Many blues style themselves as enemies of Wall Street, defenders of the little guy against voracious or reckless financiers. The branding seems unpersuasive, though, considering that pension fund managers, key stewards of the blue model, keep looking to high-risk, high fee Wall Street for help:
According to a recent report by Cliffwater LLC, an adviser to institutional investors, from 2006 to 2012 state pension funds more than doubled their allocations to alternative investments, which include private equity, real estate, hedge funds and commodities. Totaling almost $600 billion, these nontraditional investments now constitute 24 percent of public pension fund assets. In contrast, the funds dropped their investments in stocks to 49 percent from 61 percent over the six-year period.
There’s a reason for that big move, as explained in a recent International Monetary Fund report. Over the last 10 years, the average U.S. public pension fund earned a return of 6.4 percent a year, very healthy but not enough to meet the 8 percent return guaranteed to government employees. In an effort to take pressure off the state budgets that must cover those deficiencies, the IMF reports that state pension funds have been shifting billions to alternative investments promising higher yields.
The cycle of dependence on Wall Street usually follows a pattern. Public employee union leaders demand generous benefits as the price of their political support; politicians promise things like higher future pay and early retirement. Wary of public backlash, however, these officials don’t advocate cutting services or raising taxes to cover the shiny new pay packages they have established. The discrepancy between benefits promised and funds available becomes unbridgeable. Desperate to keep from falling too far behind, pension funds turn to the risky side of Wall Street, which gets rich off the panic. All too often, the Wall Street solution to blue model imperatives leaves taxpayers and pensioners stranded.
Fingers have been pointed at both sides. A piece in Rolling Stone last month argued that slimy “Gordon Gekko wanna-be[s]” have basically been stealing money in the dead of night from honest, hard-working pensioners. A piece from AEI this week shot back that pension funds are forced to approach Wall Street hat in hand by the self-serving politicians who make unaffordable promises in the first place.
Yes, those responsible for public pensions dug themselves into this hole, but the more interesting story concerns the confluence of interests between blue politicians, union leaders, and Wall Street. It’s unsurprising that few Democrats are willing to acknowledge this; the alliance doesn’t inspire confidence in the blue model’s sustainability or in the political base that supports it.