  • To instruct the IRS on granting provisional ‘mercy’ to U.S. individual taxpayers who especially have not willfully made errors on FATCA reporting.

We applaud Senator Paul and Congressman Meadows in their endeavors to repeal FATCA and redefine such an abysmal international tax policy that serves to burden the U.S. individual taxpayer involved in international banking. In addition, U.S. citizens involved in long term financial transactions abroad should seek U.S. legal counsel in regards to FATCA reporting, and not leave such documentation solely up to the discretion of a foreign financial institution or a foreign CPA.

 

REFERENCES

Tagged:

The Financial Power of Impact Investing

By:


For many years the divide between instruments of philanthropy and investing has been clear cut. Investing strategies typically did not involve social organizations focused on non-governmental organization (NGO) concerns. However, the advent of millennial investing power, the rise of social enterprises, and the need for further asset diversification have blurred the line between both industries. Environment, Social, Governance (ESG) investing, informally known as impact investing, is on the rise with both active and passive investors. For example, ESG assets under supervision at Goldman Sachs have grown from US$3.8bn in 2015 to US$6.5bn end of fiscal 2016. As Goldman Sachs poignantly stated, ESG investing is now mainstream even within the pension fund and insurance sectors.

Even though financing social causes has overlapped between philanthropy and ESG investing, by no means is the latter non-profit seeking. First, while impact investing may dive into sectors once thought as solely philanthropic, let us make it clear that the investing strategies used to generate returns do not veer from tradition asset management practices. Specific return objectives are set, even if the companies that are in the portfolio may comprise all social enterprises. In fact, Goldman Sachs recommends that investors should be even more aggressive with risk/return analyses when it comes to ESG portfolios, to ensure even more accountability. Traditional sectors tend to put the bottom line first by nature, so it is of utmost importance to hold for-profit social enterprises accountable for revenue and profit estimates.

U.S. Trust’s “Impact Investing: A Guide To Doing Good While Also Doing Well” gives an excellent overview of impact investing. According to the U.S. Trust, managed U.S. assets committed to impact investing in total grew from US$640 billion in 1995 to US$6.57 trillion at present. Impact investing can be broken down into further categories of socially responsible investing (SRI), faith based investing, green investing, and values based investing (VBI). For example, an investor who is against tobacco use but is not necessarily pro-environment may seek investment in an SRI portfolio, but not a green portfolio. As with traditional ETFs and mutual funds, diverse social investing asset classes are available via equities, bonds, REITs and even private equity. Investment funds including these ESG options in have indeed increased from 55 to 925 within the last two decades. In particular, U.S. Trust’s ESG investor pool jumped 23% from 2015, with a whopping 93% of millennial investors who have added ESG components to their portfolios!

ESG investing is an excellent mechanism to be considered by shareholders through engagement and by Board of Directors through guidance and governance. Rick Scott, Vice President of Finance and Compliance at the McKnight Foundation, gave great insight as to the need for adding and monitoring ESG components to investment strategic directions at the Board level. The McKnight Foundation has allocated 10% of its US$2bn portfolio strictly to impact investing with a focus on US clean water and carbon footprint. Scott enlightens that the Board must call for a “triple bottom-line for financial, programmatic, and learning return.” Boards must have an investment or risk committee assigned to give oversight on risk/return objectives specific to the triple bottom line, and with C-Suite determine the healthy mix of ESG and traditional components for portfolio investments. We have said time and time again that clear internal corporate governance goals and procedures, in this case adopting a “triple bottom line” approach, is the most pertinent form of corporate social responsibility an organization can practice.

While global institutional investors have now become ESG investing stalwarts, retail investors, individual private investors, and minor shareholders may still need direction in how to effectively embark on the ESG investing journey. In addition, the ESG investing sphere has been known to be have quite a few ‘greenwashers’ with more public relations talk than actual profit generating. As with any investment vehicle, extensive research is recommended. Global investment firm Cambridge Associates has developed the Impact Investing Benchmark which comprises 51 private investment closed-ended funds dealing strictly with the intent to generate social impact. From this data, Cambridge Associates created and MRI Database, and uses ImpactBase extensively as well. U.S. Trust as well has developed benchmarks via an IMPACTonomics™ program, which has specific in-house and third party impact investing platforms such as the Breckinridge Sustainable Bond Strategies and IMPAX Global Environmental Markets Fund.

