The Economist: States face a pension squeeze

[Winehole23]

A gold-plated burden
Hard-pressed American states face a crushing pensions bill (http://www.economist.com/node/17248984?story_id=17248984&fsrc=rss)





http://www.economist.com/sites/default/files/images/images-magazine/2010/10/16/bb/20101016_bbd001.jpg
CHUCK REED is the Democratic mayor of San Jose, California. You might expect him to be an ally of public-sector workers, a powerful lobby in the Golden State. But last month, at a hearing on pension reform held by the Little Hoover Commission, which monitors the state’s government, Mr Reed lamented his crippling public-pensions bill. “City payments for retirement benefits have tripled over the last ten years even though our workforce has declined dramatically, and we have billions of dollars in unfunded liabilities that the taxpayers must pay,” he said.


Mr Reed estimated that the average cost to his city of employing a police officer or firefighter was $180,000 a year. Not only can such workers retire at 50, but some enjoy annual pension payments greater than their salaries. They are also entitled to cost-of-living increases of 3% a year, health and dental insurance for life and lump-sum payments for unused sick leave that could reach hundreds of thousands of dollars.


Plenty of similar bills are looming in America’s public sector: in municipalities, in the federal government, and especially at state level. Defined-benefit pensions, which link retirement income to salary, are expensive promises to keep. The private sector has been switching to defined-contribution plans, in which employees bear the investment risk. But the public sector has barely begun to adjust, and has built up a huge liability to its staff. Worse, it has not funded the promises properly.


http://www.economist.com/sites/default/files/images/images-magazine/2010/10/16/bb/20101016_bbc454.gif


Joshua Rauh, of the Kellogg School of Management at Northwestern University, and Robert Novy-Marx, of the University of Rochester, estimate that the states’ pension shortfall may be as much as $3.4 trillion (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1352608) and that municipalities have a hole of $574 billion (http://www.kellogg.northwestern.edu/faculty/rauh/research/NMRLocal20101011.pdf). Mr Rauh calculates that seven states will have exhausted their pension assets by 2020 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1596679)—even if they make a return of 8%, a common assumption that looks wildly optimistic. Half will run out of money by 2027. If pension promises are to be kept, this will place immense strain on taxes. Several have promised annual payments that will absorb more than 30% of their tax revenues after their pension funds are exhausted (see chart 1).



The severity of states’ pension woes was disguised for years, because asset markets were so strong and because of the way states accounted for the cost of pension provision. But the 21st century has been dismal for stockmarkets, where most pension money has been put. State budgets came under huge pressure as a result of the 2008-09 recession, which caused tax revenues to plunge. Meredith Whitney, an analyst who made her name forecasting the banking crisis, believes the states could be the next source of systemic financial risk.


Now the problem is making headlines, especially in California, where taxpayer groups have been highlighting the generous pensions of some former employees. More than 9,000 beneficiaries of CalPERS, the largest state retirement plan, receive more than $100,000 a year.



The stage is set for conflict between public-sector workers and taxpayers. Because almost all states are required to balance their budgets, any extra pension contributions they make to mend a deficit will come at the expense of other citizens. Utah has calculated it will have to commit 10% of its general fund for 25 years to pay for the effects of the 2008 stockmarket crash. But attempts to reduce the cost of pensions are being challenged in court and will be opposed by trade unions, which still have plenty of members in the public sector.


A pension plan is a promise to pay employees after they retire. Most liabilities fall due well into the future, once those now working retire and receive payments until they die perhaps 20 or 30 years later. Such future liabilities have to be valued, using a discount rate to reflect what they are worth in today’s money. The higher the discount rate, the lower the present value.


States use the expected return on the assets in their pension funds as a discount rate. This is often around 8%, and reflects the performance of the past 20-30 years. However, such returns will be hard to come by in future. As Bill Gross of Pimco, a giant fund-management firm, pointed out recently, given current bond yields of 2% and a typical portfolio with 60% in equities and 40% in bonds, a total return of 8% requires a return of 12% on equities. And with American equities yielding just 2-2.5%, that in turn would require dividends to grow by 9-10% a year. Dividends grow roughly in line with the whole economy—and 9-10% is just not plausible.


This reliance on returns as the basis of the discount rate is extraordinary, when you stop to consider it. The more risk the pension fund takes (for example, by buying high-yielding bonds of companies with poor credit ratings), the lower its liabilities appear to be.



“Funding the liability with risky assets doesn’t make the liability any smaller,” says Andrew Biggs, of the American Enterprise Institute, a conservative think-tank. A state pension fund may achieve the desired returns by investing in the stockmarket. But if that does not work out, the state must still pay its pensioners.


David Crane, an adviser to Arnold Schwarzenegger, the governor of California, describes the treatment of state pension funds as “Alice-in-Wonderland accounting”. Suppose, he says, that a state had to pay a bondholder $30,000 a year for 25 years and to pay a pensioner the same sum for the same period. The bond obligation would have a present value of $425,000 in its accounts but the pension liability, with the same cashflows, would be valued at just $320,000.


Private-sector companies are no longer allowed to use assumed returns when calculating their pension-fund liabilities on their balance-sheets. They have to use corporate-bond yields. The contrast makes it appear as if public-sector pensions can be delivered on the cheap. “The accounting suggests that governments can provide pension benefits at half the cost of a private-sector fund,” says Mr Biggs.


A more prudent way of measuring the liability is to regard a pension as a debt that the state owes its employees. So one possible discount rate is the state’s cost of borrowing, the yield on its municipal bonds. Some argue that pensioners have even greater rights than bondholders and that points to using a “risk-free” rate like the Treasury-bond yield. Both rates make the present value of pensions liabilities much higher than that declared by the states.


Using Treasury bond yields as the basis for discounting, Mr Rauh and Mr Novy-Marx calculate that states’ pension liabilities are as much as $5.3 trillion. That is 68% more than reported by the states, and produces the authors’ figure of $3.4 trillion for the gap between liabilities and assets.


http://www.economist.com/sites/default/files/images/images-magazine/2010/10/16/bb/20101016_bbc443.gif
In their defence, the states say that they are following the Governmental Accounting Standards Board (GASB), which recommends discounting liabilities by assumed returns. Even on that optimistic basis, states are not putting enough aside. According to the Centre for Retirement Research, their average funding ratio, using the GASB approach, fell from 103% in 2000 to 78% last year (see chart 2); with a risk-free rate underfunding would be much worse. Despite this shortfall, 21 states failed to make their full contribution to their pension funds over the past five years, according to Eileen Norcross of George Mason University in Washington, DC.

Trouble in Trenton

New Jersey provides a prime example of America’s pension difficulties. In August the Securities and Exchange Commission (SEC) charged the state with fraud for misrepresenting the underfunding of its pension plans to municipal-bond investors. This was the first time a state had been charged with violating federal securities laws. It settled the case without admitting or denying the SEC’s findings.


A study (http://mercatus.org/pensions) by Ms Norcross and Mr Biggs outlines, using the Treasury yield as a discount rate, how New Jersey has run up a pensions deficit of $174 billion. That is equivalent to 44% of the state’s GDP, or more than three times its official debt.


http://www.economist.com/sites/default/files/images/images-magazine/2010/10/16/bb/20101016_bbc445.gif


The problems started in 1992 when the then governor, Jim Florio, increased the assumed return on pension assets from 7% to 8.75%. That allowed contributions to be reduced and helped the state balance its budget. Further reforms in 1994 and 1995 eased the accounting assumptions, allowing Mr Florio’s successor, Christie Whitman, both to cut taxes and to balance the budget. In the late 1990s the fund bet heavily on technology stocks, giving a brief boost to asset values. Employees’ contributions were cut from 5% of payroll to 3%. New Jersey also increased benefits, giving pension rights to surviving spouses in 1999 and a boost of 9.1%, in effect, to scheme members in 2001, just as the dotcom bubble was bursting and the fund’s assets were falling in value. The effect of this chronic underfunding on the pension scheme for the police and firefighters is shown in chart 3.


In March Chris Christie, the Republican governor elected in November 2009, reduced the pension benefits of new state employees. Last month he unveiled a more ambitious plan with several measures that affect existing workers. These include an increase in their contributions to 8.5%, raising the qualification for early retirement from 25 to 30 years of service, moving the normal retirement age to 65 and ending future inflation adjustments. It is too soon to tell whether Mr Christie will get this plan through. Not surprisingly, the unions oppose it. “Once again, it’s an attack on the middle class,” said Hetty Rosenstein, who heads the state chapter of the Communication Workers of America.



Other states have also started on reform, but have focused mainly on restricting the benefits of new employees. Michigan closed its defined-benefit scheme to entrants back in 1997 and Alaska moved to a defined-contribution plan for new staff in 2006. Utah is closing its defined-benefit plan to new employees next June.


But this makes only a small dent in a huge problem. The bulk of liabilities consist of promises to people already working or retired, which are often legally protected. Reducing this bill will take a much bigger reform. Mr Rauh and Mr Novy-Marx estimate that raising the retirement age by a year would trim the cost by 2-4% (http://www.nber.org/confer/2010/SLPf10/Novy-Marx_Rauh.pdf); a cut of a percentage point in inflation-linking would slash it by 9-11%. But states that have tried to adjust existing promises, such as Colorado, Minnesota and South Dakota, which have frozen cost-of-living adjustments, have faced challenges in court.
States will have to make difficult choices. A change to the rights of existing scheme members is sure to have an adverse effect on people on low pay, nearing the end of their careers or already in retirement. A cap on the cost-of-living adjustment, for example, would be a nightmare for pensioners were inflation to flare up, because they would have no way of making up the loss in their purchasing power.



But after years of neglecting the problem, such changes will be hard to avoid. In the words of Dan Liljenquist, a state senator in Utah and an architect of its reforms: “This is not a conservative-versus-liberal issue, this is a reality issue.”

[boutons_deux]

I read an article last week that said while pension obligations are necessarily on the city/county/state books, their obligations for retirees' medical care aren't, and that's many 10s of $Bs more.

America is so fucked, so fraudulent, and there's no unfucking it.

[DarrinS]

Oh well, they'll just have to save for their own retirement like the rest of us private sector folks.

[RandomGuy]

Oh well, they'll just have to save for their own retirement like the rest of us private sector folks.

Most are forced to contribute to the funds anyways. They are saving. The smart ones know that what they have been promised will probably be cut and have other vehicles of saving as well.

This ticking time bomb is in addition to SS and Medicare liabilities.

Anyone who thinks taxes aren't going up is kidding themselves.

[RandomGuy]

But after years of neglecting the problem, such changes will be hard to avoid. In the words of Dan Liljenquist, a state senator in Utah and an architect of its reforms: “This is not a conservative-versus-liberal issue, this is a reality issue.”

Wonder what the tea party crowd will make of the tax increases, speaking of politics.

The grown-ups in the room know that you have to raise taxes and lower benefits to get the problem under control, because doing one without the other will be next to politically impossible.

[boutons_deux]

The Repugs had to have their guns-for-oil, so the people get deprived of butter.

[coyotes_geek]

Defined benefit pension plans simply do not work. They all need to be scrapped.

[RandomGuy]

Defined benefit pension plans simply do not work. They all need to be scrapped.

I agree.

[CosmicCowboy]

Defined benefit pension plans simply do not work. They all need to be scrapped.

X2... The public sector retirement plans are absolutely obscene when compared to what the private sector can afford to offer.

[Wild Cobra]

Wonder what the tea party crowd will make of the tax increases, speaking of politics.

The grown-ups in the room know that you have to raise taxes and lower benefits to get the problem under control, because doing one without the other will be next to politically impossible.
The grown-ups know we need more tax payers and less tax revenue users. Deficit spending is OK as long as we are on a path to make that real, and when times are good, pay down the debt rather than fining more programs to spend it on.

Why did we have so much deficit spending in the 90's when the economy was good? That should be criminal.

[coyotes_geek]

Why did we have so much deficit spending in the 90's when the economy was good? That should be criminal.

Lemme guess, all that defecit spending from the 80s was okay though..........

[boutons_deux]

"deficit spending in the 90's when the economy was good"

Clinton used the increased tax revenues for The Longest Peace Time Economic Expansion to pay down the national debt.

dubya and St Ronnie increased the national debt. dubya dubbled it, $5T to $10T, while GDP was growing and tax revenues were up.

[Wild Cobra]

Lemme guess, all that defecit spending from the 80s was okay though..........
At least you can assign a reason for it.

[Wild Cobra]

Clinton used the increased tax revenues for The Longest Peace Time Economic Expansion to pay down the national debt.

Are you high?

The debt increased under every budget approved by president Clinton.

He did not pay down the debt. That is my point. During good times, the debt should be paid down. Not go up.

[boutons_deux]

Clinton paid down the national debt.

[coyotes_geek]

Clinton paid down the national debt.

Not true.

http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm

[Wild Cobra]

Clinton paid down the national debt.

Please...

