Respectfully submitted by Lawrence E. Rafferty (rafflaw)-Weekend Contributor
Over the last few years we have seen many stories and articles that discuss the problems States and Municipalities are having in paying their public pension payments and how various politicians propose to fix those “problems”. The politicians almost always seem to blame the pension problems on the overpaid government workers and their unions. The idea that Wall Street might have something to do with these government pension plans being underfunded is rarely discussed. Until now.
A significant portion of the funds deposited in government employee pension plans is invested with Wall Street. According to one recent study, the public pension plans are paying at least $5.4 Billion dollars each year to Wall Street.
“Currently, about 9 percent — or $270 billion — of America’s $3 trillion public pension fund assets are invested in private equity firms. Assuming the industry standard 2 percent management fee, that quarter-trillion dollars generates roughly $5.4 billion in annual management fees for the private equity industry — and that’s not including additional “performance” fees paid on investment returns. But even the $5.4 billion number could be drastically understated, according to CEM.” Reader Supported News
$5.4 Billion dollars is a lot of money, but as usual, Wall Street may be getting an even bigger piece of the pie. “If CEM’s calculations are applied uniformly, it could mean taxpayers and retirees may actually be paying double that $5.4 billion number — or more than $10 billion a year. Public officials are overseeing this massive payout to Wall Street at the very moment many of those same officials are demanding big cuts to retirees’ promised pension benefits. By comparison, the total budget of the Environmental Protection Agency is just over $8 billion.” RSN
In order to fully understand the scope of the costs these pension plans are paying to Wall Street, it may help to see how these huge fees are paid on the state level.
“California’s report said $440 million. New Jersey’s said $600 million. In Pennsylvania, the tally is $700 million. Those figures are public worker pension fees being paid annually by taxpayers to Wall Street firms, and they have kicked off an intensifying debate over whether such expenses are necessary.” RSN
When you consider that the CEM study figures that public pension plans are paying from $5.4 Billion to more than $10 Billion a year in fees, it is no wonder that so many politicians want to privatize Social Security and bring other public pensions into the Wall Street fold. Using just the standard 2% fee noted above, just how many billions would Wall Street rake in if Social Security was privatized? How many billions more would Wall Street collect if the entire public pension asset pool was also “invested” with Wall Street?
At the least, shouldn’t these States insist on a full disclosure of the secret fees that the CEM study alleged? And if the study is correct, shouldn’t Wall Street refund the secret fees back to the pension plans? In one example, the State of Pennsylvania is balking at its high fees and the Governor and the Legislature are trying to find a way to make the cost of their underfunded pension plans more manageable. Both sides of the aisle differ in their approaches to solve the problem.
In New Jersey, the evidence is mounting that the Governor steered public pension money to political allies and donors.
“This week, after an International Business Times investigative series found that Republican Gov. Chris Christie’s officials were not disclosing all state pension fees paid, New Jersey pension trustees announced a formal investigation of the fee payments. Some of those fees have flowed to firms whose executives made big donations to political groups affiliated with Christie. In just the five years since Christie took office, New Jersey fees paid to financial firms have more than quadrupled. At the same time as fees spiked, Christie has said the pension funds do not have enough money to pay promised benefits to retirees.” RSN
Do you think Gov. Christie will ask his cronies for New Jersey’s money back?
In various states, one side of the discussion wants to use bonds to make the payments more palatable and the other side is pushing to put new hires into a 401(k) system where the employees do their own investing. Of course, neither plan will quickly solve the problem of underfunded pension plans when state and municipalities have reduced or ignored payments to the pension plan for years and in some cases like in Illinois and other states, for decades.
And if the 401(k) plan that is being promulgated for Pennsylvania and other states is incorporated, who do these employees invest their retirement money with? Wall Street, of course.
I believe that a reasonable taxpayer would think that at the least, the politicians should be able to agree on reducing the cost of the Wall Street investment fees and demand an accounting of all undisclosed fees and if possible, a refund of those undisclosed fees. With both Democratic and Republican administrations involved in allowing or funneling public pension funds to supporters and donors, politics and cronyism may get in the way of a real and equitable fix. What do you think?
The views expressed in this posting are the author’s alone and not those of the blog, the host, or other bloggers. As an open forum, weekend bloggers post independently without pre-approval or review. Content and any displays or art are solely their decision and responsibility.
Rafflaw said …
In various states, one side of the discussion wants to use bonds to make the payments more palatable and the other side is pushing to put new hires into a 401(k) system where the employees do their own investing. Of course, neither plan will quickly solve the problem of underfunded pension plans when state and municipalities have reduced or ignored payments to the pension plan for years and in some cases like in Illinois and other states, for decades.
I’m simple minded. Isn’t the elephant in the room the fact that states and municipalities are not paying 100% of the funds due in to the funds in the first place? You said as much in the paragraph cited above.
