Follow The Money

220px-Chris_Christie_2011_Shankbone

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.

 

 

65 thoughts on “Follow The Money”

  1. Reply to Darren Smith,
    Where do you think our “highly qualified and highly intelligent” government accountants are coming from? From our most prestigious colleges, where they learn to scheme and cheat.

  2. Let’s put everything into proper perspective. Once again, our big government has screwed over the public workers by not having the ability to oversee the coffers. The government is the first to blame.

    The first to blame is Washington–the overseeing committees did not do their job regulating and auditing Wall Street and the banks. In fact, they too were raking in the dough and getting special favors to turn the other way.

    Secondly, the state governments are to blame for also not doing their own overseeing and auditing. What do we elect the Secretaries of the Department of Treasury for, if they’re not going to do a complete and good job.

    Thirdly, the cities are to blame for not continuing the process.

    Fourthly, Wall Street (the fox) is to blame, because they are taking and eating all the chicken feed from the people (chickens).

    I have worked in my own business and for a government agency. I have reaped more money from my own investing towards my retirement than I have from working for the government and putting into a pension fund. I am grateful for both professions, but I think people need to look after their own money and their own retirement investments. Obviously, every level of government isn’t doing a good job.

  3. You failed to mention:

    The Underfunding of State and Local Pension Plans
    May 4, 2011 Report

    That estimate of unfunded liabilities is calculated on the basis of actuarial guidelines currently followed by state and local governments. Another approach for measuring pension assets and liabilities, which more fully accounts for the costs that pension obligations pose for taxpayers, yields a much larger estimate of unfunded liabilities for those plans in 2009—between $2 trillion and
    $3 trillion. 3

    http://www.cbo.gov/sites/default/files/05-04-pensions.pdf

    States still woefully short of pension funding goals
    By Amey Stone CBS News May 27, 2014, 5:30 AM

    That’s the good news. The bad news? State and local governments around the country still don’t have anywhere close to the amount of money in their coffers that they need to pay out promised pension benefits — and the gap between what they’ve promised and what they’ve set aside continues to grow.

    http://www.cbsnews.com/news/states-still-woefully-short-of-pension-funding-goals/

    Not only are our friendly neighborhood politicians ladling out public money to their benefactors on Wall Street under the guise of fees for administering invested public pension monies they’re also not funding the pension plans at levels that guarantee their long term fiscal viability.

    How very exceptional.

  4. anon……. proving the point that the Dems have no concept of the economy as a whole or how an economy works or the psychology of the consumer.

    They think if the government could just grab more of the public’s money and take the businesses working capital and then build sh*t that most people don’t want or need…… that that is an economy.

    They still think the Government creates jobs. Ha ha ha. They never consider spending LESS and letting the people spend more or letting the people invest in their own selves..

    Sad. Very sad.

  5. @ Squeeky

    Thanks. I’m glad someone appreciates my pedantry when it comes to economics, investments and all that crud I used to have to deal with on a daily basis 😀

    Your article is sort of relevant to the concept of the “velocity of money”. Something that the Democrats and Progressives just can’t seem to understand. They don’t get how/why high taxation actually slows down the economy by removing money from the general circulation in the purchasing of goods, manufacturing and just about everything else. When you know your money is going to be confiscated/taxed you don’t spend it on other things.

    http://en.wikipedia.org/wiki/Velocity_of_money

  6. @DBQ

    You have made some fascinating and informative comments here. Thank you!

    As a theoretical matter, I wonder if the real problem is that a society can only put a certain amount of its “capital” into “savings” without screwing everything up. Sort of a financial “death spiral.” I used to do a little “Squeekonomics” blog, which I just opened back up to the public again so people could read this article, and about 4+ years ago I wrote about this:

    How Rich People Are Like Mattresses

    https://squeekonomics.files.wordpress.com/2011/01/mattress2.jpg

    There is a very famous Economy Paradox called the “Paradox of Thrift.” Which says that if a few people save a lot of their money, that is probably good for them, and doesn’t hurt anything. Just say instead of spending money, they stick it in a mattress. It is out of circulation. BUT, if everybody gets real thrifty and starts like buying stuff at Goodwill and not eating out at McDonalds, and sticking their money in a mattress, then the whole economy goes to pot because DEMAND has dried up.

    What might be good for a few people to do, which is advice to be thrifty, doesn’t work when everybody does it. Because then, the thrifty person may lose their job at McDonalds because everybody else is being thrifty, too. That is why it is called a PARADOX.

    Now another thing here which is important is that you notice how DEMAND is what makes things work in the Economy. Take away DEMAND and everything is just POOF! Just for what it is worth, a lot of Republicans are SUPPLY SIDE people which means that if you build it, somebody will buy it. Well, just look at the Economy now, and you can see that people aren’t buying stuff and it’s not because it isn’t there. It’s because they don’t have any money. This is why SUPPLY SIDE stuff is really stupid, and is also called VOODOO Economics.