Don't tell me you are that dumb.

from Table 7.1—Federal Debt at the End of Year: 1940–2015 (http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/hist07z1.xls)

Year Debt in $ millions
1989 2,867,800
1990 3,206,290
1991 3,598,178
1992 4,001,787
1993 4,351,044
1994 4,643,307
1995 4,920,586
1996 5,181,465
1997 5,369,206
1998 5,478,189
1999 5,605,523
2000 5,628,700
2001 5,769,881
2002 6,198,401

Where is the debt reduction please.

[boutons_deux]

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

http://upload.wikimedia.org/wikipedia/commons/thumb/b/b8/US_Federal_Debt_as_Percent_of_GDP_by_President.jpg/800px-US_Federal_Debt_as_Percent_of_GDP_by_President.jpg

[coyotes_geek]

debt still went up under clinton, gdp just happened to outpace it. that being said, clinton & co do deserve credit IMO for curtailing the growth in defecits we saw under reagan and Bush I.

[CosmicCowboy]

debt still went up under clinton, gdp just happened to outpace it. that being said, clinton & co do deserve credit IMO for curtailing the growth in defecits we saw under reagan and Bush I.

Gingrich and crew should get equal credit with Clinton. They had Clinton by the balls and were a good balance for each other. It basically created a spending gridlock.

[coyotes_geek]

^^^ true.

[ElNono]

You have to take GDP into account though. And I'm not saying this to defend Clinton.
Just throwing around currency numbers alone doesn't really tell you much, because the currency value over time does change. You have to have a reference value, and most everyone uses the country's GDP at that given point in time to draw a ratio.

I do agree that you have to give credit to guys like Clinton and the opposing Congress though. It's hard to get to balance that budget, specially since there's normally a fair amount of obligations that they inherit from before they were in charge.

[EVAY]

The grown-ups know we need more tax payers and less tax revenue users. Deficit spending is OK as long as we are on a path to make that real, and when times are good, pay down the debt rather than fining more programs to spend it on.

Why did we have so much deficit spending in the 90's when the economy was good? That should be criminal.

So do you consider the years of Republican control of the White House and both Houses of Congress equally criminal?

If not, why not?

[Wild Cobra]

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

http://upload.wikimedia.org/wikipedia/commons/thumb/b/b8/US_Federal_Debt_as_Percent_of_GDP_by_President.jpg/800px-US_Federal_Debt_as_Percent_of_GDP_by_President.jpg
That's not paying down the national debt.

[Wild Cobra]

debt still went up under clinton, gdp just happened to outpace it. that being said, clinton & co do deserve credit IMO for curtailing the growth in defecits we saw under reagan and Bush I.
I would give him credit if it was with a democrat congress. Opposing powers seem to be best for our national health.

[Wild Cobra]

So do you consider the years of Republican control of the White House and both Houses of Congress equally criminal?

If not, why not?
My God. No. I cannot consider that unless we were to remove 9/11 and our military deployment.

I have explained that several times one way or another in past posts.

I have always been consistent that the debt should always be paid down except in time of war or recession. We can include large scale national disasters and large scale projects like Hoover Dam, building the interstate system, Our quest to the moon, etc. I don't thing we have had any large scale projects that warrant large scale spending since we went to the Moon, and I don't thing we can afford such things any longer since we have such a social services burden now.

What did president Clinton have? No recession, no large scale national disasters, a booming economy from both the tech boost and Y2K threat.

There was absolutely no excuse not to pay down the debt in the fantastic economy that we had under president Clinton.

President Bush inherited to bursting of the tech boom and loss of Y2K threat. We had 9/11 leading to a large scale utilization of our military. We had the largest scare in maybe 20 years of a congress threatening anything to raise taxes, leading to a slow down in capital investment into the economy.

Government likes to use the good times to justify more increases in government spending. Then when the economy goes downhill, we are hurting worse than before. there is no excuse for this, and this cycle must end.

[Winehole23]

with lower interest rates, the (projected) shortfall is now $4.4 trillion

The states are essentially autonomous. Congress does not regulate their pension operations. The Employee Retirement Income Security Act, enacted in 1974, applies only to private-sector pensions.

Rather, state and local pension funds operate under guidelines of the Government Accounting Standards Board. It is essentially a federally-sponsored, private-sector advisory body, without enforcement power.


In the private sector, gains and losses of pension funds must be smoothed over seven years under the Pension Protection Act of 2006-ten years when requested by the plan's administrators. By contrast, in the public sector, gains and losses may be smoothed over 30 years.
This means that public funds can incur greater near-term deficits than private plans, because projected gains 30 years hence can be used to offset near-term losses, at least on paper.


The disparity raises a question as to whether the states and cities need to be held to a stronger discipline, according to the Hatch report.
http://www.realclearmarkets.com/articles/2012/02/16/the_state_and_local_pension_crisis_99520.html

[coyotes_geek]

I'm still sticking with this a year and a half later.......


Defined benefit pension plans simply do not work. They all need to be scrapped.

[Winehole23]

states borrowing to cover shortfalls:
Debt-burdened U.S. states and municipalities were grappling with about $900 billion in long-term unfunded pension liabilities as of 2011, according to a Boston College analysis of 126 plans. The solution for some local governments from California to Florida: Take on more debt.



State financial authorities are betting the pension assets they now manage will get better returns as the U.S. economy recovers and stock and bond markets improve. If so, states can take advantage of today’s ultralow borrowing costs to strengthen their retirement plans now—and pay off the debt later when pension funds generate returns robust enough to more than cover their annual payouts.



Local governments sold $4.96 billion of pension bonds in 2011, the most since 2008, according to data compiled by Bloomberg. In California, Pasadena issued pension bonds in March. Oakland, Calif., and Fort Lauderdale are among issuers considering a bond sale later this year. Illinois, which has one of the country’s most poorly funded public pension funds, borrowed a total of $7.2 billion in 2010 and 2011.



This strategy could backfire if state retirement fund returns don’t rebound. Recent history isn’t encouraging: In the decade through June 2010, the nation’s biggest state retirement systems earned less than half of what they needed to keep up with pension obligations, according to a Bloomberg survey. Borrowing to pay pension benefits “is risky for a government,” says Douglas Wood, Fort Lauderdale’s director of finance. “If the market stays down and the pension systems don’t earn their fair share on their return, then over time the city has to make that up” from its general budget.
http://www.businessweek.com/articles/2012-05-10/states-borrow-to-cover-pension-fund-shortfalls

[coyotes_geek]

So state and local governments are borrowing money to pay people to not work. Certainly nothing bad is going to come from this..........

[Winehole23]

experts put a dour face on it:

http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_87dlrlXQvZkFB1r

[coyotes_geek]

Yep. Everyone is going to get burned on this.

[boutons_deux]

Why piss only on public-sector underfunding?

Underfunded private-sector pension plans threaten the retirement security of millions of Americans

http://www.milkeninstitute.org/newsroom/newsroom.taf?cat=press&function=detail&level1=new&ID=200

Private Pensions Evade Honest Accounting
http://www.realclearmarkets.com/articles/2012/07/05/private_pensions_evade_honest_accounting_99749.htm l

[TeyshaBlue]

Because the OP was discussing State Pension plans? http://homerecording.com/bbs/images/smilies/facepalm.gif

[boutons_deux]

Because the OP was discussing State Pension plans? http://homerecording.com/bbs/images/smilies/facepalm.gif

Why is always only the govt that gets pissed on around here, while the UCA gets a pass?

TB :lol

[coyotes_geek]

Private sector pensions will work themselves out. Either the private sector providers and beneficiaries will work out an arrangement that allows the company to survive, or the company will just go bankrupt and everybody loses.

Public sector pensions are the far bigger problem because there's no threat of public sector entities facing a bankruptcy that results in liquidation.

[Homeland Security]

The American people will hold onto their overinflated standard of living with a death grip until the day everything falls apart.

[TeyshaBlue]

Why is always only the govt that gets pissed on around here, while the UCA gets a pass?

TB :lol

You've got your low content VRWC thread. Enjoy, bot.

[Twisted_Dawg]

This is what it will be all about:

5.Allow employers and participants to negotiate reductions in accrued benefits in appropriate circumstances. Current law prohibits reductions in accrued benefits, but employees might rationally conclude that a reduced annuitized benefit and additional job security would be preferable if the ability of the employer to meet its obligations over the long-term is less certain.

None of the pension funds can ever catch up to their requirements:

State financial authorities are betting the pension assets they now manage will get better returns as the U.S. economy recovers and stock and bond markets improve. If so, states can take advantage of today’s ultralow borrowing costs to strengthen their retirement plans now—and pay off the debt later when pension funds generate returns robust enough to more than cover their annual payouts. This strategy could backfire if state retirement fund returns don’t rebound. Recent history isn’t encouraging: In the decade through June 2010, the nation’s biggest state retirement systems earned less than half of what they needed to keep up with pension obligations, according to a Bloomberg survey. Borrowing to pay pension benefits “is risky for a government,” says Douglas Wood, Fort Lauderdale’s director of finance. “If the market stays down and the pension systems don’t earn their fair share on their return, then over time the city has to make that up” from its general budget.

[LnGrrrR]

Oh well, they'll just have to save for their own retirement like the rest of us private sector folks.

I'm pretty sure if you were promised a pension from your company, you'd be rather annoyed if it fell through.

[Wild Cobra]

I'm pretty sure if you were promised a pension from your company, you'd be rather annoyed if it fell through.
Very true. Still, anyone who doesn't see the possibility that they may outlive a company is pretty stupid. Everyone should plan for their own advanced years. Same with state pensions since that cannot print money like the feds.

On a side note, are you aware of the SS laws for military personnel? Did you join before 2002?

Check this out:

Retirement Planner: Special Extra Earnings For Military Service (http://www.ssa.gov/retire2/military.htm)

[RandomGuy]

I'm pretty sure if you were promised a pension from your company, you'd be rather annoyed if it fell through.

Private companies have already raided and plundered the pension plans and retirement funds already. It was one of the rather more shocking wealth transfers that you don't hear about. Managements of companies in the private sector pumped up quarterly profits by waving accounting wands to produce "estimates" in their favor when it came time to fund the pension plans.

You didn't hear about this, because managments and the rubberstamp BOD's went along with it behind closed doors.

The only reason you know about it for public sector employees is because it is well "public".

Essentially Darrin is saying "well, private companies stole from us when we weren't looking, so that is good enough for public employees too".

:bang

[LnGrrrR]

Very true. Still, anyone who doesn't see the possibility that they may outlive a company is pretty stupid. Everyone should plan for their own advanced years. Same with state pensions since that cannot print money like the feds.

On a side note, are you aware of the SS laws for military personnel? Did you join before 2002?

Check this out:

Retirement Planner: Special Extra Earnings For Military Service (http://www.ssa.gov/retire2/military.htm)


Yes, I joined in 1999. I'll check that link out, thanks. :toast

[boutons_deux]

" Everyone should plan for their own advanced years"

A majority of American households live paycheck to paycheck, thanks to the War on Employees and Unions holding everybody's incomes static. How many people can afford to put away 5% or 10% of their income into savings. And of course, financial sector fees will eat into their savings, anyway, which is why the Repugs/Wall St want SS funds to be funneled to them.

[Wild Cobra]

" Everyone should plan for their own advanced years"

A majority of American households live paycheck to paycheck, thanks to the War on Employees and Unions holding everybody's incomes static. How many people can afford to put away 5% or 10% of their income into savings. And of course, financial sector fees will eat into their savings, anyway, which is why the Repugs/Wall St want SS funds to be funneled to them.
Believe as you wish.

Mutual funds usually do pretty good.

[Th'Pusher]

Private sector pensions will work themselves out. Either the private sector providers and beneficiaries will work out an arrangement that allows the company to survive, or the company will just go bankrupt and everybody loses.

Public sector pensions are the far bigger problem because there's no threat of public sector entities facing a bankruptcy that results in liquidation.

who picks up the tabs for the municipalities in CA, that have already declared bankruptcies ?

[Winehole23]

For years, state and local governments have been playing imaginative or patently dishonest games with their pension funds, thinking they could get away with it. But now the chickens are coming home to roost, as federal authorities have begun cracking down on corruption and mismanagement.

The modus operandi was much the same in state after state: government officials underfunding or skimming retiree pension funds to meet other more immediate costs; financial officers papering over or hiding the extent of the funding shortfalls; and private financial managers exaggerating the return they could deliver on pension fund investments while often leaving the fund vulnerable to unexpected market swings.


State pensions, still feeling the pain of the Great Recession (http://www.thefiscaltimes.com/Articles/2013/01/16/Scores-of-City-Pension-Funds-Battered-by-Recession.aspx#page1), are now underfunded to the tune of more than $4 trillion, according to State Budget Solutions, a non-partisan fiscal watchdog.