Let’s not even go in to how Medicare became pay as you go versus payment from a dedicated fund. Meld funds and watch them disappear….then to make things all better, cut the tax/fee collection by 1/3 and call it good.
As for the crony-ism involved by both parties, I agree…but fees are not the elephant. If they are please relieve me of my ignorance. What you do not put in cannot generate income, or losses, or fees.
Whether private sector or public, it should be serious felony, applied to those with fiduciary responsibility for the funds, to fail to deposit 100% of the funds due….both the contributions of the employees and that owed by the government entity. Unless 100% is deposited, gains or losses can’t occur…the money is just “missing.”
As for 401K’s … most instances that I know of let the account owners designate categories, but not investments per se. My federal 401k is an example…I could choose categories like stocks, bonds, Treasuries, etc., but I could not direct the actual investments.
I admit I am not expert at this stuff…I may be missing something due to a log in my eye….versus a splinter, or just my devotion to the KISS principle. If so, correct me. 😀
randyjet
I didn’t know these firms hacked into the system and stole the accounts? Who do you think hires these organizations?? Wouldn’t be the corrupt, lazy. inept politicians and their supporting staff and career bureaucrats? Where is the government accountability? Letting a contract with terms and conditions specified, visible and clear to the paying customer should be within the means of a journeyman lawyer.
Thanks for the link Max.
raff,
like this one…
The Media Fall for Hillary Clinton’s Gensler Gambit
http://neweconomicperspectives.org/2015/04/the-media-fall-for-hillary-clintons-gensler-gambit.html
raff
With both Democratic and Republican administrations involved in allowing or funneling public pension funds to supporters and donors, politics and cronyism may get in the way of a real and equitable fix. What do you think?
= = =
I think both Parties are ‘in on it’.
reff
Thanks for following up with this story. I’ve been reading a lot of David Sirota who’s been covering Christie and the N.J. Governor’s ability to skirt the law.
There’s a lot of wheelin’ and dealin’ going on in his office… just saying.
“In all, CEM Benchmarking concludes that America’s public pension funds are paying billions of dollars in undisclosed fees to private equity firms.”
“Less than one‐half of the very substantial [private equity] costs incurred by U.S. pension funds are currently being disclosed,” says the report from CEM, whose website says the financial analysis firm “serve over 350 blue-chip corporate and government clients worldwide.”
“If CEM’s calculations are applied uniformly, it could mean taxpayers and retirees may actually be paying double that $5.4 billion number — or more than $10 billion a year. Public officials are overseeing this massive payout to Wall Street at the very moment many of those same officials are demanding big cuts to retirees’ promised pension benefits.”
RSN: Cities and States Paying Massive Secret Fees to Wall Street: Report
By David Sirota and Matthew Cunningham-Cook, International Business Times
18 April 15
Sounds like a very strong argument against Big Government. And for getting the government out of anything associated with retirement and SSA management.
mhj,that is actually funny. So the Wall Street managers cheat or siphon off funds, and the solution is to give them MORE funds to do that with! Sort of like the geniuses who find Medicare fraud by doctors, and their solution is to punish the poor folks on Medicare for crooked doctors! Love it!
Now you are in my area. Defined Benefit Pension plans. Those should have gone the way of the Dodo years and years ago. They are completely inappropriate for large companies and more than inappropriate for Government employees. A DBP is unsustainable for many reasons.
The few people in the private sector who set those up are closely held corporations and family type businesses. I set up many of those and managed the portfolios for Doctors, Lawyers, Architects and some large family ranches.
The problems with these types of plans….besides the fees that are being funneled to favored firms and people who have the juice to get the plum that is a DBP are several.
I’m not going to go into the mechanics of a DBP here. or compare them to a Defined Contribution Plan….. Google it. They are very very complicated.
1. Unsustainable promises of a future benefit based on shifting sands
1a) Employees renegotiate retirement years and percentages such as changing retirement formulas from 2 at 60 to 3 at 50. The entire actuarial formula is now completely wrong.
1b) Allowing the employee to retire using the highest paid year instead of an average or other formula. This leads to fraud, where an employee who earns $75 K and is going to retire at 3 at 55 will suddenly pad their last year or two and then be able to draw more than there could possibly be funded for his retirement. Police unions are famous for this.
2. Actuarial assumptions that do not keep pace with the reality of investment returns.
2a) For the longest time, Calif was (and may still be) using an assumption of a 7.5% return, when for several years they had no where near this return and even have had some significant losses. Instead of increasing the amount the employee is to contribute and the amount that the employer (taxpayers) contribute, they used some fancy smoothing formulas to HIDE how woefully under funded the plan was.
