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?
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SteveH, LOL, speaking of magical thinking. Do you seriously think Professor Turley wants an echo chamber here? He has said numerous times that he likes the fact that his blog has commenters from different political philosophies. Besides being a blog that focuses on free speech.
The very same guy who continuously comes onto threads lauding people for having “great discussions and not being toxic” is usually one of the first to post inane comments that are completely off the mark and toxic to boot. The irony is amazing.
Rafflaw, I think anyone who read your article and followed the links saw the clear reference to BOTH sides being guilty of allowing Wall Street to rip off the pensioners.
Rafflaw, you do not have a “progressive leaning.” There are many on this blog who lean left but they do not spend so much time, energy, and Professor Turley’s reputation to attack, attack, attack. Your vitriol is offensive; your motives transparent; and teenage-level retorts about “… read the article including the links…” (to see that the source articles criticize both Dems and Repubs) are laughable.
You, sir, put the picture of Christie on top of the article.
Again, I appeal to Professor Turley to remove you from the list of “weekend contributors”. You diminish him and yourself.
It is improper fees by Wall Street and States not paying their bills over decades that has led up to where we are now.
Yes. That is part of it. The real reason that we are where we are now is the flawed structure of a DBP when used for large groups such as Unions or Government employees.
As I detailed in my comment at http://jonathanturley.org/2015/04/19/follow-the-money/#comment-1440617
The mechanics of a DBP are incredibly complex.
Plus as you noted. The States and companies who have these plans have been underfunding them for various reasons, AS I detailed. One reason on the part of the States, is they are just trying to hide how bad it really is. Hoping that the problem will just go away and solve itself some how.
Magical thinking.
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.
@ Ari
Most 401K plans that are company owned, (meaning the company has set up the plan and therefore has picked the investment vehicles) allow you to choose from investment categories which are in mutual fund. You don’t get to pick out individual stocks. The IRS also has a list of investments that are NOT allowed in 401K plans. Some plans also have restrictions on how much of your money can be invested in risky investments. Some plans insist that you have 20% (or so) invested in fixed income funds.
The plan administrator is responsible for setting up the 401k plan according to government guidelines. Part of this is to make sure the plan obeys all applicable rules and regulations, but it also involves the administrator making prudent and cautious selections of the properties and securities in which the plan invests. The Employee Retirement Income Security Act of 1974, known as ERISA, says that the administrator must exercise the level of judgment he would use if the investments were his own. Provided he meets these requirements, neither the plan administrator nor the company will be held responsible if the 401k investments lose money.
DBP plans controlled by your employer do not even give the employee the option to select categories of risk. You are all in one pool. Like it or not. So if Cal Pers sucks in an investment year…you have no choice but to take the suckage.
Once you “roll” your funds out into a sheltered account and place it at a brokerage or with a financial professional, THEN you can choose individual stocks. You are still restricted by IRS rulings in some ways as to the type of investments you can hold in an IRA> You can’t invest in collectables for example Art….If you do, then you will have to pay taxes and possibly a 10% early withdrawal penalty on the amount considered distributed.
To those who complain about the fees for the portfolio manager…..I challenge you to create, manage and monitor a portfolio of millions or even billions of dollars. It isn’t easy and if the manger is doing a good job, using his/her years of experience and training, you should consider the fees (if minimal) to be money well spent.
Many of my larger accounts were on a fee basis (% of the portfolio at the end of the contract year)so that when the portfolio grew, I was compensated. If it didn’t grow I lost money in my practice because I had to bear all the costs of the trades.
Nick,
Once again, your animus towards me and anyone who has a progressive leaning is too apparent. If you actually read the article including the links, you will see that both Republican and Democratic administrations mishandling of state funds are discussed. The only party to the contracts between the unions and the States that did not break their contract was/is the union employees. The employees paid their contractual share, but the states, including mine for decades over multiple Democratic and Republican administrations. underpaid or violated those contracts by deferring the state’s share to the pension plans. This was an article that attempted to show that it was politics on both sides of the aisle that has aided and abetted the shortfall of these pension plans along with the undisclosed and possibly illegal fees charged by Wall Street. Please tell the class how the union employees caused Wall Street to charge undisclosed fees in the billions and how union employees caused the States to underfund their shares of the pension agreements.. The pension plan itself is not the issue here. It is improper fees by Wall Street and States not paying their bills over decades that has led up to where we are now.