In the past week alone, government officials and private investment groups with major government contracts have learned hard lessons about the risks of playing fast and loose with the government retirement systems:

• The Securities and Exchange Commission charged Illinois with securities fraud following years in which state officials misled investors and shortchanged the state pension system and stuck future generations of taxpayers with the staggering bill. The suit was part of a larger push by the SEC to bring greater transparency and accountability to the municipal bond market (http://online.wsj.com/article/SB10001424127887323826704578354370478104256.html), according to the Wall Street Journal.

• A federal grand jury indicted the former CEO and former board member of the $232 billion California Public Employees’ Retirement System on bribery and influence peddling charges. The indictment accuses them of unduly using their influence to defraud a giant equity firm of millions of dollars.

• The nearly bankrupt city of Detroit was placed under a state financial overseer after years of mismanagement, corruption and obfuscation of major obligations – including billions of dollars in retiree health costs. Federal authorities meanwhile charged two former pension officials with bribery and accepting kickbacks.

Read more at http://www.thefiscaltimes.com/Articles/2013/03/22/Mismanaged-State-Pensions-Bill-Taxpayers-for-Shortfall.aspx#PfOaOkMTFKLcy2pv.99

[Nbadan]

cool link

Debt Ceiling

Because all federal spending and taxes must be approved by both houses of Congress and the executive branch, a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse fiscal outcomes.

http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_555sdN4BXmfNKCN

[Winehole23]

relevance?

[Winehole23]

[Update 14th Feb 2014: Following Pando's exposé, PBS has announced (http://pando.com/2014/02/12/the-wolf-of-sesame-street-revealing-the-secret-corruption-inside-pbss-news-division/pando.com/2014/02/14/nyt-pbs-to-return-john-arnolds-3-5-million-following-pando-expose/) it will return John Arnold's $3.5m donation.]


On December 18th, the Public Broadcasting Service’s flagship station WNET issued a press release (http://www.thirteen.org/13pressroom/press-release/the-pension-peril/) announcing the launch of a new two-year news series entitled “The Pension Peril.” The series, promoting cuts to public employee pensions, is airing on hundreds (http://www.cpb.org/aboutpb/faq/stations.html) of PBS outlets all over the nation. It has been presented as objective news on major PBS programs including the PBS News Hour.


However, neither the WNET press release nor the broadcasted segments explicitly disclosed who is financing the series. Pando has exclusively confirmed that “The Pension Peril” is secretly funded by former Enron trader John Arnold, a billionaire political powerbroker who is actively trying to shape the very pension policy that the series claims to be dispassionately covering.


In recent years, Arnold has been using massive contributions to politicians (http://blogs.wpri.com/2012/12/11/texas-enron-traders-fortune-helped-fund-engage-rhode-island/), Super PACs (http://pando.com/2014/02/07/how-a-100000-check-exposes-the-politics-of-pension-theft/), ballot initiative efforts (http://www.sanjoseinside.com/news/entries/10_2_13_mayor_chuck_reed_state_pension_reform/), think tanks (http://www.huffingtonpost.com/2013/09/24/pew-trusts-pensions_n_3983654.html) and local front groups (http://blogs.wpri.com/2012/12/11/texas-enron-traders-fortune-helped-fund-engage-rhode-island/) to finance a nationwide political campaign aimed at slashing public employees’ retirement benefits. His foundation which backs his efforts employs top Republican political operatives (http://y.ourfuture.org/wp-content/uploads/2013/09/Plot-Against-Pensions-final.pdf), including (http://www.arnoldfoundation.org/node/1#calabrese) the former chief of staff (http://www.humanevents.com/2007/05/31/conservative-spotlight-the-patriot-group/) to GOP House Majority Leader Dick Armey (TX). According to its own promotional materials, the Arnold Foundation is pushing (http://www.arnoldfoundation.org/sites/default/files/pdf/A9RBC84.pdf) lawmakers in states across the country “to stop promising a (retirement) benefit” to public employees.


Despite Arnold’s pension-slashing activism and his foundation’s ties to partisan politics, Leila Walsh, a spokesperson for the Laura and John Arnold Foundation (LJAF), told Pando that PBS officials were not hesitant to work with them, even though PBS’s own very clear rules prohibit such blatant conflicts. (note: the term “PBS officials” refers interchangeably to both PBS officials and officials from PBS flagship affiliate WNET who were acting on behalf of the entire PBS system).


To the contrary, the Arnold Foundation spokesperson tells Pando that it was PBS officials who first initiated contact with Arnold in the Spring of 2013. She says those officials actively solicited Arnold to finance the broadcaster’s proposal for a new pension-focused series. According to the spokesperson, they solicited Arnold’s support based specifically on their knowledge of his push to slash pension benefits for public employees.


The foundation’s spokesperson said PBS executives approached Arnold “with the proposal for the series, having become aware of LJAF’s interest” in shaping public pension policy, and moving that policy toward cutting retirement benefits for public workers.
According to newly posted disclosures (http://www.arnoldfoundation.org/grants) about its 2013 grantmaking, the Laura and John Arnold Foundation responded to PBS’s tailored proposal by donating a whopping $3.5 million to WNET, the PBS flagship station that is coordinating the “Pension Peril” series for distribution across the country. The $3.5 million, which is earmarked for “educat(ing) the public about public employees’ retirement benefits,” is one of the foundation’s largest single disclosed expenditures. WNET spokesperson Kellie Specter confirmed to Pando that the huge sum makes Arnold the “anchor/lead funder of the initiative.” A single note (http://www.pbs.org/newshour/bb/business-july-dec13-dutchpensions_11-10/) buried on PBS’s website – but not repeated in such explicit terms on PBS airwaves – confirms that the money is directly financing the “Pension Peril” series.

http://pando.com/2014/02/12/the-wolf-of-sesame-street-revealing-the-secret-corruption-inside-pbss-news-division/

[boutons_deux]

who picks up the tabs for the municipalities in CA, that have already declared bankruptcies ?

The federal Pension Benefit Guaranty Corp may come into play, as it did for Delphi.

[boutons_deux]

Wealthy capitalists sucking down working peoples' retirement savings: "2 and 20" (aka, we screw you)

Study: Hedge Funds Taking Over Pension Fund Investments, Increasing Risk (http://news.firedoglake.com/2014/06/04/study-hedge-funds-taking-over-pension-fund-investments-increasing-risk/)

http://www.pewstates.org/uploadedImages/PCS_Assets/2014/pension_investment_figure_1.png

In a bid to boost investment returns, public pension plans in the past several decades have shifted funds away from fixed-income investments such as government and high-quality corporate bonds. During the 1980s and 1990s, plans significantly increased their reliance on stocks, also known as equities. And during the past decade, funds have increasingly turned to alternative investments such as private equity, hedge funds, real estate, and commodities to achieve their target investment returns….

In short, increased investments in equities and alternatives could result in greater financial returns but also increased volatility and the possibility of losses on these assets. Even relatively small differences in returns resulting from investment performance or fees can have a major effect on the asset values of pension funds. A difference of just one percentage point in returns in a single year on $3 trillion equates to $30 billion.

http://news.firedoglake.com/2014/06/04/study-hedge-funds-taking-over-pension-fund-investments-increasing-risk/

[boutons_deux]

How the Private Equity Industry Is Looting the Middle Class

A few weeks ago, a top official at the Securities and Exchange Commission reported on what he called a "remarkable" amount of potentially illegal behavior in the private equity industry -- aka the industry that buys up, changes and sells off smaller companies.

In its evaluation of private equity firms, the SEC official declared that half of all the reviews discovered "violations of law or material weaknesses in controls." The announcement followed an earlier Bloomberg News report on how the agency now believes "a majority of private equity firms inflate fees and expenses charged to companies in which they hold stakes."

At first glance, many probably dismiss this news as just an example of plutocrats bilking plutocrats. But that interpretation ignores how such malfeasance affects the wider economy.
One way to understand that is through the simmering debate over pension obligations in states and cities across the country.

Citing data from the National Association of State Retirement Administrators, Al-Jazeera America recently reported that the average amount of pension dollars devoted to private equity and other so-called "alternative investments" "has more than tripled over the last 12 years, growing from 7 percent to around 22 percent today." With public pensions now reporting $3 trillion in total assets, that's up to $660 billion of public money subject to the rapacious fees being exposed by the SEC. Those fees are paid through a combination of tax increases and pension benefit cuts.

Private equity shenanigans can also hurt the middle class by encouraging looting. For instance, as Crain's New York recently reported, in the last decade, private equity firms have collected $2 billion in so-called "transaction fees," which the business publication says "are bonuses the firms take for conducting their business of buying, managing and selling companies." This scheme has been called the "crack cocaine of the private equity industry."

As just one example of how it works, the New York Times recently examined a merger of two orthopedic implant manufacturers and how that merger resulted in a Wall Street jackpot. Indeed, according to the Times, the financial firms involved in the deal ended up extracted "a 20 percent share of gains from the sale, as well as management fees of 1.5 percent to 2 percent charged to investors" and "a share in an estimated $30 million in 'monitoring fees.'" The Times noted that "this deal will be a gift that keeps giving" to the private equity firms involved because "they will be paid millions more in fees for work that they are never going to do."

In other words, millions of dollars are taken out of companies creating tangible economic value and jobs. The money instead is sent to the speculators.

The good news, of course, is that we know how to curtail some of the worst effects of private equity's expansion. For one thing, the SEC can follow up its evaluation with fines and prosecutions.
Additionally, states can pass laws mandating at least some modicum of transparency in their pension funds' dealings with the private equity industry. And, as Eileen Appelbaum of the Center for Economic and Policy Research has written, the tax code can be changed to make sure that the fees claimed by private equity managers are no longer treated as capital gains and therefore taxed at a discounted rate.

The trouble is that these straightforward solutions all require political will, and American politics remain dominated by Wall Street money.

The question, then, is simple: How much more looting has to happen before that cash can no longer buy inaction?

http://www.alternet.org/economy/how-private-equity-industry-looting-middle-class?akid=11896.187590.Po0b4A&rd=1&src=newsletter1000956&t=7&paging=off&current_page=1#bookmark

[CosmicCowboy]

Defined benefit pension plans are abused by politicians to buy public sector votes and kick real costs down the road until they are someone else's problem. I totally support 401K matching as an alternative to public sector defined benefit plans. They are much more transparent and expense the cost in the year they occur. Real employment/contract costs for 2014 should be paid in 2014.

[CosmicCowboy]

I know a TEXDOT engineer whose salary all his career has been dollar for dollar competititive with private firms but he gets to retire next year at 55 at essentially full salary for the rest of his life.

[boutons_deux]

North Carolina is still suing Facebook, wants to pass law banning public from knowing what else it’s doing (http://pando.com/2014/06/13/north-carolina-is-still-suing-facebook-wants-to-pass-law-banning-from-knowing-public-what-else-its-doing/)

In the last few months, there has been increasing (http://www.kentucky.com/2014/02/01/3064736/bills-seek-to-let-taxpayers-know.html) pressure (http://www.nytimes.com/roomfordebate/2014/05/11/secret-pension-fund-deals) on public officials to stop hiding the basic terms of the investment agreements being cemented between governments and Wall Street’s “alternative investment” industry.

That pressure has been intensified, in part, by two (http://pando.com/2014/05/05/leaked-docs-obtained-by-pando-show-how-a-wall-street-giant-is-guaranteed-huge-fees-from-taxpayers-on-risky-pension-investments/) sets (http://www.nakedcapitalism.com/2014/05/private-equity-limited-partnership-agreement-release-industrys-snowden-moment.html) of recent leaks showing how these alternative investment companies (private equity, hedge funds, venture capital, etc.) are using the secret deals to make hundreds of millions of dollars off taxpayers. It is also in response to the Securities and Exchange Commission (http://www.bloomberg.com/news/2014-05-07/private-equity-scrutiny-deepens-as-sec-finds-illegal-fees.html) recently declaring that many of the stealth schemes may be illegal.

And yet, as the demands for transparency grow louder, a potentially precedent-setting push for even more secrecy is emerging. Pando has learned that legislators in North Carolina — whose $86 billion public pension fund is the 7th largest in America (http://www.forbes.com/sites/edwardsiedle/2014/04/16/nations-seventh-largest-state-pension-cant-afford-financial-audit/) – are proposing to statutorily bar the public from seeing details of the state’s Wall Street transactions for at least a decade. That time frame is significant: according to experts, it would conceal the terms of the investment agreements for longer than the statute of limitations of various securities laws.

In other words, the legislation – which could serve as a model in state legislatures everywhere – would bar the disclosure of the state’s financial transactions until many existing securities laws against financial fraud become unenforceable.

A growing scandal in North Carolina

If the North Carolina Retirement System and its sole trustee, Treasurer Janet Cowell (D), seem familiar to tech readers, that is because the NC system is one of the lead plaintiffs (http://www.bna.com/facebook-ipo-class-actions-consolidated-lead-plaintiffs-and-lead-counsels-appointed/) in the class action suit surrounding Facebook’s initial public offering. Additionally, as part of her career in the financial sector, Cowell was the marketing director (http://www.bizjournals.com/triangle/stories/2004/02/16/daily6.html) for the tech-focused (http://www.sjfventures.com/industry-focus/tech-enhanced-services) VC firm, SJF Ventures.

