Tuesday, March 9, 2010

"Public Pension Funds Are Adding Risk to Raise Returns"

Talk about your moral hazard, these so-called fiduciaries can roll the dice and if they come up snake-eyes the taxpayers are contractually obligated to make up the difference.

During boom times the public employee pension plans crank up the promises to their beneficiaries based on their expected return projections and during slack times go to the tax well to make up the difference. This ratchet effect means benefits can only go up or sideways, transferring wealth from the productive portion of the economy to public servants.

There is going to be an explosive backlash as taxpayers come to understand that they are now working for government workers.

It won't end with the pension plans, folks will start to connect the fact that the California city of Vallejo's bankruptcy may be connected to the fact that a police captain was receiving $306,000 a year in pay and benefits or that 21 firefighters were at or over $200,000. The whole idea of public employee unions may be revisited.

The politicians who cynically allow this have a ready base of support (as long as they keep the ratchet turning) both in votes and cash. Going back to Vallejo, here's a line from our September '08 post "The Front Line of the Housing Mess. And: The Climateer Line of the Day":
...each of the 100 firemen paid $230 a month in union dues and each of the 140 police officers paid $254 a month, giving their respective unions enormous sums to purchase a compliant City Council.
Back to pensions, CalPERS has over 5000 beneficiaries taking over $100,000 per year in pension loot, with the top looter, Bruce Malkenhorst of Vernon getting a $499,674 public pension last year. In addition, the teachers union pension plan, CalSTRS has 3,000 beneficiaries bringing home over $100,000 p.a. The majority are superintendents and other senior paper pushers. A lower-paid teacher retiring at age 60 will receive a pension with a present value of $1,500,000. Either way that's a lot of loot.

To top it off the pension managers combine the worst of Wall Street and City Hall.
Back in June '08 we posted "Come on Lucky Seven: CalPERS Bets on Alternative Investments".
Four months later, as the market tanked and they had to pony up for their private equity, real estate and commodity investments it was: "Calpers Sells Stock Amid Rout to Raise Cash for Obligations"
I said at the time:
This is hedge fund behavior, selling your most liquid investments to prop up the illiquid....
Here's a major piece from today's New York Times:
States and companies have started investing very differently when it comes to the billions of dollars they are safeguarding for workers’ retirement.

Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds.

But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.

“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.”

Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now.

The Texas teachers’ pension fund recently paid Chicago to receive a stream of payments from the money going into the city’s parking meters in the coming years. The deal gave Chicago an upfront payment that it could use to help balance its budget. Alas, Chicago did not have enough money to contribute to its own pension fund, which has been stung by real estate deals that fizzled when the city lost out in the bidding for the 2016 Olympics.

A spokeswoman for the Texas teachers’ fund said plan administrators believed that such alternative investments were the likeliest way to earn 8 percent average annual returns over time....MORE

If you're interested, a complete list of our CalPERS posts can be accessed via

site:climateerinvest.blogspot.com climateer calpers