    Which now brings you to the DEMAND stuff. There are two things that sound hard in Economy issues, but really aren’t. They are called Marginal Propensity to Save (MPS) and Marginal Propensity to Consume. (MPC) What these are is what people will do with the very next dollar they get. Poorer people spend it on stuff like food and shelter. Rich people tend to save it or invest it because they already have 10 cars, and 4 houses, and a couple of boats. They just can’t hardly spend all that they have.

    The rest of it is at this link:

    https://squeekonomics.wordpress.com/2011/01/02/how-rich-people-are-like-mattresses/

    Squeeky Fromm
    Girl Reporter

  7. @Rafflaw

    Steve and some of the others have a point. I like your article, sooo there is no problem with that. But, you remind me of those bad cops who once they make a necessary arrest, and have the subject subdued on the ground, they just have to give him a few good swift kicks to the rear end. You are that way with Republicans and conservatives, and even though your story is good and true, you just have to get in a few partisan slaps upside the head.

    Sooo, rather than just fuss at you, I have a workable solution to help you overcome your partisan prejudices and biases. You need to do a little reverse discrimination, just like years ago where, for example, the fire department had hired only white folks, they had to compensate for this by hiring mostly black folks until they evened stuff out. You need to do a hundred or so articles where you slam Democrats and use their pictures on your article. You could start with Eric Holder, and his refusal to prosecute any Wall Street bigwigs. Or, Obama and the fact that the jobs numbers are totally bullsh*t and we have less people working than we did back when he came in. That kind of stuff.

    The upshot of this is that you will make yourself a more credible person. Plus, it will force you to do more thinking, and less overly simplistic partisan sniping.

    Sincerely,

    Squeeky Fromm
    Girl Reporter

  8. The employees paid their contractual share and they are the ones asked to take the hit. It is not right. Secondly, the underpayment by the States is still a problem. If they are allowed to get away with violating their contracts, why should future payments be met or delayed even further?

    I agree with you. The employees have not done anything wrong…..well with the exception of those who pad their final year in order to cheat the system and draw more than the should be able…… and they should not be punished for the failures of the system and the failure of the market to provide the required returns. The employees have fulfilled their end of the bargain and are vested in the plan and the plan has to fulfill its end of the bargain.

    Unfortunately they made promises that they cannot keep unless they make some MAJOR changes.

    The promises that were made are unsustainable under the current system.

    I gave you the choices that are available to make a fix. Most of which require a larger cash infusion into the DBP. The underfunding of the plan is not by a conscious choice…at first….it is an effect of MATH and the defective mechanics of a DBP in a large group plan.

    the failure of governments to fulfill their fiduciary 100% deposit responsibility

    If the plan administrators are not depositing 100% of the funds and channeling them to non plan purposes, then that WOULD be criminal.

    Because the plan will be charged for maintenance fees, trading costs, administrative costs, then those costs are built into the mechanics of the plan and the actuaries will (or should) include those costs into the amounts that the employer is required to deposit. For instance if you expect a 2% administrative cost, then the employer (or taxpayer) and a portion to the employee is required to pay those costs over and above the expected funds needed to provide the future benefit. If they have not included those or have so badly miscalculated due to incompetence and not due to circumstances beyond their control, like market returns, then the pension administrators might be liable.

    why should future payments [not] be met or delayed even further?

    Because there is NOT enough money. How do you propose to fix that? Wish it away?

    I’ve given the easiest choices that are available to fix an underfunded plan. Most are unpalatable. What is your solution?

    You can make this political if you like….and it probably is in the selection of plan administrators who lobby very hard to get this plum …..but many of the reasons for the underfunded plans have to do with math, returns, poor choices by the Board of Directors and the flawed application of a defined benefit plan in a large group setting.

    In conclusion: you said:

    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.

    Where do you think the DBP plan for the State or Municipality or Union plan is invested. Wall Street of course. Stocks, Bonds, Reits, Mutual Funds, Options.

    Where do you WANT them to invest, if not in the markets? Give us some alternatives. Remember the IRS has rules on what these types of accounts and plans CAN invest in.

    If you don’t have solutions, then all you are doing is complaining without understanding.

  9. rcocean said ..

    And its not a Republican vs. Democrat issue….there ain’t a dime worth of difference between the two parties.

    Amen. I’ve said it before, but always to “crickets.” No one is willing to address the subject Rafflaw himself briefly cited…the failure of governments to fulfill their fiduciary 100% deposit responsibility…including Rafflaw. However obscene the fund management fees might be, they cannot be assessed on funds not deposited. Go figure.

    Otherwise, these threads are good for amusement, IMO…and not much else.

  10. DBQ,
    We will have to agree to disagree on the viability of DBP’s generally. The options that are always brought out to “fix” the problem are usually paid for by the only party that did nothing wrong in this contractual arrangement. The employees paid their contractual share and they are the ones asked to take the hit. It is not right. Secondly, the underpayment by the States is still a problem. If they are allowed to get away with violating their contracts, why should future payments be met or delayed even further?
    Rcocean,
    I don’t disagree with your general them, but it has been quite awhile since any benefits were raised in most DBP’s, but they are robbing Peter to pay Paul by underfunding the plans for years and in some cases, decades.