Like other states, North Carolina has been redacting (https://www.dropbox.com/sh/0pvpzp8qc5xboyf/AAA2TPsspgVgV8t3Ut03e4vFa/Carousel%20III%20%28NC%20Disclosure%29%20-%20Partnership%20Agreement_Redacted%286180001_2_NY %29.PDF) and/or refusing to release the contractual terms of its pension fund’s massive Wall Street investments, even though the contracts involve public money and a public agency. In recent months, that practice exploded into a full-fledged political scandal when the State Employees Association of North Carolina released a 147-page report (http://www.seanc.org/files/5113/9817/8618/North_Carolina_Pension_Fund_Forensic_Investigation _Report.pdf) from former SEC investigator Ted Siedle.

The report asserted that under Cowell, up to $30 billion of state money is now being managed by high-risk, high-fee Wall Street firms, and that the state could soon be paying $1 billion a year in fees to those firms. The report also noted that the investment strategy “has underperformed the average public plan by $6.8 billion” and it alleged that Cowell has misled the public about how where exactly she is investing taxpayer dollars. The union has called for a federal investigation (http://www.washingtontimes.com/news/2014/apr/22/seanc-taking-pension-system-complaints-to-us-sec/?page=all), while Cowell has publicly denied (https://www.nctreasurer.com/inside-the-department/News-Room/press-releases/Pages/Treasurer-Cowell-Urges-House-to-Pass-Pension-Investment-Transparency-Measure.aspx) the allegations.

Following the report, (SEANC) is now pushing the legislature to adopt a simple two-page bill (http://www.ncga.state.nc.us/Sessions/2013/Bills/House/PDF/H1237v1.pdf) that would force the Treasurer to open up the state’s books so that taxpayers and public employees can at least see how their money is being invested. In response, Cowell sprung into action against the transparency initiative and on behalf of the financial and securities industries that have given her election campaign committee more (http://www.followthemoney.org/database/StateGlance/candidate.phtml?c=99345)than (http://www.followthemoney.org/database/StateGlance/candidate.phtml?c=116371)$250,000 (http://www.followthemoney.org/database/StateGlance/candidate.phtml?c=141471) since 2008.

First, in an email obtained by Pando (embedded in full below), Cowell’s office told legislators that the transparency bill would violate previously undisclosed contractual provisions that Cowell agreed to. Those officials claim that “losses as a result of the breaking of these contracts is $1.8 billion.” Put another way: Cowell asserted that, unbeknownst to lawmakers and the public, she had already signed North Carolina taxpayers into secret deals with Wall Street firms – deals that allegedly aim to financially punish taxpayers if the public is ever permitted to see the details of the agreements.

At the same time, Cowell’s allies in the legislature filed a bill to serve as a replacement for the transparency legislation. Upon that replacement bill being introduced, Cowell issued a press release (https://www.nctreasurer.com/inside-the-department/News-Room/press-releases/Pages/Treasurer-Cowell-Urges-House-to-Pass-Pension-Investment-Transparency-Measure.aspx)endorsing it. Proposed only days before the SEC sounded the alarm (http://online.wsj.com/articles/sec-official-points-to-disclosure-failings-by-private-equity-firms-1402412192) about a lack of transparency in the private equity industry, Cowell’s legislation claims to be about transparency, but weaves in provisions that seem designed to enshrine the exact opposite.

Specifically, section 3(b) of the proposal says that if Wall Street firms demand secrecy, the law will automatically bar the public from viewing key information about public pension investments for 10 years after the investment is terminated. That includes, according to the bill draft, “information regarding the portfolio positions” of public pension fund investments; “capital call and distribution notices” sent to state pension officials by investment firms; investment firms’ “private placement memorandum and other offering and marketing material”; and, perhaps most important of all, “the investment’s contractual documents.”

According to the North Carolina House’s website, two of the lawmakers sponsoring the bill currently work in the financial industry – one (http://www.ncleg.net/gascripts/members/viewMember.pl?sChamber=House&nUserID=611) is described as a “financial consultant,” the other (http://www.ncleg.net/gascripts/members/viewMember.pl?sChamber=House&nUserID=664) is described on the website as “Vice President & Investment Officer – Wells Fargo Advisors.” The State Treasurer’s2013 report (https://www.nctreasurer.com/inside-the-department/Reports/NCDST_Annual_Report_FY2012-2013.pdf) notes that Wells Fargo does brokerage business with North Carolina’s pension system. Additionally, documents (http://www.secretary.state.nc.us/lobbyists/directory.aspx) from the North Carolina Secretary of State’s office (embedded below) show at least 22 financial firms and securities industry trade associations have registered lobbyists in the state capitol.

A license for Wall Street malfeasance

Critics argue that the bill is a license for Wall Street malfeasance because its 10-year secrecy mandate appears to exceed the statute of limitations of many state and federal securities laws.

For instance, the North Carolina Securities Act (http://www.ncleg.net/EnactedLegislation/Statutes/HTML/ByChapter/Chapter_78A.html) includes language outlining a three to five year statute of limitations. Similarly, a law firm (http://www.baughdaltonlaw.com/news/pdf/article_timeLimitations.pdf) specializing in securities work and a North Carolina insurance firm (http://files.lawyersmutualnc.com/risk-management-resources/risk-management-handouts/avoiding-malpractice-traps/Statutes_Index.pdf) both point out that the statute of limitations in securities fraud is well shorter than the 10 year gag order being proposed by North Carolina legislators.

Meanwhile, the Securities Fraud and Investor Protection Resource Center (http://www.securitieslaw.com/information/eligibility-statutes-of-limitation.asp) reports that the federal law’s statute of limitations is “not more than five years after the fraud occurred.”

All of this means that if the secrecy bill passes, and if violations of existing securities laws are then uncovered only after the 10-years secrecy period, there may be no way for taxpayers and retirees to seek legal recourse. In short, Wall Street firms would potentially be able to bilk the pension fund knowing that the public would be statutorily barred from seeing what’s happening until it was too late to seek redress under state and federal law.

A possible precedent-setting move for secrecy

In recent years, states and cities have been moving more money into high-fee alternative investments – up to $660 billion (http://pando.com/2014/05/05/leaked-docs-obtained-by-pando-show-how-a-wall-street-giant-is-guaranteed-huge-fees-from-taxpayers-on-risky-pension-investments/) by one estimate. With that kind of cash on the line – and with leaked documents and the SEC raising questions about the propriety of such investments – unions and watchdog groups (http://www.providencejournal.com/breaking-news/content/20130808-open-government-groups-fault-raimondo-for-withholding-hedge-fund-records-from-the-providence-journal.ece) like the American Civil Liberties Union and Common Cause have become more aggressive in demanding basic transparency.

The bill in North Carolina, however, may represent a precedent setting escalation in the fight against such transparency. Indeed, whereas most states up until now have relied on discretionary executive branch decisions and Attorney General opinions as a justification for secrecy, North Carolina is attempting to statutorily mandate secrecy through bill language that could easily be replicated in states across the country.

As one example of how that could happen, consider the Wall Street-alignedAmerican Legislative Exchange Council. That conservative group works in legislatures all over America and, according to the Center for Media and Democracy (http://www.sourcewatch.org/index.php/ALEC_Commerce,_Insurance_and_Economic_Development_ Task_Force%23cite_note-MeetingAgenda-10), the organization’s economic task force works closely with the trade group representing the banking industry.

Additionally, North Carolina’s House Speaker Thom Tillis (R) – whose fellow Republicans are backing the secrecy bill – has been both a board member of ALEC (http://www.newsobserver.com/2013/05/07/2877941/alecs-guy-is-thom-tillis.html) and has received large campaign contributions from the financial sector.

Indeed, data from the Institute on Money In State Politics (http://www.followthemoney.org/database/StateGlance/candidate.phtml?c=141588) show that 20 percent of his entire campaign fund in 2012 (or more than $345,000) came from the
Finance, Insurance & Real Estate industries. That is on top of the more than $47,000 (http://data.influenceexplorer.com/contributions/%23Y29udHJpYnV0b3JfaW5kdXN0cnk9RjA3JTJDJnJlY2lwaWV udF9mdD1UaG9tJTIwVGlsbGlzJmdlbmVyYWxfdHJhbnNhY3Rpb 25fdHlwZT1zdGFuZGFyZA==) he has received from the securities industry in his current run for U.S. Senate.

... more

http://pando.com/2014/06/13/north-carolina-is-still-suing-facebook-wants-to-pass-law-banning-from-knowing-public-what-else-its-doing/

[RandomGuy]

Defined benefit pension plans are abused by politicians to buy public sector votes and kick real costs down the road until they are someone else's problem. I totally support 401K matching as an alternative to public sector defined benefit plans. They are much more transparent and expense the cost in the year they occur. Real employment/contract costs for 2014 should be paid in 2014.

NOt many defined benefit plans left anywhere.

Now it is mostly defined contribution plans.

[boutons_deux]

401Ks are "transparent"? you can see all fees?

[Wild Cobra]

401Ks are "transparent"? you can see all fees?
Yes, at least every one I've seen.

[Winehole23]

and when the state pensions try to hold private equity funds accountable, they threaten to cut the states out of the action:


A new story on private equity secrecy (http://online.wsj.com/articles/buyout-firms-push-pension-funds-to-keep-information-under-wraps-1415142588) by Mark Maremont at the Wall Street Journal started out with a bombshell, that of private equity industry kingpin KKR muscling a public pension fund to deny information requests about KKR’s practices:


KKR & Co. warned Iowa’s public pension fund against complying with a public-records request for information about fees it paid the buyout firm, saying that doing so risked it being barred from future private-equity investments.
In an Oct. 28 letter to the Iowa Public Employees’ Retirement System, KKR General Counsel David Sorkin said the data was confidential and exempt from disclosure under Iowa’s open-records law. Releasing it could cause “competitive harm” to KKR, the letter said, and could prompt private-equity fund managers to bar entree to future deals and “jeopardize [the pension fund’s] access to attractive investment opportunities.”


http://www.nakedcapitalism.com/2014/11/private-equity-kingpin-kkr-threatens-iowa-pension-fund-foia-request.html

[Winehole23]

So why has industry leader KKR stooped to issue an explicit, thuggish threat? Why are they so threatened as to cudgel an Iowa pension fund into cooperating with KKR and heavily redacting the response? Just as with the Sequoia and Kleiner Perkins case, it’s naked, and not at all defensible self interest.


Law firm Ropes & Gray, which counts Bain Capital among its clients, issued what amounted to an alarm to its private equity and “alternative investment” clients over an increase in inquiries to public pension funds (http://www.ropesgray.com/news-and-insights/Insights/2014/October/Surge-in-FOIA-Requests-to-State-Agencies-Seeking-Information-About-PE.aspx) about the very subject that the SEC had warned about in May, about fee and expense abuses, as well as other serious compliance failures. It’s a not-well-kept-secret that many investors were correctly upset about the SEC’s warnings, and some lodged written inquires with general partners as to what specifically was going on. We’ve embedded an unredacted example of one such letter at end of this post. It was the same one that CalPERS board member JJ Jelincic used to question investment consultants last month (http://www.nakedcapitalism.com/2014/10/private-equity-consultants-flounder-question-abusive-evergreen-fees-calpers-board-meeting.html) because the letter ‘fessed up to an abusive practice called evergreen fees.


Journalists like Maremont and interested members of the public have written public pension funds to obtain the general partners’ responses to these questionnaires. And this is a matter of public interest, since shortfalls in private equity funds, even minor grifting, is ultimately stealing from beneficiaries, and if the pension fund is underfunded, from taxpayers. Yet notice how Ropes & Gray depicts questions about what are ultimately taxpayer exposures as pesky and unwarranted intrusions...

same

[Winehole23]

The fact is that the various FOIAs focused on getting at SEC abuses aren’t about protecting valuable industry intelligence, to the extent there really is any in any of their documents; it’s simply to hide their dirty laundry. The Wall Street Journal story reports how in Washington, Florida, and North Carolina, public pension fund officials have been acceding to private equity fund “concerns” and using strategies ranging from foot-dragging to woefully incomplete disclosure to outright denial to stymie inquiries.

The interesting thing about KKR’s exposure is that its defensiveness is likely due to how much scrutiny it is getting from the SEC. Maremont earlier exposed how KKR’s captive consulting firm KKR Capstone appeared to be charging undisclosed, hence impermissible fees to KKR funds (http://www.nakedcapitalism.com/2014/10/private-equity-latest-example-sec-enforcement-cowardice.html). KKR has attempted to defend the practice by arguing that KKR Capstone isn’t an affiliate. We debunked that argument here (http://www.nakedcapitalism.com/2014/06/kkr-capstone-scam-picture-worth-10000-words.html).