Many have the misconception that impact investing precludes investing in traditional industries, such as the fossil fuel and mining industries. Absolutely not! The smart and savvy investor must see diversification opportunity in line with tailored return objectives. There is financial power in such comprehensive asset management. The end point is return on investment, whether from most profitable traditional, social, and technologically advanced companies in the market. A gold mining company with a strong, proven corporate responsibility background can share the same portfolio as a profitable microfinance company that lends globally to small entrepreneurs. Again, the crux of investing in any asset class lies with return objectives. ESG investing, like smart technology, is no longer the niche market. As Rick Scott and Goldman Sachs put it, the point is to find the “right tools for the right time.” The time is right to consider impact investment vehicles in tandem with traditional market portfolios.

SOURCES

Tagged:

Chinese Investments in U.S. Real Estate – Challenges, Opportunities and Policy Recommendations

By:


As the world’s second largest economy, China’s influence on the global economy is expanding at a furious pace, thanks in part to the surge in outward foreign investment. In the United States, China is now a major source of foreign investment with capital flowing into virtually every industry and market. For many Chinese firms and individuals, the United States is a prime destination for their investments because the prospects for stable returns are high.

 Policy makers, business leaders, and the general public in the United States still do not have a comprehensive understanding of the patterns and implications of Chinese investment in the United States. While foreign investment has been a critical piece of this country’s economic success, the recent boom of Chinese capital flowing into the United States has stoked fears of job loss and disruptions to local and regional economies and markets, and even threats to national security.

 Chinese investment into U.S. real estate, in both the commercial and residential sectors, stirs up these misgivings and sparks debate about the domestic costs of these investments. Concerns range from anxieties over the potential inflationary effects of deep-pocketed firms and investors in the residential real estate market to more pronounced anxieties over property acquisitions that can endanger national security. The reality, as this landmark study makes clear, is much more complex.

 Chinese investment around the world surged in the past decade, expanding from an early focus on natural resource extraction and energy in developing countries to broader industries and advanced products and services in developed markets. In 2014, Chinese outward FDI flows totaled $116 billion, and approximately $18.1 billion flowed into the United States. In 2015, Chinese outward FDI flows totaled $118 billion, and Chinese foreign direct investment flows into the United States increased to $22.3 billion. Still, China accounts for less than 10% of all foreign direct investment in the United States.

 Chinese direct investment in U.S. real estate was negligible until 2010 but has since grown dramatically and visibly. In 2015, China ranked third in U.S. commercial real estate acquisition volume, trailing only Canada and Singapore and tied with Norway. Chinese developers are building multi-billion-dollar projects in several major cities. A Chinese insurance firm bought the prized Waldorf Astoria hotel in New York City in 2015 and struck a $6.5 billion deal for Strategic Hotels & Resorts in early 2016. Chinese investors dominate an immigrant investor program known as EB-5, and in 2015, China overtook Canada as the biggest foreign buyer of U.S. homes.

 This anecdotal portrait reveals the rapid and widespread entry of Chinese investors, both firms and individuals, into the U.S. real estate market, but it also underscores how real estate differs from other investment sectors. It defies the traditional definition of foreign direct investment – ownership of at least a 10% stake in a U.S. company – with a broad range of entry points. Buying a home, for example, does not have an analogue in the technology industry but is critical in painting a full picture of Chinese capital flows into the U.S. real estate market. Furthermore, in addition to the unique channels of real estate development and EB-5 capital, Chinese investors are also increasing investment in portfolios of U.S. assets through real estate investment trusts and private equity funds.

 These real estate investments come on top of China’s position as the biggest holder of mortgage-backed securities issued by U.S. government-sponsored enterprises such as Fannie Mae and Freddie Mac. Like U.S. Treasuries, these bonds are important investments for Chinese government finances, because they allow for recirculation of dollars gained by the trade imbalance, and for the U.S. housing market, because they help ensure liquidity and mortgage rate stability. Chinese banks have also become major sources of debt capital in the U.S. real estate market, primarily for U.S. firms. To fully understand the role of Chinese capital in the U.S. real estate market, it is vital to look beyond direct investment. More than any foreign investor other than Canada, China stands out for the breadth, depth, and speed of its participation in the U.S. real estate market.

