How a Gang of Hedge Funders Strip-Mined Kentucky’s Public Pensions
theintercept.com
theintercept.com
Fun fact most people don't know about some of these- you forfeit your social security benefits when you participate. Because of this my mom cannot draw my dead fathers benefits.
https://www.courier-journal.com/story/news/education/2018/03...
Does Kentucky not want teachers? There are shortages in some states.
1 - https://www.courier-journal.com/story/news/local/joseph-gert...
Instead, in America, public school students are told which school they will attend. Usually, but not always, the closest. The Democrats are responsible for that.
(The problem, of course, is when someone raids the fund itself.)
It sounds like that was a conscious choice. It's not like it was taken away from them.
https://www.nbclosangeles.com/news/local/Ripoff-Social-Secur...
She also worked in private practice and I believe still had to pay into SS but at a reduced rate since wouldn't be able to draw.
I'm lee at lee trout dot com if you want to drop me a line.
I'll try to find the story and post. I came across the story shortly after the 2008 crisis.
- Overpromising of benefits
- Underfunding mechanisms that allow deferral of contributions
- General mismanagement (I can assure you the best and brightest investors and fiduciaries don't work at public pensions)
- Corruption (ie related party deals)
The idea that "evil hedge funds" are responsible is silly. This might make for more clicks but the investment committee made the decisions to invest, so blame them. This isn't about hedge funds.
I've long argued that public pensions should be illegal. There are too many areas of interest misalignment. Things that can be abused, will, and public pensions are perfectly designed to facilitate these kinds of shenanigans. Anyone looking for what the next great crisis will be, this is it.
All of this is a sideshow to the egregious overpromising of benefits and underfunding mechanisms.
probably hedge funds, banks, loans, short selling, maybe even stock markets in general should also be illegal then for those same reasons?
You don't really need "the best of the best" to run a public pension; you're not trying to outsmart the markets with some super-clever arbitrage. You just need to invest in the right balance of index funds.
If you need the very best people not to raid the pension because it had one good year when the markets were up, we're all screwed.
That lie, that something in the US will ALWAYS lead to gdp growth is the root of all yield chasing fiascos of American pension underfunding. There is no way that gdp will increase without a rise in working age population (especially with no immigrants) or a dramatic increase in automation which can be taxed.
FYI for any youngsters who don't realize what a con job this is: The recent tax cuts have created massive deficits which will collapse debt availability and thus economic growth and thus tax revenues and thus social security payments when you get unemployed (or old).
Maybe not over (specific) very short periods, but it depends on the mutual and it depends on the hedge fund. If you're saying pension funds should be locked in then you can't invest in anything that has exposure to equities, see: 2008, 1974, 1930.
I was just trying to nudge the post I was replying to into realisation that you either accept burning significant money to avoid risk or accept the chance of burning more money. This kind of "pensions should invest in the good guys who don't take risks..." well that's only govt bonds, and one day those will pop also.
In all seriousness though, large pension plans have very diverse portfolios. Ontario teachers used to own 80% of the Toronto Maple Leafs. Ontario Municipal Employees Retirement System owns Oxford Properties, which owns and manages the office building I work in (and many others).
Edit: Added "Employees" to OMERS.
> Pension funds should have steady, modest gains year over year and minimize risk of dips as much as possible.
This is what hedge funds were built for - hedging.
Whoever concentrated the money in such funds was likely corrupt, otherwise grossly incompetent.
Hedge funds are a very diverse group (see my above comment about how they are defined by compensation schemes nowadays and not strategies).
The original idea of hedge funds was to provide low volatility (like bonds) and high returns (like equities).
Ideally.
But then you have things like: https://www.mercurynews.com/2016/11/01/bart-janitor-grossed-...
and look at stories here: https://hn.algolia.com/?query=pensions&sort=byPopularity&pre...
Mostly unions graciously award over time work, and other benefits to people about to retire in the last years. Since the pension benefits are based on the benefits and pay in the last years, You now have retirees drawing millions in benefits and pay.
I guess in California a lot of tax dollars already go to pay pensions then help build schools and roads.
You can't exactly pay all that big money pensions by just investing in bonds alone.
Pensions are a fine tool but they have to be funded responsibly, states liked to use them as an incentive but then refused to properly fund them banking instead on large returns. Companies did the same thing for a long time but they've been allowed to cut benefits to retirees when they run dry and have since moved on to 401ks if they offer any thing at all.
You're right, it deceptively leaves out such vital information.