2b) By law (varies from State to State and plan to plan) the plan is required to put a portion of assets into “safer” assets such as bonds. When interest rates on fixed income investments are at a negative real return, you can imagine what THIS does to the portfolio performance. Bonds are a suckers investment right now. Low interest rates, guaranteed to fall in value as soon as rates go up, and are a long term loser in the portfolio.
2c) When faced with years of negative performance, the actuaries have to drastically reconfigure the contributions and make the people/politicians realize that there will be many more years of recovery to get past just one or two years of down returns. People don’t want to hear it and frankly, like Gruber says, are too stupid to understand it. Head in the sand.
3. Investments driven by political correctness instead of by sound financial principles.
3a) People deciding to divest their portfolios of icky oil companies and other types of industries that are out of political favor. Or….investing in the pie in the sky green energy companies. The point of investing is to make money and when you are investing for everyone in the pool, you don’t have the luxury of idealism. Make money stupid!
Could the States bypass some of the fees and charges by setting up their own fund managers. Probably. Would they be competent…..probably not. They would likely be just as corrupted by nepotism, favoritism and stupid investment decisions based on political agendas.
There is more. But I don’t care anymore.
Oh, the wordpress filter doesn’t like one of the words in the link! Sooo, let’s try it a third time! Good start on this issue! If you want more info on crooked fees, then see this link, which you will have to take the hypen out of the word meaning nude, to get there:
http://www.na-kedcapitalism.com/2015/04/investors-like-calpers-and-new-york-city-in-the-dark-about-private-equity-fees.html
Squeeky Fromm
Girl Reporter
The states should all start state banks to handle all the money they take in. Simply deposit those pension funds in state bank bonds or simple deposits.
Follow the money? You want to see someone bought and paid for check how much money the arabs contributed to the Clinton foundation, who do you think she’s going to represent if elected?
If pensions are over paying for services, It is the responsibility of the pensioners and the pension fund managers to cut better deals with the investment bankers. If you expect policy makers to do it, you are in for a long wait. Politicians view public pensioners as the do taxpayers; economic slaves. Wake up America, don’t you know the government is always here to help you.
Hidden fees and kickbacks need to be prosecuted. The pension problem is structural and would still exist if all past fees were waived. The problem is the large fund size and lack of managers that care and politicians that promise the world to workers. One day we will need to address the problem and it won’t be pretty.
Look at CalPERS the largest state fund in the nation that has an independent board. They still have problems and pay a lot of $ for management.
http://en.wikipedia.org/wiki/CalPERS
Darren
The first problem is that there is a substantial disconnect between those that enter and leave the government every four years plus and a certain degree of confusion when it comes to dealing with career economists whether theoretical or actually in the business. The government end typically has to defer to the private end. I had a client once who was well up in the California union structure, the largest union fund in the world. He was a lawyer, economist, and career Calpers man. Yet he made, sometimes good deals and sometimes bad deals. It is business and either you are all in or you hire someone that is all in.
In other words, you pays your money, you buys your ticket, and you takes your chances.
You can negotiate fees and prosecute for double dealings but no one complains when the profits roll in but everyone complains when they don’t.
One thing is for sure, the government should be more carefully guarding the henhouse and not hiring foxes to do the job.
Two thoughts.
With the resources of a state, there is no reason the state cannot hire its own economists, actuaries, and other financial professionals to provide management services for the public pension systems. Surely, if state colleges can aggressively work to attract those with high talent and credentials to their faculty, and compensate them well, there is little reason this cannot be performed for state departments of retirement systems.
There also comes a time where one would think economies of scale would kick in and no additional management fees would be required. A small municipality could see effective management fees of two percent where a state level might command effective management fees of less than one. Once the overhead of the system is paid, the remaining fees would be related to any brokerage costs involved in the transacting of securities which of course also benefit from economies of scale.
The entry into political graft at the expense of public pension systems is tantamount to theft on the basis of conversion of the public interests for political or personal gain.
Wall Street firms have been ripping if pension funds for years. They are really to blame for their short falls in pension funds. They made big promised; crashed the economy; never met their bench marks but because of sweet heart deals they kept their massive fees. And pension funds weren’t the only things they defrauded municipalities and states over. Municipal and special purpose bonds were sold as can’t lose deals; complex documents explained to Mayors and City Councils is glib language to calm and seduce. The wall Street firms and their related consultants took their BIG fees and left; and the cities and states were left holding the bag. See for example DETROIT!
They belong in jail along with people like Christie but it won’t happen because Obama and others are beholden to them. And the little guy will keep paying and paying.
Thanks Lawrence this needed to be said!
eh gaba goo meatball
fat diego pig will be lucky if he ever gets elected for street sweeper for which he would’nt quailfy either
Jade Helm 15 News: http://beforeitsnews.com/alternative/2015/04/jade-helm-decoded-jade-helm-guide-stone-this-is-no-false-flag-video-audio-3139880.html
Regards,George