Raff, I actually do have a big problem w/ shady dealings by ALL people. You seem to have problems w/ Republican guvs. You attack your own guv because he is doing what TAXPAYERS demand, that being ending the fat cat union gravy train and the raping of hard working people w/ high taxes. Your motivation in virtually every post you write is painfully transparent. When I see you acknowledge the abuses of unions, the exorbitant taxes, I will back off. You have my word on it.
Nick,
As usual you are too kind and way off base. The piece is not about supporting unions, although they do have a First Amendment right to associate and work together for a common cause, don’t they?
It is about the undisclosed fees that the fund managers are charging that cost the retirees and the states, Billions. These undisclosed fees could be illegal, but yet you seem to have no problem with that. All of our taxes are impacted by the disclosed and undisclosed fees. If some of it is illegal, people should be investigated, charged if there is sufficient evidence and tried, shouldn’t they??
DBQ, Great, substantive comment. But, how dare you interject facts into a classic Rafflaw govt. union supporting hit piece.
He’s just another Jersey goombah.
Well, New Jersey has some other interesting persons, for example this Democratic Party big wig, Jon Corzine, about whom there is some wonderful news!
More at this link:
http://www.wsj.com/articles/jon-corzine-considers-launching-hedge-fund-1429484718
Squeeky Fromm
Girl Reporter
(music- to tune of Where Have All The Flowers Gone- Lyrics to same song altered)
Where has all my money gone!
Long time passing.
Where has all my money gone…
Long long time ago.
Fatboy Christie pockets full…
Long time passing.
Fatboy Christie pocket full… long long time ago.
Fatboy is no alter boy.
No, he’s a squatter.
Fatboy is no alter boy.
He plays with all our toys.
When will we ever learn? When will we evveeeer learn?
And its not a Republican vs. Democrat issue. The Democrats are in the pocket of Wall street and big business too. Whether its amnesty and open borders, cutting the capital gains tax, cheap H-1 visa labor, “free trade”, or letting corporations like Apple skip out on paying Corporate income taxes, there ain’t a dime worth of difference between the two parties.
Yes, the Wall street rip off of the pension funds is a disgrace. As stated above, if the funds are big enough they can manage it themselves, and if not, they should just put the money in a a stock index fund. One problem we have with interest rates at all time lows, is the only way the funds can make enough money is to invest in the stock market. Well, what if the stock market starts to go down? Yes, I know, its unpossible, right? It will just keep going up forever,
Yes, follow the money…
https://twitter.com/davidsirota/status/589930423150518272
raff
Senator Sanders had a good interview today…
http://www.nbcnews.com/news/us-news/hundreds-attend-10-year-old-mackenzie-moretters-birthday-party-after-n344391
Wow. Gives me hope.
Rafflaw always blames the Republicans and Wall Street and the Koch brothers for just about everything. So, when the various governments overpay and under-report, he blames Wall Street for ripping off the taxpayers. When one of the states has a long liberal, Democrat heritage, he points the finger at its rare Republican governor.
Any article written by Rafflaw is biased to promote his agenda of hate.
Raflaw –> hat tips to you for a simple yet challenging piece.
Weather makes a drought, but man makes a shortage! Good luck California with managing your groundwater as well as CalPERS manages your water agency portfolio. Who will be the fall guy, the manager of the water agency or the manager at CalPers?
mhj … Bingo!
BTW…the bureaucrats that make the policy are institutionalized elements of government, large or small. Who is elected this or that makes little difference to any of them. As a long time DOD “Fed” this fact scares me a bit….policy & procedure guidance (orders) provided by senior executives with no real experience in their fields in about 9 out of 10 cases.