 Our findings are that from a modest base in 2010, China was the source in aggregate of at least $350 billion in U.S. real estate holdings and investments by the end of 2015. This figure includes the direct purchase of real property and indirect investment through the purchase of agency mortgage backed securities and provision of debt financing, among other channels. In addition, we estimate that Chinese entities managing U.S. real estate operations and individual investment through vehicles including the EB-5 program may have created or sustained 200,000 jobs. For commercial and residential real estate, China has been an important source of capital as the U.S. economy recovered from the recent financial crisis and Great Recession.

 Chinese investment in U.S. real estate is a recent development with considerable growth potential. While it is not as politically sensitive and does not directly impact national security as does Chinese investment in U.S. technology or telecommunications, real estate affects more people and communities and involves policy makers at multiple levels.

 This report aims to objectively present the following:

  • Sources of Chinese capital flowing into U.S. real estate;
  • Motivations and drivers for various Chinese investors;
  • Benefits and impediments posed by this wave of investment;
  • Analysis and projections of the sustainability of Chinese investment in commercial and residential property; and
  • Recommendations for U.S. and Chinese investors, policy makers, and stakeholders to keep investment channels open.
  •  Combining information from public records, reports, and trade groups – based in part on gathering of data and interviews with industry sources – this report assembles a unique information set, providing the first comprehensive analysis and understanding of Chinese inbound investment into all facets of U.S. real estate.

 This reported investment data are not perfect, a result of the combination of the particulars of real estate investment avenues and the ability of government and third-party sources to accurately measure capital flows. Furthermore, a significant portion of investment from offshore locations, including China, comes in the form of minority interests in projects sponsored by U.S. entities and is not directly traceable to the capital country of origin.

 Our study is focused on investment from mainland China, but the flow of capital through intermediary destinations sometimes necessitates the inclusion of capital from Hong Kong, Macau, or Taiwan. Moreover, the task is complicated by the multiple channels for investment, ranging from purchases of homes and apartments to business investment in commercial assets to development and construction, as well as through provision of debt to both residential and commercial property investors. The myriad ways in which to record real estate ownership can also obscure the true country of origin of the buyer. With this in mind, this report presents the data as minimum investment volumes. While acknowledging these data limitations, we have made every effort to compile data and insight that provide a more complete reflection of actual Chinese investment activity across the entire spectrum of the U.S. real estate market than previously published. This includes enhancing investment volumes reported publicly as well as confirming the reported data via industry participants.

 The investment flow has come into the United States through several channels:

 

• Residential property: Between 2010 and 2015, Chinese buyers spent at least $93 billion on homes, including condominiums, for occupancy and investment. Spending rose at an annual rate of 20% and provided important demand in many local markets hit hard by the housing crisis. Chinese buyers paid substantially more, on average, per home than other international buyers because of their concentration in prime neighborhoods in California and New York.

 • Commercial property: Between 2010 and 2015, Chinese investors acquired at least $17.1 billion of existing office towers, hotels, and other commercial buildings, representing an annual growth rate of 70%. Half of that investment came in 2015 alone. The buyers were mainly large Chinese companies, including real estate firms and institutional investors.

 • Development: By the end of 2015, Chinese-funded projects under construction or planned totaled at least $15 billion. These range from multi-billion-dollar mixed-use projects in Los Angeles and the San Francisco Bay Area to smaller-scale developments in secondary markets. These investors include Chinese developers, builders, and construction companies, some of which have set up U.S. offices, creating local jobs for ongoing operations beyond the construction phase.

 • EB-5 visa program: Since 2010, Chinese nationals have been the most numerous investors in the EB-5 U.S. visa program. The program enables a foreign national who invests at least $500,000 in projects that create a minimum of 10 jobs to receive a U.S. visa and, on completion of the project, a green card for permanent residency status. Detailed data on these investments and the actual number of jobs created are not generally available. But based on the minimum investment and job creation requirements, and assuming all investments are successful, Rosen Consulting Group estimates that since 2010, nearly 20,000 Chinese EB-5 investors have generated at least $9.5 billion of investment capital and contributed to the creation of 200,000 jobs.

 • Residential mortgage-backed securities (RMBS): Chinese government entities began purchasing U.S. government agency-backed RMBS in the early 2000s to diversify beyond U.S. Treasuries. As of June 30, 2015, China held $207.9 billion in agency-backed mortgage bonds, more than any other country, according to preliminary U.S. Department of the Treasury data. These holdings contribute to enhanced liquidity in the U.S. housing finance market.

