When retirees in the Sacramento County Employees’ Retirement System began to outnumber its active members about a decade ago, it tipped the plan into negative cashflow territory—right around the time Steve Davis was promoted to CIO from deputy. To ensure the pension would have enough liquidity to always pay its benefits, Davis increased the plan’s allocation to cash-flowing assets like infrastructure and private credit.

Sacramento County’s pension has a math problem familiar to many mature plans: it pays out far more in benefits than it takes in. Its solution is to push deeper into niche corners of private credit in search of steady income and equity-like returns while “always being in the proper liquidity profile,” according to Davis. 

“We're going into a lot of illiquid structures, so we structure the portfolio to make sure we have enough liquidity to meet our benefit payments at all times,” the Public Pension CIO of the Year finalist told Institutional Investor.

Since expanding into private credit and direct lending strategies to curb its negative cash flow when Davis took over as CIO in late 2016, SCERA has gone into “a lot more esoteric lending strategies” like asset-based finance and royalty-based lending in sectors such as entertainment, healthcare, and aircraft engine leasing. 

Asset-based lending—loans backed by things like outstanding invoices, inventory, or royalty streams—is quickly gaining popularity among allocators. By entering the $6.1 trillion global private asset-based finance market, SCERA is tapping into a space KKR has projected to grow to $9.2 trillion by 2029—larger than the syndicated loan, high yield bond, and direct lending markets combined. 

These investments have the potential to provide higher risk-adjusted returns than traditional corporate lending. However, they’re not foolproof. When the collateral falls in value, the securities can struggle. 

Although they can have more concentration risk than most corporate loans, Davis argues that these strategies offer better downside protection because the loans are backed by physical assets rather than the company’s enterprise value or cash flows. If the loan defaults, the holder can sell the assets, whereas a default typically results in a restructuring or bankruptcy.

While SCERA had been investing in real assets and private credit on an ad hoc basis since about 2011, private credit wasn’t designated as a formal asset class until 2017. His office also carved out a dedicated cash allocation. “We certainly evolved the portfolio as the plan has grown in size,” he said. When Davis joined SCERA in 2010 as an investment officer, the pension was roughly $5 billion—now, it’s about $15 billion. 

Davis and his team now manage a portfolio that’s tilted roughly 40 percent to alternatives (including a 12 percent allocation to private equity). Given its large private market footprint, SCERA runs formal liquidity analysis studies annually with its general consultant Cerity to make sure it has the required liquidity to meet its needs.

“We’ve been very active in private markets and alternative assets for quite a while now, to the point where we have fully built out private markets: They’re mature, they're self-funding, cash flow positive, and have generated really strong performance,” Davis added. 

 

Negative Cash Flow ≠ Insolvent

Most major U.S. public pension plans operate with negative net cash flow, as benefit payments to a growing pool of retirees naturally outpace incoming contributions from current workers.

Data compiled by the Center for Retirement Research at Boston College show that the vast majority of mature state and local plans face an ongoing net cash outflow equating to a regular reduction of about 2 percent of assets each year before accounting for market returns.

But this does not immediately signal insolvency. The funded status of public plans continues to improve. Just look at Sacramento County: while it paid out $742 million in retirement benefits versus receiving $545 million in total contributions for its 2025 fiscal year, net investment income, which includes $1.3 billion in net appreciation of assets, more than covers the gap (SCERS was 93.5 percent funded as of June 30).