Here at Via Meadia, California has received considerable attention for the poor handling and shaky finances of its state pension funds. Yet California is hardly alone in these problems, and recent news out of Louisiana suggests it may not even be the worst. Three major public pension funds put money in a fly-by-night enterprise—and now it looks as if all the money is gone, to the tune of $100 million.Naturally, the funds are claiming ignorance of the shadier side of this setup, but as Forbes reports, most of the details were pretty suspicious from the beginning:
In 2008, the three pensions invested a combined $100 million in Fletcher, which promised a guaranteed 12 percent return. If the fund returned less than 12%, an unnamed financial backer would make up the difference. How could three public funds have fallen for a preposterous investment scheme involving a 12% guaranteed return backed by a mystery investor? The investment consultant to the three funds, Consulting Services Group recommended it.
This is a particularly egregious example of pension mismanagement, but the decisions made here reflect a similar chain of events that is wrecking pension plans throughout the country. Here’s a quick lesson in how state retirees can be hung out to dry:
- Step one: State makes unrealistic pension promises.
- Step two: State underfunds the promised pensions.
- Step three: Pension trustees realize how much trouble they are in and start hunting for risky, high yield investments to make up the shortfall.
- Step four: Bernie Madoff or one of his colleagues stops by and makes a presentation.
- Step five: Clueless trustees write a check.
Pensions should be treated conservatively: Promises should be conservatively made, without unrealistic pie in the sky expectations. States should then set aside enough money each year so the funds will be fully covered even if returns are modest. This will allow trustees to invest the money sanely and safely and keep them away from the slick schemes that i-bankers dream up to separate fools from their money.Simple really, but most states haven’t done this. The bill could be huge, and retirees will get stuck with it.