 • Real estate loans: In recent years, Chinese banks increased activity in lending for real estate acquisitions, recapitalizations, and construction and development. The banks have amassed at least $8 billion in loans and have become a major source of funding for large commercial real estate projects. This loan portfolio extends beyond Chinese investors and projects with Chinese partners, as leading Chinese banks are active competitors with U.S. and international banks and private sources of capital in the commercial property market. Residential mortgage lending by Chinese banks in the United States is more limited, but growing.

 OUTLOOK

We believe China’s economic turbulence will create a short-term speed bump for real estate investment overseas, including in the United States. In the near term, a 6- to 24-month temporary period of increased capital controls is likely – either formally via policy announcements or informally through administrative processing – until the Chinese currency can be re-aligned with that of global partners. However, this does not mean investment will cease during this period. Furthermore, the long-term investment drivers remain: strong U.S. demand for capital; a widening and deepening pool of Chinese investors, many of whom have not ventured into U.S. real estate; increasing global appetite by Chinese developers and construction companies; a $1.6-trillion insurance industry that has become active overseas but invested just a fraction of funds available for real estate projects; and new Chinese investment vehicles, such as private equity funds, which have only recently become a factor in the U.S. market.

 We project that Chinese direct investment across existing U.S. commercial real estate assets and residential purchases, excluding new development projects, could total at least $218 billion, cumulatively, from 2016 through 2020. In the short term, capital controls will likely slow individual purchases of U.S. homes, the biggest component of Chinese real estate investment, and slow the growth rate of commercial property acquisitions. Chinese-backed development projects are likely to remain a substantial component of the commercial real estate market even as the economic cycle in the United States slows the overall pace of new development announcements. Beyond 2020, Chinese investment in U.S. real estate could accelerate further.

 RECOMMENDATIONS

These large capital flows, accelerating substantially in a short period of time, do not come without challenges in both countries.

In the United States, several policy areas will need attention in the next several years:

 

1. Rationalization of taxes affecting foreign investment: The Foreign Investment in Real Property Tax Act (FIRPTA), while perhaps well intentioned at inception, is an onerous structure that creates an impediment to international investors in real estate. Every effort should be made so that there is a level field for taxes on foreign investors regardless of their domicile.

 

2. Continuation of the EB-5 program: While the program was extended through the summer of 2016, renewal is by no means a certainty. It has been a successful bridge builder, bringing capital into the marketplace, growing or retaining jobs in the United States, and allowing Chinese citizens and families access to visas and residency. The EB-5 program will likely undergo reform, but it should not be altered so dramatically as to cut off access to international capital and immigration, including those from China.

 

3. Continued implementation of existing security policy: Offshore investors are understandably screened for security risks and legitimacy of capital sources. So far, such concerns have not been an impediment to investment in U.S. property, as it has been in technology platforms, manufacturing firms, or natural resources extraction and processing. Any proposal to restrict U.S. government occupancy, including those of certain government contractors, in foreign-owned buildings – as is being discussed in congressional circles – should be carefully monitored.

 

On the Chinese side, the issues that deserve attention include the following:

 

1.Continued development of legal and financial rules to encourage private sector investment in overseas property: Chinese companies and individuals can benefit themselves and the Chinese economy by diversifying assets globally. It is critical that China develop a robust domestic legal framework for foreign investment, as many countries expect reciprocal treatment of foreign investors. Likewise, reforms that reduce bureaucratic bottlenecks and expedite outward investment should continue.

 

2. Enhanced transparency in capital ownership: The United States and other global financial centers are increasingly monitoring the identities of foreign investors and business operations. While China is not the only country that raises concerns, Chinese businesses historically have been less open regarding origination of capital and ties to government or military officials. Continuing progress toward the transparency required by international agencies – many of which are welcoming China as a significant participant – will be an important step.

 

3. Avoidance of capital controls: China’s economic growth rate has slowed, and its currency is re-aligning with that of other major economies. Chinese concern over capital outflows is understandable, but a hard capital-control regime could negatively impact the financial institutions the government nurtured over the past two decades.

 China is a powerhouse the US cannot discount. Prosperity and free flow of capital between the 2 nations is the only way to go.

Tagged:

A Case For US Infrastructure

By:


US infrastructure policy has failed dismally over the past two decades. The nation’s decision makers must agree that American roads, bridges, plumbing systems and public buildings are falling apart. A trip to most of American urban centers leaves all in shock and wonderment at the failure of prior US governments to upkeep basic infrastructure needs of the American people. President Trump’s intention to pump US$1 trillion into America’s failing infrastructure is by no means an overestimation!