It also leaves out:
- how productive he actually was for each of those 80 hours
- how many workers "only" at 1.5x time were willing to take those shifts but denied because of seniority
- how much of the compensation came from the non-standard practice of letting him redeem PTO for 2x its value by applying it to week where he already worked overtime
- whether those long, hard hours actually translated into clean BART stations, or were just roundabout compensation for being physically present but ineffective
Once you have that full picture, I'm pretty sure the typical person's initial reaction will be closer to right than wrong.
No one, no investment, no taxation can pay for something like that.
More here:
https://news.ycombinator.com/item?id=1638926
http://www.latimes.com/projects/la-me-el-monte-pensions/
https://news.ycombinator.com/item?id=14083193
>>Pensions are a fine tool but they have to be funded responsibly
And who is going to fund them? As of now California tax payers are paying for pensions. Surely this is not a sustainable way of running things?
Why not the rest of public sector employees compensation comes out of tax revenues. The only reason pensions are unsustainable now is because in order to hide the cost of pensions the budgets underfuneded pensions years ago and the funds they did allocate they assumed extremely high returns on.
Of course, hedge funds nowadays are just defined by a compensation scheme (2 and 20, though today more like 1.5 and 15).
Hedge funds are exactly the kind of investments that pension funds should have.
Edit/Follow-up: I guess there are two more sane alternatives:
1) Let public-sector workers manage their retirements privately e.g. 401k-style .
2) Let state and municipal public-sector workers opt-in to the federal pension system for federal public sector workers.
Taxpayers don’t like that because they’d rather pretend to believe that investment returns will fix everything while really just saddling the next generations. Government employees don’t like that because they’d rather have the extravagant promises they can extract, figuring that future governments will find a way to pay them.
If both employees and taxpayers prefer to keep pretending that the Emperor is wearing clothes how many politicians are going to fall on the sword of good government?
It would also make government budgets a lot easier to understand and harder to fool taxpayers.
There is. In Germany, the Prussians back in the 18th century formed the "Berufsbeamtentum", basically civil servants. The idea is that the state guarantees that the Beamten be permanently employed by the state (basically, short of committing serious crimes > 12mo jail time, there is no way for the state to fire one), have their (first class) healthcare taken care of and that they will have decent pensions. For this, the Beamten bind their work life to the state.
The downside, of course, is that there are several limits for Beamte: most notably they must be absolutely loyal to the state, restrict themselves/their speech in the public (e.g. memberships in "extremist" parties are a no-go), they are forbidden from strikes, and their pay schedules are fixed (so, no individual contract agreements, everyone on the same step of the career ladder gets the same salary). Also (mostly valid for police officers and judges) the state may decide to reassign you to a different post... which may even be at the other end of the country, for those who are with the federal government.
The benefit is that Beamte are locked in to the state. It's rare that the private sector snatches Beamte away from the state. This means that, unlike in the private sector, the state does not have to worry that its most competent employees suddenly vanish.
No. Even with paying market wages, there can someone come along and flood the market with cheap money. Then the state has to massively counteract and waste taxpayer money.
Beamtentum is the core of German societal stability, as a result.
The societal stability part should be offered to all taxpayers, not just government employees, so I don't see why that would be tied to an employer at all.
Foreign money comes into a city and artificially (= not backed by local growth) drives up the prices, gobbles up the knowledge, then leaves. The city however is stuck with their now inadequately overpaid employees, which of course have every incentive to leave once the city inevitably tries to lower their pay again, thus basically holding the city at gunpoint: pay us or you shut down.
Just imagine how the finances of the Silicon Valley cities would be in that scenario - if they would go with the exorbitant pay rates for IT employees also for city staff, and another dotcom bust/financial crisis hits. The startups fold up, and the government is locked into now-enormous wages for the city employees.
And please don't act as if this wouldn't happen - half of SV economy / wealth is built up on dirt cheap Saudi blood money (as e.g. Uber and many others are finding out in the wake of the Khashoggi murder), and in Europe it's Chinese and Russian money instead of Saudi money. It's not a question of IF a bust happens, just WHEN. London is about to blow up in Brexit, I'm waiting for the chain reactions.
I'm not a fan of many German eccentric policies, but the Beamtentum is something that will keep the government running no matter how colossal the fuck-up. For example, something like the US gov't shutdowns is unimaginable here.
If "cheap money" floods into a city and causes salaries to go up and competition to increase, then in the next budget, the city will find that it will have to raise taxes. This will make the city less desirable for the "cheap money", hence reducing it. The reason you even see floods of money is because of arbitrage opportunities, and those are reduced when you have quicker price discovery.
