Monday, May 16, 2016

The Growing Crisis in Public Sector Pension Funding and Continuing Governmental Neglect ... The Hopeful Illinois Story vs. the Reckless Obama Administration

Yesterday's post described our entitlements and interest-on-the-debt financial debacle and the resulting deep hole our federal government's finances are in before considering our nation's defense or infrastructure needs.

Today let's add to the quickly developing American debt debacle story take a quick look at some additional huuuuuuuuge issues facing our cities, states and government sponsored entities such as school districts, colleges and even private plans whose benefits are guaranteed by the government's PBGC (Pension Benefit Guaranty Corporation).

See Treasury's Teamsters Bailout Ploy which is subtitled 'By rejecting a pension rescue plan, Obama sets up taxpayers for a hit.' It's a specific and sad story with a broad lesson for We the People concerning the can kicking, finger pointing, free spending and financially reckless Obama administration and 'friends.'

What virtually all of these sad stories have in common is that the promised retirement benefits are underfunded by huuuuuuuge amounts. Accordingly, either promised benefits will be cut or huuuuuuge tax increases will be implemented. More likely both benefit cuts and tax increases will be coming to the not-far-off future for We the People.

While government officials generally admit that most of our public sector pension funds already are in a woeful condition, the real amount of underfunding is actually much greater than the official version.

That's because the investment returns for these plans after fees and expenses will result in the portfolios' bonds and stocks not coming close to earning their actuarially assumed rates of return over time. Stated another way and speaking in plain language, most of these plans have an unrealistic formula for funding requirements which results in too little in contributions being added to the funds each year. Thus, the annual funding deficit and growing unfunded debt hole will keep getting deeper.

That's due to high management fees, an underforming investment mix between 'safe' bonds and stocks, and our existing and foreseeable slow growth American economy.

Added all together, the crisis is becoming insoluble. Today let's look at what should be manageable but our governments haven't been managing properly or in a fiduciary manner --- fees.

Fees That Sickly Public-Pension Funds Can't Afford is subtitled 'Illinois paid hedge-fund managers $180 million over three years, with underwhelming results:'

"The crisis in many state-pension funds is by now familiar: Unfunded obligations are at $1 trillion .... But there is a lesser-known aspect of the problem. Many boards of government pension funds, often composed of politicians and political appointees, have paid more than necessary to manage the $2.5 trillion of assets in these funds.

Consider the Illinois State Board of Investment. Over the past three years, it has paid hedge-fund managers more than $180 million in fees. . . . excluding compensation, the performance generated by these managers was worse than that of a balanced index fund. . . .

Illinois isn’t alone. Thirty-three state pension systems spent $6 billion on asset-management fees in 2014, according to a 2015 study by the Maryland Public Policy Institute. . . . Over a five-year period ... managers employed by pension systems significantly underperformed both the S&P 500 and the Vanguard Balanced U.S. Fund, which invests in stocks and bonds.

Sometimes the problem isn’t high fees but the opportunity for political mischief. Federico Buenrostro Jr., the former chief executive of Calpers, California’s public-pension fund, admitted in 2014 to accepting bribes, a felony. Prosecutors said he collected money, casino chips and other gifts from a middleman who connected Wall Street investment firms with the fund.

In New York, State Comptroller Alan Hevesi accepted $1 million in gifts from a money manager in return for steering him $250 million in state-pension-fund money to invest. Mr. Hevesi spent more than a year in prison after pleading guilty to corruption charges in 2011.

The Illinois State Board of Investment, which oversees $16 billion of pension assets, is moving to maximize the value it gets from fees paid to investment firms, while minimizing the potential for political meddling. A majority of the board was replaced last year by Gov. Bruce Rauner . . . .

{The} board has taken several significant actions, including terminating its long-standing investment consultant and replacing about 40% of high-cost, underperforming investment managers with index-based portfolios. Once the board’s actions are fully implemented, about 70% of the money previously invested in stocks and bonds will be in funds that employ indexing, with a typical fee of less than 0.1% of assets.

By moving to index funds, a pension system may miss out on investment managers who beat the market. But it is extremely difficult to identify these managers in advance. No more than 23% of active managers in any segment of the U.S. equities market outperformed the S&P 500 over the past five years, according to the S&P Dow Jones SPIVA U.S. Scorecard. . . .

Investing is hard enough outside the political spotlight. Hitting the 7.7% return, which is now the average target for state and local pension funds, is a herculean task. Eliminating unnecessary costs and limiting the incentive of political interference through use of index funds is a step in the right direction."

Summing Up

Illinois isn't unique in its funding 'dilemma' for pension obligations for public employees.

Many other states, cities and school districts, as well as the PBGC and countless other government sponsored plans, are in the same woefully underfunded boat.

The mess won't be cleared up anytime soon, and it won't even be addressed as long as self dealing politicians and their hand picked expensive and underperforming investment advisers are running the show largely out of taxpayer sight.

Congratulations to Illinois Governor Rauner for taking the unpopular and absolutely necessary lead on working hard to get a seemingly uncontrollable fiscal fiasco under control.

He deserves taxpayer support and his example should help lead the way to governmental fiscal sanity all across America.

That said, it's definitely going to be both a long struggle and an uphill battle.

That's my take.

Thanks. Bob.

1 comment:

  1. Definitely GGG candidate behavior here. Pay 2-3% in fees and get performance worse than the index funds and even than index funds which include bonds. Along with the pressure here to get fees under control, this article ( describes the same pressure with the 401k plans of the private sector for big and small companies. The fees paid look to be headed from 1.5% to .5% in those plans, via shifts to index fund based plans.