The US Congress’s dire inability to legislate on funding to support both new and retrofitted roads, bridges, public buildings and general physical transit communications has landed America in this mess. The majority of transit and road retrofits have stalled because the US Congress has managed only temporary funding for infrastructure maintenance, sometimes lasting for a matter of months. It is only from December 2015 that Fixing America’s Surface Transportation (FAST) Act was passed for a US$305bn to highway and transit maintenance over 5 years. From 2005 the US Congress depended mainly on funding extensions, nearly depleting the Highway Trust Fund. This lack of oversight has left America closer to third world status when it comes to infrastructure development.

US infrastructure should be a bipartisan issue and will be made priority over the course of the Trump administration. President Trump and his team proposed to immediately increase private sector spending on infrastructure projects with US$137bn in tax credits. The Federal gas tax has funded America’s infrastructure to date. However, this tax has not been increased, or adjusted for inflation since 1993. And since 1993 US politicos over various administrations have complained and whined on the need to come up with money for failing US infrastructure, without even considering basic economics such as an inflation adjusted gas tax rate. Due to this mismanagement, we will need more than pure fiscal spending to solve this maligned infrastructure funds drought.

The Canada Pension Plan Investment Board’s (CPPIB) US$18bn global infrastructure portfolio is a strong replication to follow for infrastructure investment outside of tax revenue. The CPPIB’s fund invests US$375m to US$1.5bn in single projects. In this sense, the fund has blanket management oversight in the project. According to Mrs. Hogg, Managing Director of the CPPIB, the Fund has gen­er­ated annual re­turns for the port­fo­lio of 12.8%, consistently for a five year period. While the CPPIB invests globally, we invite US institutional investors such as US public pension funds to actively step up and invest heavily in the nation’s infrastructure projects, and to also take a management oversight approach in investing where possible. Thus far, US pension funds such as CalPERS have made investing strides in domestic highway projects. This trend must continue if we are to have the funds America needs to both maintain and develop our infrastructure.

Private infrastructure funds will have a crucial part to play as well. According to Preqin’s 2016 Infrastructure Fund Outlook, while the majority of capital raised for infrastructure needs comprised a minority of global funds, 51% of private sector infrastructure investors are motivated to provide capital to first-time funds due in part to the US’s renewed infrastructure focus. Most infrastructure investors are interested in both global and boutique funds that are backed by businesses with long-term commitments from a healthy mix of public and private infrastructure projects.

We have a healthy rebound in mutual funds and ETF funds that are primed towards infrastructure companies and industrials. Morningstar has reported the asset base of such funds to be well over US$10bn. Capital concentration for unlisted infrastructure funds have almost skyrocketed from 2015 to present. Preqin’s Infrastructure Capital Concentration report for first quarter 2017 states that total fund size for unlisted infrastructure funds jumped by 73% from 2015 to 2016. These unlisted funds raised US$59bn in 2016. We can attribute such a jump in capital concentration in part to strong investor expectations regarding the Trump Administration’s infrastructure policy.

Suggestions and Recommendations:

  • The inability of US Congress to stand by infrastructure funding has failed America’s infrastructure in the past. We need bipartisan support on Federal infrastructure laws, acts, and bills that are introduced.
  • State legislature needs to step up to the plate when it comes to state enforcement of laws, acts and bills to strengthen funding for depleted infrastructure. This is not only a Federal issue.
  • Infrastructure projects will need to focus more on user fees and revenue. Both Federal and State projects have only focused on steady toll revenue on major highways within the past 5 years. User fees offer funds for maintenance, and projects with user fee projections are much more attractive to institutional and private investors.
  • Funds such as the Highway Trust Fund may need more private sector input on their Advisory Boards to ensure that the funds are well managed with consistent returns.

US infrastructure has lagged so far behind in build and maintenance over the past decades that it will take an intensive ground-war approach to getting prioritized projects up and running. We cannot afford to have stalling for even one year on proposed measures to begin fixing America’s roads, bridges, buildings, levees and all physical infrastructure systems. The Trump Administration has pledged full support in bringing US infrastructure up to standard. US political decision makers and citizens should stand by this pledge.

Sources

Tagged:
Page 1 of 2
1 2