Even though we have criticized the SEC (http://www.nakedcapitalism.com/2014/09/sec-coverup-private-equity-worse-tbtf-banks.html) for its apparent inaction on the private equity front (http://www.nakedcapitalism.com/2014/10/private-equity-latest-example-sec-enforcement-cowardice.html), in terms of following through with Wells notices after describing widespread private equity industry malfeasance, we have been told that the agency is in the process of building some major cases against private equity firms. Given how many times KKR’s name has come up in Wall Street Journal, New York Times, and Financial Times (http://www.nakedcapitalism.com/2014/07/financial-times-reports-on-private-equity-firm-fee-grifting-investor-discontent.html) stories on dubious private equity industry practices, one has to imagine that KKR would be a likely target for any action that the SEC would consider to be “major”.

same

[boutons_deux]

logical assumption: financial sector STEALING Human-Americans' pensions. guilty until proven innocent.

and you right-wingers want to kill SS and give those $Ts to Wall St? :lol

[Winehole23]

Thanks to new pension accounting rules put forth by the Governmental Accounting Standards Board (GASB), Kentucky, along with a handful of other plans, has been forced to lower its discount rate -- that is, the rate of return on its investments that it uses to determine the value of its total pension liabilities. The higher the expected rate of return, the lower the amount of funding a government needs to pay into its pension plan. The opposite is true when the rate of return is lowered. For Kentucky, which had to bring its rate down by more than two points to 5.23 percent, the effect was to increase the total liability. With the lower rate for investment performance, the plan will need more money to pay its pension obligations.

In a Governing analysis of 80 pension plans (http://www.governing.com/gov-data/finance/public-pensions-fiscal-2014-2013-financial-data.html) that had comparable data available, about one-third adjusted their discount rate downward but just nine plans in four states lowered it by more than a half-percentage point. The results for most of those plans were dramatic changes in their total pension liabilities while their assets on hand either improved somewhat or stayed the same.


http://media.navigatored.com/images/pensions_funded_status.pngOverall, the total liability of the plans reviewed increased an average of only 9 percent, a hike generally attributed to retirees living longer. But some plans saw more dramatic changes. In New Jersey, pension liabilities for the state employee retirement plan increased 55 percent. While the aggregate average plan saw a boost in its funded ratio of 4 percentage points, New Jersey’s funded status fell by nearly one-fifth to 28 percent.
The discount rate rule, known as GASB 67, is just part of the story. Another piece of the new rule, GASB 68, will hit financial statements starting later this year. Under that new rule, governments that are members of a pension plan -- say, localities that pool their money with a state plan -- are required to report their share of that plan’s unfunded liability on their governmentwide balance sheet for the 2015 fiscal year, something most of those governments have never before had to do. Now most will be adding millions of dollars in liabilities, forcing lawmakers to acknowledge the role pension payments play in their government’s overall financial picture.

http://www.governing.com/topics/mgmt/gov-gasb-pension-plans-may-look-worse-soon.html

[boutons_deux]

Here's how the plutocrats vote themselves taxpayers' funds for their PENSIONS

Aaron Schock still gets taxpayer-funded pension

Rep. Aaron Schock, who announced his resignation (http://www.politico.com/story/2015/03/aaron-schock-resigns-116153.html?hp=t1_r) today under suspicion of misusing public money, will be eligible for more of it in retirement.

Schock, a Republican from Illinois, could eventually collect hundreds of thousands of dollars in taxpayer-funded retirement benefits, depending on how long he lives.

Starting at age 62, he will be eligible for just under $18,500 annually, according to estimates by the National Taxpayers Union (http://www.ntu.org/), a conservative nonprofit organization.

Douglas Kellogg, a spokesman for the National Taxpayers Union, added that members of Congress are also eligible for a 401(k)-style plan, but it’s unknown whether Schock has chosen to participate in it.

According to a June report (http://www.senate.gov/CRSReports/crs-publish.cfm?pid=%270E%2C*PLC8%22%40%20%20%0A) from the Congressional Research Service, members of Congress who have completed at least five years of service are eligible for taxpayer-funded pensions beginning at age 62.

The amount of a former congressional member’s pension varies, but the payout is based on the number of years of service and an average of the member’s three highest years of salary.

http://www.publicintegrity.org/2015/03/17/16922/aaron-schock-still-gets-taxpayer-funded-pension?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+publici_rss+%28The+Center+for +Public+Integrity+Latest+Stories%29

My guess is that nearly every politician run for office as strategy to become (more) wealthy, not to serve America.

[boutons_deux]

Elizabeth Warren Exposes How Financial Advisers Exploit Retirees

Retirees across America look to financial advisers for help in navigating options for smart retirement saving. But there's a scary fact many folks don't know when they entrust their life savings to a broker. According to a report (http://www.warren.senate.gov/files/documents/2015-10-27_Senator_Warren_Report_on_Annuity_Industry.pdf) released by Sen. Elizabeth Warren (D-Mass.) last week, many financial advisers promoteinferior financial products to collect kickbacks—from pricey Caribbean vacations to gift cards and golf outings—offered by the companies that sell certain annuities. And what's worse, that practice is totally legal.

The study, called "Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry," points out that loopholes in various rules from the Securities and Exchange Commission, the Financial Industry Regulatory Authority, state insurance departments, and other agencies allow this practice to continue. The tainted financial advice costs Americans about $17 billion (https://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf)every year.

To get a sense of the prevalence of these perk-induced conflicts of interest, Warren's Senate office wrote to 15 leading annuity providers (http://www.warren.senate.gov/files/documents/AnnuitiesLetters.pdf), asking whether they offered non-cash incentives, including vacation trips, cruises, and dinners, to annuity sales agents for promoting their financial products. Often, agents have to hit multi-million-dollar sales goals to trigger giveaways, so the letter also asked these companies about their protocols for disclosing sales incentives to annuity purchasers. Warren began the investigation in April, a few weeks after the Department of Labor proposed a rule to help curb conflicts of interest in annuity sales.

None of the companies, says the report, provided complete answers to Warren's questions, but "the responses nonetheless reveal a widespread practice of offering agents kickbacks in exchange for promoting certain annuities…and that such kickbacks are effectively concealed from customers."

Thirteen of the 15 companies contacted by Warren's office admitted to offering perks either directly to sales agents or indirectly through third-party providers.Some of the top perks included a 30-day trip around the world for two, a week in Bora Bora, a trip to Monte Carlo, and a week in Rome. Beyond vacations, Warren's office heard from companies that they offered items such as iPads, golf outings, jewelry, dinners at expensive restaurants, and sports tickets.

Here are more examples of the types of perks that companies revealed to Warren's office:


In 2015, American Equity offered the top sellers of its products a trip to San Francisco for agents "and their guests." In 2014, the company offered top-selling agents a trip to Disney World. Children of sales agents who had sold an extra $600,000 worth of American Equity products traveled for free.
For its agents who sell more than $3.5 million worth of Athene products, the company is offering a 2016 trip to a conference in Aruba, with accommodations at the RitzCarlton.
Fidelity Guarantee and Life offered top agents a trip to the company's Power Producer Conference at the Four Seasons Resort in Punta Mita, Mexico.
American National offered its top-performing agents and their guests a five-day, four-night stay at the Cove Atlantis on Paradise Island in the Bahamas.


Existing rules limit non-cash compensation for annuity sales, but these regulations still make it fairly easy to provide kickbacks while staying within the confines of the law, the report found. For instance, companies are allowed to offer expensive vacations when they're tied to sales meetings or conferences. They are also allowed to provide perks via third-party marketing organizations as a way to get around limits on non-cash compensation provided directly to sales agents.

http://www.motherjones.com/politics/2015/11/elizabeth-warren-financial-advisers-retirees-kickbacks-vacations

[Winehole23]

ongoing kerfuffle at CALPERS over undisclosed fees to managers. $3.4 billion since 1990.

http://www.wsj.com/articles/calpers-discloses-performance-fees-paid-to-private-equity-managers-1448386229

[Winehole23]

blow by blow:

http://www.nakedcapitalism.com/2015/11/calpers-pokes-board-in-the-eye-by-releasing-private-equity-carry-fee.html

[Winehole23]

Experts on the tax beat have recently been saying, as incredible as it may seem, that the days of the billionaire-creating carried interest loophole are numbered. The release by CalPERS of carry fee information across its portfolio yesterday may well move its sell-by date forward.same

[boutons_deux]

calpers 19% gain was reduced to 12% as the fund mangers took 7%, over 33% of the gains.

then there are the often secret, unquestionable fees.

[rmt]

Getting back to the original topic: my friend has 28 years in the Florida retirement system. She transferred to the City of Miramar - different retirement system - plans to work for 10 years there - collect 40% of her current salary and then add 2 more years at some low end job (she already has her 5 highest years that the pension is calculated for) to finish up the 30 years in FRS. Will be collecting 2 pensions (1 full) at age 62 till what's the average age for a woman - 88? Some also save up overtime, vacation time, etc and claim at the end (to blow up the salary) when pension is calculated.

Be careful where you live - e.g. Illinois at 43% liabilities funded is in BIG trouble. Taxpayers will have to cough up.

[Winehole23]

Here’s what U.S. state and city pension funds are getting this year for the hundreds of millions of dollars in fees they’re forking over to hedge funds: almost nothing.


The investment pools gained 0.4 percent through November, putting them on pace for the worst year since 2011, according to data compiled by Bloomberg. The industry’s struggle was underscored over the past two months as BlackRock Inc., Fortress Investment Group and Bain Capital closed hedge funds after running up losses.


The low returns are dealing a setback to governments that boosted exposure to hedge funds, seeking windfalls to help close a $1.4 trillion shortfall that’s facing public-employee retirement systems nationwide. The investment funds have underperformed stocks since 2008 as share prices rallied and volatility whipsawed global financial markets.


“The bull market of the last six years allowed public pension plans to become poor consumers,” said South Carolina Treasurer Curtis Loftis, who has criticized the fees his state has paid firms including hedge funds. “The plans viewed hedge funds as an ‘elite investment’ and therefore neglected to perform strenuous and ongoing due diligence.”

http://www.bloomberg.com/news/articles/2015-12-09/hedge-fund-rout-leaves-pensions-with-little-to-show-for-the-fees

[Winehole23]

thematically related: study shows private equity firms take over 6% of invested equity in hidden fees


A study just released by Oxford Professor Ludovic Phalippou seeks to identify how much limited partner are paying in fees they don’t see and can’t control, as in the charges private equity firms make to the companies they buy on behalf of investors, the so-called “portfolio companies”. The headlines at the Wall Street Journal and the Financial Times report his study as finding $20 billion in hidden fees, but they fail to emphasize that this study was based on an in-depth examination of 592 companies and 1044 transactions, meaning a subset.


Remarkably, neither article includes a conclusion in the study’s’ opening paragraph, which is far more arresting (emphasis ours):



We describe these contracts and find that related fee payments sum up to $20 billion evenly distributed over twenty years, representing over 6% of the equity invested by GPs on behalf of their investors.

http://www.nakedcapitalism.com/2015/12/partial-tally-of-hidden-private-equity-fees-6-of-equity-invested.html

[Winehole23]

The reason these fees have been opaque to investors is that they are not paid by the private equity fund, but skip the fund’s books entirely by going straight from the investee companies to the general partner. And the arrangements are not set forth in the limited partnership agreements that govern these deals either. Yes, the limited partnership agreements give the general partners the right to make enter into these types of contracts with the portfolio companies, peculiarly without setting any parameters on them. One type of common agreement, so so-called monitoring agreement, routinely calls for companies to pay fees whether any services have been rendered or not. As Phalippou has “translated” (http://www.nakedcapitalism.com/2014/12/private-equity-tax-games-another-example-elite-lawlessness.html) these agreements for the benefit of his students:



I may do some work from time to time

I do some work, only if I feel like it. Subjective translation: I won’t do anything.

I’ll get [in this case] at least $30 million a year irrespective of how much I decide to work. Subjective translation: I won’t do anything and get $30 million a year for it.
If I do decide to do something, I’ll charge you extra.

I can stop charging when I get out (or not), but if I do I get all the money I was supposed to receive from that point up until 2018.


This study does represent a meaningful sample. The 592 companies represent a total of $1.1 trillion in value. The fees charged over twenty years was $16 billion; adjusted for inflation, the total comes to $20 billion. And these companies generally were larger than average by virtue of having been reported in SEC filings.same

[Winehole23]

Both the Journal and the Financial Times mentioned a “back of the envelope” calculation using CalPERS data to give a sense of the magnitude of these only partial “hidden fees” compared to carry fees. From the Financial Times (http://www.ft.com/cms/s/0/890c7006-9fe5-11e5-beba-5e33e2b79e46.html):



Mr Phalippou’s analysis indicated that Calpers paid around $2.6bn in hidden fees on private equity investments made between 1991 and 2014 on top of its $3.4bn bill for carried interest. Around $1.3bn was repaid to Calpers as rebates against annual management fees.

[boutons_deux]

working assumption: the ENTIRE FINANCIAL SECTOR is fraudulent, thieving, criminal.