  11. @ Rcocean

    Exactly. A defined contribution plan, like a 401K, does shift the risk (and reward) to the employee.

    The funds are deposited by employer and employee, but UNLIKE a DBP or other company controlled plan, the employee can decide which level of risk they want to take. In a DBP plan, everyone has the same investment portfolio no matter their actual age or risk tolerance.

    For younger employees, this is a plus because most DBP and company controlled plans are much too conservative for the younger person’s time frame. An older person who also has more risk tolerance might want to take a more aggressive stance in their portfolio.

    In a 401K you have choices. The downside, of course, is that there is no guarantee.

    However, when your retirement plan goes broke….the guarantee isn’t there either.

    I would rather take my chances on my own than be shackled to an underfunded and under performing group plan 🙂

  12. Defined contribution plans are favored by business because it shifts the risk from them to the employees. OTOH, DFP’s have been abused in the past, particular by state and local governments. because the Pols know they aren’t going to be around when it time collect. So, they buy votes now by raising Benefits and let someone else in the future pay the price.

  13. A third option to fix a flawed DBP retirement plan….is to freeze the DBP and transfer any new contributions by existing employees into a new 401K plan (defined contribution) and any new employees into the same plan. This is the fiscally smartest plan for the States, Unions and Taxpayers .

    The existing DBP participants are still vested in their plan, however the benefits may have be adjusted to reflect the reality of the amount able to be paid. If they want to, they can wait until retirement and hope that the plan recovers by wise investment choices…..OR….they may be able to roll their vested amount into the new 401K and invest more aggressively, especially if they are younger workers.

    Since most people (ala Gruber) are not able to comprehend these things or are unwilling to accept reality…nothing will be done and the problem gets worse.

  14. Raf.

    I agree that there has been long term underfunding by the State. However, the reason have to do with basic math as well as with the shifting sands and moving parts in a large pool of people.

    When those things shift (low performance of the assets, change in ages of the group, changes in the defined benefit)……the plan may become SUDDENLY underfunded, even if it were well funded previously.

    One answer to fix the plan is to increase the contributions. AKA ask the employees and the taxpayers to put in even MORE money. The employees squawk and the tax payers don’t like it. SO….the politicians don’t face the problem and try to hide it.

    Another answer is to decrease the future benefit. Well, we know how popular that option is with the employees. They were promised something and now you want to take it back!?!?! Nevermind that the promise was impossible to keep in the first place and was made by morons (politicians) who barely understand economics or math….or were made by a business under coercion.

    When a plan becomes underfunded, it may take years or even decades to recover unless you take one or both of the steps above.

  15. @ Raf

    The reason that a DBP is not useful or effective for large groups has to do with the difficulty of the actuary in determining the amount that is needed to adequately fund for the future defined benefit.

    The reason that a small group plan can work is due to the fact that the participants are stable. For example an Architect firm. The principals are generally going to be the same people for years and years or the lifetime of the firm. The salary is stable, and can be controlled by the principals. Employees who are transitory can be excluded from the plan. This enables the administrator and actuary to be able to have some certainty in funding for the future. (I won’t go into the tax benefits to the principals, but they are very substantial). A small group plan is stable and able to be funded.

    In a large plan, say General Motors for example, people come and go. The benefit level to be funded for the future is a moving target. As I indicated when the formula for benefits radically changes the actuaries have to completely recalculate and what might have been adequate funding in the past is no longer going to cut it. The age of the pool of participants is also changing as people (workers) come and go.

    The uncertainty and moving parts in a LARGE group pretty much make it a likelihood that such plans, DBP, will be unable to be adequately funded.

    Then, throw in the uncertainty of the market and the fluctuation in fixed income rates, which are at an historic low, the portfolio manager and the actuaries are attempting the impossible.

    Re: 401K plans. By design and by IRS rules they are limited in the investment choices. They are also very conservatively administered to protect the employer and administrator from liability. If you are in a 401K plan and then leave employment, you should as soon as possible put the funds into your own control by establishing a roll over self directed IRA.

  16. DBQ,
    While I do not agree that a DBP is systemically not useful for government pensions, I can agree that the combination of underfunding by the state and undisclosed fees by Wall Street are a big reason why some pensions are in big trouble. In the Illinois example, TRS which is funded by the employees and the state, is in the worst shape. However, the municipal pension plan which is paid by the municipalities and the employees is in much better shape because the municipalities have done a much better job in paying their share over the years. The system, in my opinion, has worked and can continue to work if the States do their jobs and honor their contracts and Wall Street takes a fair fee for their work.
    As an aside, I have been personally involved with 3 401(k) plans over the years and 2 of the three did not allow the employees to make any investment choices. The last trust department I worked for had a 401(k) plan that allowed the employees to invest in various segments and various individual funds.

  17. Steve,
    You accuse me of vitriol, and yet you are the one who has consistently attacked me at every occasion. The mere fact that Christie’s picture is at the top of the article does not make this article any less non-partisan. I apologize for actually suggesting that you actually read the full article that you are attempting to ridicule or criticize. I cannot help it if the facts on certain issues disturb you.

Comments are closed.