The blue model continues to crumble in the face of harsh fiscal realities. The latest example: public sector pensions, where desperation over falling returns has pushed fund managers into riskier investments in private equity, real estate, and hedge funds. As the NY Times notes, this hasn’t worked out very well, especially for Pennsylvania:
The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent. That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.
As Pennsylvania and many other states are finding, the investment equivalent of a Hail Mary pass can’t save unsustainable public programs from the assault of arithmetic.Pennsylvania seems bent on following a recipe for guaranteed failure:
- Make unrealistically high pension promises to your employees.
- Fail to set enough money aside to honor your promises.
- Cover up that failure by making unrealistic assumptions about your rate of return.
- When trouble looms, make riskier and riskier bets in hopes of a big payoff.
If the leaders of a private company did this, they would go to jail for fraud. But when politicians do this they — collect fat pensions when they retire. We need laws to stop public pension fraud and to force states and local governments to provide accurate, honest and externally audited statements that clearly show where things stand.