[Winehole23]

actual journalism and studies showing HOW money is stolen and BY WHOM is much preferable to blanket assumptions of criminality.

[Winehole23]

a peek into the shady -- and possibly very dangerous world -- of low grade corporate financing:


In 2008 that excess risk rose up from subprime mortgages. Today, risk is pooling in a different area: corporate debt. From multinationals to small businesses, corporate debt has exploded over the past two years, alarming regulators and policymakers. “In many ways, this is a test of all the mechanisms that caused the financial crisis,” said one fearful Senate Democratic aide. “If there’s another crisis, this is where it might start.”


A clear example of this gold rush can be seen in Apple’s recent $17 billion corporate bond sale (http://www.bloomberg.com/news/2013-04-30/apple-plans-six-part-bond-sale-in-first-offering-since-1996-1-.html), the largest on record and the tech giant’s first since 1996. Apple, with $158 billion in cash reserves (http://www.cultofmac.com/272570/apples-cash-reserves-30x-10-years-ago/), has little need to borrow money. But thanks to several years of low Federal Reserve interest rates, it’s become so cheap for corporations to borrow that big firms who resist just leave money on the table. Tellingly, Apple plans to use the funds not to develop new products or finance new capital investments, but simply to boost returns to shareholders. So the increased borrowing risk doesn’t even improve the economy; it goes straight from the fruits of worker productivity into the accounts of the top one percent.


Much of this corporate debt is more dangerous than Apple’s, however. In fact, Wall Street describes it as “junk bonds,” which offer a higher return because of the higher risk of default. That’s attractive to investors, who have been “reaching for yield” above what safer investments will produce. Since March 2009, the junk bond market has doubled to $2 trillion (http://www.bloomberg.com/news/2014-03-19/junk-bonds-at-2-trillion-as-gundlach-pulls-back-credit-markets.html), as worries about risk have flown out the window. Got an idea for a vegan restaurant on a cow farm or a lingerie shop in a nunnery? No problem, some investor will lend you lots of money.
In fact, loading up companies with massive debt is a business strategy for the kinds of companies that will be familiar to anyone who paid attention during the 2012 Presidential election to Mitt Romney’s exploits at Bain Capital. Private equity firms like Bain take over companies and borrow lots of money to make the acquisition, a process known as a leveraged buyout. The assets of the company become the collateral for the loans. This puts the company and all its workers at great risk, because if their operating revenue cannot pay off the high interest payments on the debt, their assets get sold in bankruptcy and everyone loses their jobs. Even in that situation, private equity firms can walk away with a profit, as they put up nothing to acquire the company, and they make their money through management fees (http://www.nakedcapitalism.com/2014/05/new-york-times-new-editor-buries-important-story-private-equity-fee-shenanigans-holiday-weekend.html). It’s an old story: the big money boys come to town, suck out the value from a company and then leave its dried husk by the side of the road.


Loans in private equity deals are often “covenant-lite” leveraged loans (http://www.forbes.com/sites/spleverage/2014/03/21/u-s-leveraged-loan-issuance-totals-10-7b-this-week-140b-ytd/), a type of junk bond that offers fewer safeguards for investors. Given the desperation for higher yields, investors foolishly accept higher risk (http://www.ft.com/intl/cms/s/0/f9992ce2-e11e-11e3-b59f-00144feabdc0.html) to get their hands on low-grade corporate debt. So under the terms of these loans, investors do not get informed when the underlying companies run into financial trouble, making it harder to avoid losses. Leveraged loans hit a new record (http://www.ft.com/intl/cms/s/0/eb9e619c-b9f6-11e3-a3ef-00144feabdc0.html) last year, and covenant-lite loans exploded (http://4.bp.blogspot.com/-cQCBy14OYCw/U2k2iOOAQrI/AAAAAAAAel4/VaL5yGIPXIs/s1600/Cov-lite.PNG), comprising over half of all leveraged loans, according to the New York Federal Reserve (http://ourfinancialsecurity.org/blogs/wp-content/ourfinancialsecurity.org/uploads/2013/11/ADAM-ASHCRAFT-SHADOW-BANKING-PPT.pdf). Demand was so high, in fact, that the spread between “high yield” corporate debt and risk-free securities like Treasury bonds fell to all-time lows (http://finance.fortune.cnn.com/2014/05/08/janet-yellen-congress-economy/), making it even crazier to purchase riskier debt for a small additional reward.


Smaller and smaller firms were the beneficiaries of these loans, like Learfield Communications (http://dealbook.nytimes.com/2013/11/26/new-boom-in-subprime-loans-for-smaller-businesses/?partner=rss&emc=rss&wpisrc=nl_wonk), a media group with $40 million in annual revenues that received an incredible $330 million in covenant-lite loans last October. It’s correct to call this the “subprime of the corporate world.”

http://daviddayen.tumblr.com/post/135158683211/the-next-financial-crisis-will-start-here

[boutons_deux]

actual journalism and studies showing HOW money is stolen and BY WHOM is much preferable to blanket assumptions of criminality.

The repeated evidence of the years, of just the ones caught (not all of them have been caught) justifies my assumption. Give your money to the financial sector at risk to your money.

[Winehole23]

your mind always takes a shortcut to what it already knows. it's hard to imagine a more basic definition of idiocy.

[boutons_deux]

your mind always takes a shortcut to what it already knows. it's hard to imagine a more basic definition of idiocy.

you're welcome prove me wrong, but you can't. I get to the knowledge based on long observation, even your posts in this thread are NOTHING but more evidence supporting my positon on BigFinance.

[Winehole23]

you're welcome prove me wrong, but you can't.you're welcome to prove your own over-broad, information-free generalizations, but you can't.

[Winehole23]

you won't convince anyone by pointing at your own head, or by promiscuously dumping links. that's not how persuasion works.

[boutons_deux]

you won't convince anyone by pointing at your own head, or by promiscuously dumping links. that's not how persuasion works.

sez the great link dumper hisself.

[boutons_deux]

Pensions & Investment Editorial Savages Trustees for Failing to Perform Fiduciary Duty Over Private Equity Fees (http://www.nakedcapitalism.com/2015/12/pensions-investment-editorial-savages-trustees-for-failing-to-perform-fiduciary-duty-over-private-equity-fees.html)
http://www.nakedcapitalism.com/2015/12/pensions-investment-editorial-savages-trustees-for-failing-to-perform-fiduciary-duty-over-private-equity-fees.html

[Winehole23]

solution to embarrassing disclosures: limit disclosure


Earlier this month, the nation’s largest public pension fund roiled the financial world: Officials overseeing $300 billion of California public employees’ retirement savings disclosed (http://www.wsj.com/articles/calpers-discloses-performance-fees-paid-to-private-equity-managers-1448386229) that the fund had paid $3.4 billion in fees to private equity firms over the last two decades. The news of the fees -- and a call (http://www.nakedcapitalism.com/2015/10/after-nc-media-coverage-of-calpers-and-calstrs-private-equity-fee-lapses-treasurer-john-chiang-calls-for-legislation.html) by California Treasurer John Chiang for legislation requiring more ongoing disclosure -- seemed to herald a new trend toward greater transparency at a time when the Securities and Exchange Commission has warned that private equity investors may be getting hit hard by hidden fees.


That momentum toward transparency at the California Public Employees' Retirement System (CalPERS), however, appeared to abruptly halt last week when pension overseers quietly rejected a measure that would have required Wall Street firms to disclose all possible levies before they get their hands on the retirement savings of the system's 1.7 million members (https://www.calpers.ca.gov/docs/forms-publications/facts-at-a-glance.pdf). Some CalPERS board members said they were concerned the measure might alienate private equity firms, thereby denying pensioners the benefits of those investments.http://www.ibtimes.com/political-capital/california-pension-wont-force-wall-street-disclose-all-fees-charged-retirees

[CosmicCowboy]

Let me get this straight...the private equity firms wouldn't take calpers money if they had to disclose their fees? And that's a problem?

[boutons_deux]

Let me get this straight...the private equity firms wouldn't take calpers money if they had to disclose their fees? And that's a problem?

for the funds, yes. They prefer their pilfering to be secret.

"I need a new yacht, so I'll hit up CalPERS for another $100M in secret fees"

[Winehole23]

Let me get this straight...the private equity firms wouldn't take calpers money if they had to disclose their fees? And that's a problem?there's a damn good reason there's a kerfuffle over disclosure. managing partners of hedge funds took CalPERS for over six percent of the principal in hidden fees.

[Winehole23]

it's allowed to read through the thread and catch up with the conversation. you should try it sometime.

[CosmicCowboy]

Lol. Your assumption is the guys running calpers had no knowledge of the fees and there was no quid pro quo for overlooking them.

[Winehole23]

I've given you no reason to think I've assumed anything like that.

it's encouraging that you see the problem. a second ago you were acting like ripping off one of the biggest pension funds in the world for billions of dollars is no big deal.

[Winehole23]

and so much the worse if the board colluded, no?

[Winehole23]

does that make it right for you?

[Winehole23]

well, does it?

[TeyshaBlue]

and so much the worse if the board colluded, no?
It's what BODs do.

[Winehole23]

I get the opportunity can be hard to pass up, but there's a fiduciary responsibility to (someone) that's supposed to prevail.

[Winehole23]

The headline of a December article (http://www.nytimes.com/2015/12/09/business/dealbook/does-private-equity-earn-those-exorbitant-fees.html?_r=0) in The New York Times declared: “Private Equity Fees Are Sky-High, Yes, but Look at Those Returns.” The author, Steven Davidoff Solomon, was making the case that while “critics love to complain about private equity and its exorbitant fees … as an asset class and with the right fund, private equity is nigh unbeatable” and “well worth the fees paid.”




He cites a recent disclosure by the California Public Employees’ Retirement System (CalPERS), the nation’s largest pension system, that despite paying billions in fees, its private equity investments had earned an annualized return of 12.3% per year over the 20 years ending June 2015.



Compared with the return of 8.9% provided by the S&P 500 Index, that may look like the fees were well spent. While that comparison is one private equity (PE) fund that sponsors would love you to make, unfortunately it’s also incredibly misleading.

Let’s see why comparing returns on PE to the S&P 500 Index isn’t appropriate.



Different Risks



For starters, they are very different investments in terms of risk. Companies in the S&P 500 are typically among the largest and strongest, while venture capital traditionally invests in smaller and early-stage companies with far less financial strength. Studies have estimated the betas for buyout funds at roughly 1.3, and for venture capital funds from about 1.6 to 2.5. Since the S&P 500 has a beta of 1, adjusting for the higher betas alone would have more than wiped out any evidence of outperformance.



In addition to the problem of adjusting for the higher betas (exposure to equity risk), investors in private equity forgo the benefits of daily liquidity provided by mutual funds. It’s been well documented in the literature that investors demand a premium for investing in illiquid assets, especially ones that perform poorly in bad times (as PE does). There is no adjustment in the returns data for the risk of illiquidity.



Moreover, relative to investments in mutual funds, PE investors forgo the benefits of transparency and broad diversification (and for individuals, the ability to harvest losses for tax purposes).



Another risk issue is that the median return of private equity is much lower than the mean (or arithmetic average) return. The relatively high average return reflects the small possibility of a truly outstanding return combined with the much greater probability of a more modest or even negative return.



In effect, PE investments are similar to options (or lottery tickets). They provide a small chance for a huge payout, but a much larger chance for a below-average return. And it’s difficult, especially for individual investors, to sufficiently diversify this risk.

It’s important to note as well that the standard deviation of PE returns is in excess of 100%. Compare that with a standard deviation of approximately 20% for the S&P 500 and about 35% for small value stocks.

http://www.etf.com/sections/index-investor-corner/swedroe-private-equity-not-worth-fees?nopaging=1

[Winehole23]

side letters with favored investors and hidden fees to fund managers rip off pensioners:


Giving special preferences to elite investors is a controversial practice barred (http://www.wsj.com/articles/SB111076642955978353) in some parts of the financial world, such as mutual funds. In more lightly regulated alternative investments, though, the strictures are less clear.


“An investment manager [in alternatives] owes a fiduciary duty such that he or she treats investors in a similar manner,” said Ron Geffner, a former SEC regulator who is now a private attorney and the vice president of the Hedge Fund Association. “That said, many things may be negotiated in a side letter, giving managers the flexibility to negotiate certain terms with investors.”


According to financial experts who were asked about special investor rights in general (not specifically the Rhode Island deals), financial firms sometimes use side letters to court deep-pocketed investors with access to non-public information, lower fees or special rights to withdraw their money — potentially leaving other investors with losses. The letters are also used to comply with certain clients' special needs — say, a public institution's bylaws requiring it to collect customized data about its investments. Some (http://www.adviserinfo.sec.gov/iapd/content/viewform/adv/Sections/iapd_Adv2Brochures.aspx?ORG_PK=160925&RGLTR_PK=50000&STATE_CD=&FLNG_PK=0411E62C0008017D047CAE80057931B1056C8CC0) financial firms say they do not have to notify investors of their side letters with others.