(Of course some companies from a pre-government-guarantee era are still in business, but "some" isn't enough when we're talking about your retirement savings)
I don’t want politicians buying union votes with unsustainable promises that get kicked down the road 20 years later, and I don’t want to hear “my predecessors didn’t properly fund the pensions”. You create a system loopholes and bad incentives, of course they are going to be used.
The solution is simple, time saving, and efficient. If a private entity can’t afford to offer annuities without the power to increase taxes, then they are obviously a very, very expensive benefit, so why should only government employees get them?
Because the government can provide them more cheaply than a private entity by its very nature - shouldn't it make use of that competitive advantage? Better pension schemes are one of the ways government are able to offer a competitive employee compensation package despite substantially below-market headline salaries; if you replaced the guaranteed annuities with their market dollar value that would mean costing the government more to be able to hire the same people, offering government employees less value overall and so getting lower-quality employees, or both.
Please justify this. Public sector is not known for it's low overhead of efficiency.
The point is the government is already "too important to fail" and already bearing the costs of having to still exist in hundreds of years' time (in terms of plans, processes, backstops and all that).
> Public sector is not known for it's low overhead of efficiency.
True enough, but neither are large private financial institutions.
>Whereas the defining characteristic of a private company is that it can, ultimately, go bankrupt and be wound up with little recourse.
Wall street already has countless mechanisms for pricing risk into things.
If governments could provide it more cheaply, then we wouldn't be hearing about this massive problem in the first place. The very existence of this extremely widespread problem proves that taxpayer provided defined benefit pensions are not cost efficient and allow for the fleecing of taxpayers.
From the article, it seems that teachers don't have Social Security withheld, so they don't have that as a fallback either:
Teachers, like any other public employees who don’t have Social Security withheld, are not eligible for Social Security benefits; even if they earn Social Security by working a side job, those benefits are adjusted downward based on their pension income.
The US federal government previously had a system similar to state pensions (CSRS), but employees hired after 1983 are required to be enrolled in the new system (FERS) which includes Social Security. There's also another difference: the federal government has far better internal controls than most of its states.
The blame solely lies on the incompetent pension fund managers. There are plenty good choices for alternatives in the market that are accepting new money (AQR or 2 Sigma or Bridgewater come to mind).
It's 100% on the pension fund managers that they squandered the money on some no-name fund with no track record.
1) The lack of responsible stewardship in overseeing the pensions and how they were invested.
2) Under-contribution to these funds.
Follow-up:
I think the best way to deal with 1) is to do something like the Ontario Teachers' Pension Plan, which is "jointly sponsored by the Government of Ontario and the Ontario Teachers' Federation" [0] . You can still have greed ruining things, but at least the administration of the plan is totally dominated by a sometimes adversarial entity i.e. the state government.
[0] https://en.wikipedia.org/wiki/Ontario_Teachers%27_Pension_Pl...
I don't know why they don't just switch to private pensions. In theory public pensions should be less risky because the investment risk is spread between lots of people, but in practice it seems that the risk of management looting the fund is a much bigger concern, and one that you don't have with private pensions.
Defined benefit pensions largely only exist in the public sector in the US because they are phenomenally expensive. The reason public employees don’t want to switch is that these are huge perks.
In the UK they're called Self Invested Private Pensions.
Buried deep inside the idea of a government pension is the idea that individuals are incapable of saving for their own retirement. That government needs to care for its people in old age because they won't take the necessary steps themselves.
Questionable assumptions aside, this article and many, many more like it demonstrate that government is incapable of caring for people in their old age, making many of the same mistakes with "investing" that individuals will. From the federal government down, officials have shown no reluctance to raid pensions to fund pet project, resulting in chronic underfunding.
Inflation supplies the energy to keep this toxic cauldron bubbling along. It's not enough to simply "put money aside for retirement." Instead, you need "investments" that will at least keep up with inflation. Savings accounts are out.
Enter investment "advisors," all too willing to tell an individual (or government) what to do - for a fee.
Edit: the downvotes are amusing, but a comment explaining why would be more interesting.
1. Most people are incapable of saving for their own retirement, because they either lack the discipline or the skill set to do so.
2. Because of (1), people want the government to take care of it. But government does a mediocre job of most things.
3. Elected politicians have an incentive to get in bed with unions of government employees and screw taxpayers by cleverly mis-evaluating the present cost of future retirement payout streams.
4. Bad actors in the world pray on everyone involved: the employees, the pension funds, the government, individuals, etc, to get management fees from the corpus of retirement programs.