“There is a legitimate reason for some of these preferences,” said Harvard University’s Jay Youngdahl, an attorney who serves as a trustee for a steelworkers’ pension fund in Ohio. “But there’s also a not-so-legitimate reason for these preferences: If you are a Wall Street money manager, it allows you and your buddies to build a black box and loot retirees’ money.”

http://www.ibtimes.com/wall-street-fine-print-retirees-want-fbi-probe-pension-investment-deals-2250476

[Winehole23]

once we get a little peek under the hood, legislators slam it shut:



“The net effect is that a California public fund would receive much less than a full picture of the related-party transactions,” said Michael Flaherman, a former board member of the California Public Employees’ Retirement System and chairman of its investment committee, who is now a visiting scholar at the Goldman School of Public Policy at the University of California, Berkeley. “The missing part of the picture would be the portion of the fees that the private equity firms get to pocket in full.”
Not to be outdone, some lawmakers (http://ourfinancialsecurity.org/wp-content/uploads/2016/05/AFR-Investment-Advisors-Letter-5.17.16.pdf) in the nation’s capital are trying to roll back newer regulations that have given the Securities and Exchange Commission a window onto private equity practices.


This fight against transparency, it’s worth noting, coincides with a series of S.E.C. enforcement actions (https://www.sec.gov/news/speech/private-equity-enforcement.html) against private equity firms. Stated simply, these cases prove that investors need more, not less, information about what their managers are up to.
“Just when they lift the hood on private equity and find some mechanical problems, they want to slam it shut again,” said Jennifer Taub (http://www.vermontlaw.edu/directory/person?name=Taub,Jennifer), a professor at Vermont Law School. “Having a whole big pot of money in the shadows is not a good idea if you’re trying to prevent systemic risk.”


The attempts to keep private equity practices under wraps also coincide with a decline in the industry’s investment returns. An analysis (http://cepr.net/images/stories/reports/private-equity-performance-2016-06.pdf) published in late June by the Center for Economic and Policy Research notes that private equity’s performance in recent years is about even with that of the overall stock market. That means investors are not receiving appropriate rewards for the additional risks they take in these funds.


The research also identified another crucial shift: Past returns by a private equity manager are no longer as reliable a predictor of that manager’s future performance.

http://www.nytimes.com/2016/07/03/business/private-equity-funds-balk-at-disclosure-and-public-risk-grows.html?_r=1

[Winehole23]

https://pbs.twimg.com/media/Dh6bQdnXUAAbUFh.jpg

[Winehole23]

hedge funds and private equity sucked hundreds of billions out of public pensions in the last ten years:


Over the last decade, fund managers who oversee the pensions of the nation’s teachers, firefighters, police and other government workers have doubled down on an investment strategy that has cost U.S. taxpayers at least $600 billion, possibly more than $1 trillion, investment data and calculations by Yahoo Finance found.https://finance.yahoo.com/news/wall-street-managers-cost-americans-600-billion-past-decade-134658282.html

[boutons_deux]

one of the biggest, if not the biggest

Why Is CalPERS’ Staff Serving Up Tech Charlatanism to Its Board? (https://www.nakedcapitalism.com/2018/07/why-is-calpers-staff-serving-tech-charlatanism-to-its-board.html)

https://www.nakedcapitalism.com/2018/07/why-is-calpers-staff-serving-tech-charlatanism-to-its-board.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capi talism%29

[Winehole23]

motif: firing the money managers and putting the money in plain vanilla index funds works better.

https://news.ncsu.edu/2018/10/pensions-management-fees/

[Winehole23]

Vanguard beats even endowments:

https://www.nakedcapitalism.com/wp-content/uploads/2019/02/Screen-Shot-2019-02-13-at-4.41.59-AM.png
This comparison is more damning than you might appreciate at a first look because the endowments are taking far more risk than the prototypical 60/40 stock/bond mix suggested for retail investors:
https://www.nakedcapitalism.com/wp-content/uploads/2019/02/Screen-Shot-2019-02-13-at-4.46.07-AM.png


https://www.nakedcapitalism.com/2019/02/even-endowments-not-beating-vanguard-good-high-fee-private-equity-hedge-funds.html

[Winehole23]

Republican AG sues private equity managers (*Blackstone*) on behalf of KY taxpayers.

https://sirota.substack.com/p/a-major-wall-street-scandal-just

https://kcoj.kycourts.net/eFilingRetrieval/Home/DocSearch?mytextbox=A4BA8A34-76A8-44B4-BC70-1895AA89AF33&src=false

[diego]

man, i just read through this whole thread, so depressing...

chile has a "iconic" pension system setup during the dictatorship by milton friedman's pets, private fund managers take 10% of everyone's paycheck, charge a commission win or lose, each has 5 funds of supposed different risk and even though they charge you to manage your fund you have to choose which fund to be in and switching takes several days. the selling points for the system are that everyone's pension is self funded so its impossible for the state to go in debt and its YOUR money so you can count on it being there*, individuals can "choose" which company and which risk level they want, it creates a local financial market, and supposedly people would get about 70% of their last salary.. the unfortunate reality is that that number is closer to 25%, there is little actual choice, and that the fund managers' yearly profits have steadily increased to over 50% of workers total yearly contribution. The "local" financial market exists, but the fund managers have no restrictions on what to invest in and very few disclosure requirements, so it is difficult to know how much is invested abroad or at home and for what kind of activity. and probably the most toxic effect, is that obligatory 10% salary cut basically gives both companies and employees an incentive to skirt the law, either by pretending to freelance or declaring a lower salary and receiving the rest intact or straight up working without a contract. for many people, once you put together 5-6 years of unemployment/freelancing it no longer even makes sense to put in money to a $130 pension

anyways my takeaway from reading this whole thread and applying it to the local situation, is that private or public fund managers need serious oversight otherwise the money is just too powerful, they can buy politicians like toilet paper. in fact the system here was actually fairer when they started it 30 years ago, but under every government they just slip more hidden fees, reduce their capital requirements, their taxes, ease up disclosure, etc etc.. who knows, they might have been right and found the perfect system, with the corruption we'll never know..

right now with the pandemic, economically our govt has basically bailout/stimulus for businesses (including using workers unemployment funds- similarly setup to the pension funds with an individual system- to cover %of wages during pandemic) but very little for people and today a plan for people to be able to take 10% out of their pension fund now got passed- the right is going to our "supreme court" and the president can still try to veto (he is in major lame duck territory and i suspect he will at least try to veto because he has nothing to lose at this point :lol). So after 15 years of people protesting, the massive unrest we had 9 months ago, the funds finally appear to be cracking... but after reading this thread its pretty clear whatever comes next will likely fail for the same reasons:pctoss

[Winehole23]

Thanks for the keyhole view from your own country, diego. It's really weird -- maybe predictable from the outside -- that the USA is starting to resemble Chile in certain ways.

Colonialism came home, maybe. The financial sector are the masters and we are the farm.

[rmt]

Previous to Rick Scott's reforms to Florida Retirement System, pensions were PLATINUM: 50% of average of 5 highest years' income (calculation includes overtime hours, unlimited sick leave and 30 years to qualify [33 years now]) plus 3% Cost of Living Adjustment increase every year for the rest of your life.

After Scott's reforms, they're now just GOLDEN - no cost of living adjustment for years after 2011 (a fraction is subtracted for these). Also, to encourage people to retire, they instituted DROP which if entered, you get a pot of 5 years' retirement IN ADDITION to your regular income but you must retire after 5 years of entering DROP. Please stop complaining about how low these teachers pay are and silently calculate 1 1/2 times and consider that whether they do the work (not even do it well), they still get paid. Sometimes, it's "Can someone fix this program - my laptop is giving trouble and I have to go in for another". Like any other unionized sector, it's near impossible to fire the bad and the remaining good do all the work. No where in the private sector would you get this kind of retirement or guarantee of job security/pension no matter the job performance.

And WE are all paying for it - and for what? Crapping education outcomes.

[Winehole23]

Previous to Rick Scott's reforms to Florida Retirement System, pensions were PLATINUM: 50% of average of 5 highest years' income (calculation includes overtime hours, unlimited sick leave and 30 years to qualify [33 years now]) plus 3% Cost of Living Adjustment increase every year for the rest of your life.

After Scott's reforms, they're now just GOLDEN - no cost of living adjustment for years after 2011 (a fraction is subtracted for these). Also, to encourage people to retire, they instituted DROP which if entered, you get a pot of 5 years' retirement IN ADDITION to your regular income but you must retire after 5 years of entering DROP. Please stop complaining about how low these teachers pay are and silently calculate 1 1/2 times and consider that whether they do the work (not even do it well), they still get paid. Sometimes, it's "Can someone fix this program - my laptop is giving trouble and I have to go in for another". Like any other unionized sector, it's near impossible to fire the bad and the remaining good do all the work. No where in the private sector would you get this kind of retirement or guarantee of job security/pension no matter the job performance.

And WE are all paying for it - and for what? Crapping education outcomes.Sorry to hear Rick Scott crapified your pensions in FL.

Blaming teachers for bad education while saying nothing of administrative bloat and decades long disinvestment on the part of the states discloses a narrow, more or less partisan point of view.

[CosmicCowboy]

If you think public pension returns are bad now, just wait. Many of them went heavily into REIT's over the last 20 years and they are due to take a greasy shit post covid. Big box stores and shopping malls were already sucking because of Amazon etc. Now with covid, big companies were forced into allowing/requiring employees to work remotely and realized that it didn't hurt efficiency. With zoom, facetime, etc. companies are realizing they don't need those expensive office towers, conference rooms, etc. I know in San Antonio class A warehouse space also is way overbuilt because all the REIT's jumped in at the same time and we have millions of square feet sitting vacant.

[rmt]

If you think public pension returns are bad now, just wait. Many of them went heavily into REIT's over the last 20 years and they are due to take a greasy shit post covid. Big box stores and shopping malls were already sucking because of Amazon etc. Now with covid, big companies were forced into allowing/requiring employees to work remotely and realized that it didn't hurt efficiency. With zoom, facetime, etc. companies are realizing they don't need those expensive office towers, conference rooms, etc. I know in San Antonio class A warehouse space also is way overbuilt because all the REIT's jumped in at the same time and we have millions of square feet sitting vacant.

Yep - Facebook, iirc, is considering allowing employees to work remotely POST-covid. If other companies follow suit, the policy could decimate big city office space/real estate values.

[ElNono]

Yep - Facebook, iirc, is considering allowing employees to work remotely POST-covid. If other companies follow suit, the policy could decimate big city office space/real estate values.

Which could be an opportunity to re-classify the area and help with housing crisis in many cities.

[rmt]

Which could be an opportunity to re-classify the area and help with housing crisis in many cities.

Also, take their tax dollars with them.

[ElNono]

Also, take their tax dollars with them.

State get the taxes no matter what you do. Online now is taxed, property taxes, etc.

[rmt]

Not to worry - at least, as far as tech companies are concerned - imo, their location is based more on presence of top CS universities (recruiting, collaboration) - not big city. See Seattle (U of Washington), Mountain View/Menlo Park (Stanford) vs Los Angeles, Miami, etc. New York, of course, is the exception (Amazon, not withstanding :-)

[rmt]

State get the taxes no matter what you do. Online now is taxed, property taxes, etc.

I think it's where you are physically (like NBA players). Dd couldn't stay longer than 3 weeks (at a time) teleworking in Florida during covid because of (her resident state) tax complications.

[rmt]

In case, I wasn't clear - I'm referring to moving to another state instead of living in the big (in this case - tech) cities.

[ElNono]

In case, I wasn't clear - I'm referring to moving to another state instead of living in the big (in this case - tech) cities.

There are reasons for living in the big cities though. It's the main reason Silicon Valley hasn't gone anywhere, you only get more tech hubs in other places.

Things like ultra fast internet infrastructure, close access to international airports, 24/7 service, having a presence where the best talent is, etc.

[Winehole23]

and when the state pensions try to hold private equity funds accountable, they threaten to cut the states out of the action:

http://www.nakedcapitalism.com/2014/11/private-equity-kingpin-kkr-threatens-iowa-pension-fund-foia-request.html



Republican AG sues private equity managers (*Blackstone and KKR*) on behalf of KY taxpayers.

https://sirota.substack.com/p/a-major-wall-street-scandal-just

https://kcoj.kycourts.net/eFilingRetrieval/Home/DocSearch?mytextbox=A4BA8A34-76A8-44B4-BC70-1895AA89AF33&src=falseKKR now faces discovery in this case. The stakes are high because KKR invests for pension funds in many states.

The case is Mayberry v. KKR.


Background

Mayberry v. KKR is a high stakes case, confirmed by the legal scorched earth tactics of the defendants, Blackstone, KKR/Prisma, and PAAMCO, along with key principals, including Blackstone founder and CEO Steve Schwarzman and KKR co-founder and CEO Henry Kravis. The case was first filed in December 2017 derivatively, on behalf of eight beneficiaries of the fabulously badly managed, corrupt, and underfunded Kentucky Retirement System. The plaintiffs alleged that that Blackstone, KKR/Prisma and PAAMCO had each sold KRS high fee, high risk customized hedge funds that they falsely billed as the impossible combination of “low risk, high return,” contradicting what their own SEC filings said about the very same products. The Kentucky Retirement System made a sudden, large commitment to all three funds and even added to the pot despite underperformance. As we explained: (https://www.nakedcapitalism.com/2021/02/mayberry-v-kkr-kentucky-attorney-general-shows-true-colors-looks-over-eager-to-settle-pathbreaking-pension-case-rather-than-inconvenience-private-equity-kingpins-blackstone-and-kkr.html)


The fund managers allegedly focused on KRS and other desperate and clueless public pension funds who were unsuitable investors, particularly at the risk levels they were taking. KRS made what was a huge investment for a pension fund of its size. $1.2 billion across three funds all at once, in 2011, roughly 10% of its total assets at the time. They all had troublingly cute names. The KKR/Prisma funds was “Daniel Boone,” the Blackstone fund was “Henry Clay” and the PAAMCO fund, “Colonels”.

In the case of KKR/Prisma, the fund had installed an employee at KRS as well as having a KKR/Prisma executive sitting as a non-voting member of the KRS board. The filing argues that that contributed to KRS investing an additional $300 million into the worst performing hedge fund even as it was exiting other hedge funds.

The ante is much higher than the potentially meaty recoveries. Private equity and hedge funds fetishize secrecy because too often, their conduct will not stand up to scrutiny. The giant fund managers are almost certain to be most afraid of discovery, since they sharp practices they used with Kentucky Retirement Systems were very likely to have been replicated at other public pension funds. Even the limited discovery so far uncovered more misconduct and allowed the plaintiffs to add to their claims.

https://www.nakedcapitalism.com/2021/02/hoist-on-his-own-petard-kentucky-attorney-generals-apparent-plan-to-settle-landmark-pension-case-mayberry-v-kkr-likely-to-be-undermined-by-discovery.html

[Winehole23]

custom benchmarks hide PE's crappy performance


Ennis’ latest paper is if anything more damning than it appears. He used the data from 24 state-level public pension funds. It was only 24 due to the need to have everyone use the same fiscal year end (June 30) and report performance net of costs (Ennis said 1/3 fell short on that criterion). These state funds will generally be larger and more professionally managed than smaller pension funds, particularly police and fire pension funds. In other words, the level of underperformance is certain to increase if smaller funds were included. It’s also a reasonable suspicion that bigger funds that did not report returns net of fees felt the need to exaggerate their performance.


You can see Ennis’ conclusions in data form below. Negative excess returns means the funds would have done better with simple-minded indexing.
https://www.nakedcapitalism.com/wp-content/uploads/2021/07/Screen-Shot-2021-07-21-at-9.39.59-PM-1-1024x865.png
Note again his assumptions about investment expenses are conservative. Ennis shows in Table 1 the estimated cost of investing in various alternative investment strategies. Private equity is listed at 5.7%. CalPERS is continuing to use 7% as its estimate, per board member remarks at its last public meetings.


Ennis also documents how public pension funds lie to themselves, beneficiaries, taxpayers, and the press via flattering benchmarks. He explains how all-too-cooperative advisers feather their own beds:



Public pension funds use benchmarks of their own devising, describing them variously as “policy,” “custom,” “strategic,” or “composite” benchmarks. I refer to them as reporting benchmarks (RBs). …RBs are often opaque and difficult to replicate independently. RBs invariably include one or more active investment return series and thus are not passively investable. They are subjective in several respects, rendering their fashioning something of a black art. Moreover, they are devised by the funds’ staff and consultants, the same parties that are responsible for recommending investment strategy, selecting managers, and implementing the investment program. In other words, the benchmarkers have conflicting interests, acting as player as well as scorekeeper. To state the obvious, perhaps, RBs generally do not measure up to the standards of objectively determined, passively investable benchmarks used by scholars and serious practitioner-researchers..


Public fund portfolios often exhibit close year-to-year tracking with their RB. This results in part from how RBs are revised over time…


No doubt the benchmarkers see such tweaking as a way of legitimizing the benchmark so that it better aligns with the actual market, asset class, and factor exposures of the fund. It accomplishes that, to be sure. But it also reduces the value of the benchmark as a performance gauge, because the more a benchmark is tailored to fit the process being measured, the less information it can provide. At some point, it ceases to be a measuring stick altogether and becomes merely a shadow.


We talk about “hugging the benchmark” in portfolio management. Here is another twist on that theme: forcing the benchmark to hug the portfolio.


Ennis uses CalPERS as a case study because its behavior is typical:

CalPERS’s portfolio return tracks that of the RB extraordinarily closely. The 10-year annualized returns differ by all of 3 bps, 8.54% versus 8.51%. Year to year, the two-return series move in virtual lockstep, as demonstrated by the measures of statistical fit—an R2 of 99.5% and tracking error of just 0.5%—and even by simple visual inspection of the annual return differences. For example, excluding fiscal years 2012 and 2013, the annual return deviations from the RB are no greater than 0.4%. This is a skintight fit.


CalPERS’s EB return series also has a close statistical fit with CalPERS’s reported returns in terms of R2 and tracking error, although not as snug a fit as with the RB. Moreover, there is an important difference in the level of returns. Whereas CalPERS’s 10-year annualized return is virtually identical to that of its RB, it underperforms the EB by 114 bps a year. And it does so with remarkable consistency: in 10 years out of 10.


The return shortfall relative to the EB is statistically significant, with a t-statistic of –2.9. And it is of huge economic significance: A 114 bp shortfall on a $470 billion portfolio is more than $5 billion a year, a sum that would fund a lot of pensions.
https://www.nakedcapitalism.com/2021/07/quelle-surprise-new-study-confirms-that-public-pension-funds-use-flattering-benchmarks-to-hide-failure-to-beat-simple-indexing-calpers-is-a-case-study.html

[RandomGuy]

If you think public pension returns are bad now, just wait. Many of them went heavily into REIT's over the last 20 years and they are due to take a greasy shit post covid. Big box stores and shopping malls were already sucking because of Amazon etc. Now with covid, big companies were forced into allowing/requiring employees to work remotely and realized that it didn't hurt efficiency. With zoom, facetime, etc. companies are realizing they don't need those expensive office towers, conference rooms, etc. I know in San Antonio class A warehouse space also is way overbuilt because all the REIT's jumped in at the same time and we have millions of square feet sitting vacant.

Seems like a way to get affordable housing jumpstarted. Bit of conversion, but you already have a working shell, to prompt some mixed use.

[Winehole23]

Cory Doctorow with receipts and details about a new disclosure law proposed in NY

MEGO= "my eyes glaze over"


Writing for The Lever, Matthew Cunningham-Cook reports on New York A09948, "to amend the retirement and social security law, in relation to disclosing certain investment managers and investments."

https://www.levernews.com/wall-streets-biggest-secret-could-be-exposed/ (https://www.levernews.com/wall-streets-biggest-secret-could-be-exposed/)

The things this law would require are a kind of inverse-mold of the scam itself, like flipping a doctored photo to negative to spot the tampering. If this law passes, then, for the first time, the Wall Street firms that handle New York's $269B public pension would have to disclose the cozy – and nakedly corrupt – contracting terms they arrive at with the funds' overseers. For example, it would require disclosure of when fund managers charge private jets to the pension fund:

https://www.ft.com/content/1212b266-8760-4766-a03e-9e7db203b5d2 (https://www.ft.com/content/1212b266-8760-4766-a03e-9e7db203b5d2)

But gold-plated expenses are just the obvious part of the corruption. The good stuff is pure MEGO: for example, the Carlyle Group's contracts reserve the right to invest pensions' money in ways that lose money for the pension, but make money for Carlyle Group execs and their pals:

https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=500146 (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=500146)

Leaked contracts reveal that public pensions have to promise not to demand a jury trial if they get ripped off by private equity firms, and to indemnify fund managers for all misconduct unless it rises to the (very high bar of) "fraud, gross negligence or willful misconduct."

Some of these contracts explicitly waive the "fiduciary duty" – the obligation on fund managers to put the pensioners' interests ahead of their own
.
If passed, the New York bill will expose standard contracting terms that stretch out nationwide, thanks to all of the cities, towns and states that enter into comparable high-risk/high-fee arrangements with the same Wall Street firms.

It will force private equity firms to disclose what they're buying with pensioners' money – for example, if they're buying group homes, laying off staff, and killing and maiming the residents, as KKR did with public pension money:

https://www.buzzfeednews.com/article/kendalltaggart/kkr-brightspring-disability-private-equity-abuse (https://www.buzzfeednews.com/article/kendalltaggart/kkr-brightspring-disability-private-equity-abuse)






The Center for Economic and Policy Research's co-director Eileen Appelbaum succinctly described the disclosure demand to Cunningham-Cook: "How good are the contracts? What are the fees, expectations in terms of returns?" These are modest demands, and the outright refusal to meet them should raise alarm bells.

This is especially true in light of the corrupt arrangements that have been revealed, like former NYC Comptroller Alan Hevesi's conviction of taking bribes from Carlyle Group in exchange for access to the city's pension money. DiNapoli, the new comptroller, promised an ethics overhaul – and then spectacularly failed to deliver. How bad is it? Navnoor Kang, the former NYC head of fixed incomes, went to prison in 2018 for taking bribes from brokers:

https://www.wsj.com/articles/former-new-york-pension-fund-executive-sentenced-to-21-months-in-prison-1531429910 (https://www.wsj.com/articles/former-new-york-pension-fund-executive-sentenced-to-21-months-in-prison-1531429910)
https://pluralistic.net/2022/05/05/mego/

[Winehole23]

The disclosure law didn't pass.


In a landmark study (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3623820) entitled An Inconvenient Fact: Private Equity Returns & the Billionaire Factory, Oxford University’s Ludovic Phalippou documented that private equity funds “have returned about the same as public equity indices since at least 2006”, while extracting nearly a quarter-trillion dollars in fees from public pension systems.


A 2018 Yahoo News analysis found that US pension systems had paid more than $600bn (https://www.yahoo.com/news/wall-street-managers-cost-americans-600-billion-past-decade-134658282.html) in fees for hedge fund, private equity, real estate and other alternative investments over a decade.


“The big picture is that they’re getting a lot of money for what they’re doing, and they’re not delivering what they have promised or what they pretend they’re delivering,” Phalippou told the New York Times (https://www.nytimes.com/2021/12/04/business/is-private-equity-overrated.html) in 2021.




Even some on Wall Street admit the truth: a JP Morgan study (https://www.institutionalinvestor.com/article/b1sk0t9kg78dlv/Private-Equity-Still-Outperforms-Listed-Stocks-But-It-s-Losing-Its-Edge) in 2021 found that private equity has barely outperformed the stock market, but it remains unclear whether that “very thin” outperformance is worth the risk of opaque and illiquid investments whose actual value is often impossible to determine – investments that could crater when the money is most needed.

https://www.theguardian.com/business/commentisfree/2023/feb/02/us-pension-funds-implosion-wall-street-private-equity

[Winehole23]

As chairman of the Montgomery County, Pennsylvania, commissioners, Shapiro in 2013 persuaded colleagues to fire dozens of traditional pension managers and replace them with low-cost index funds.

Governors don't directly control pension investments. They do appoint some members of the pension boards, who are charged with managing funds to members' advantage.

Investment profits alone are not enough to finance future payments from the underfunded plans because of past investment returns, a high number of retirees compared with active workers, and the state's failure to fully fund pensions in the 2000s.

State and school district taxpayers contribute more than $8 billion a year to keep the plans healthy, with help from smaller employee contributions from future pensioners. The state also has more than 1,000 independently managed, locally funded county, public authority, municipal, police, firefighter, and other pension plans — more than in any other state.

Shapiro told reporters Tuesday that he hopes to do for Pennsylvania what he did for Montgomery County when he headed county government in the early 2010s: "Fire the money managers, saving millions of dollars that's going to their high fees."

He blamed the private managers for "costing the county millions and, frankly, leaving us with far worse returns than simply investing in a passive system like Vanguard" Group, the Malvern, Pennsylvania, company that pioneered low-fee stock-index funds that rise and fall with broad market indexes such as the S&P 500.
https://www.dailyitem.com/business/should-pennsylvania-pension-funds-to-ditch-wall-street-money-managers-gov-thinks-so/article_7ed1c6c5-a86d-56c5-9445-c2c5315cb646.html

[pgardn]

States don’t have real experts in investing in large pensions so they can’t be expected to be able to get through all the expenses and then just flat out hiring lying grifting fund companies.

Warren Buffet was very concerned about many of the horrible decisions these public fund managers made when choosing who to invest with and the expected returns were way off what he would expect. Expectations way high. Sorry if this was already posted.