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To The Casino
Public Pension Funds Are in Trouble

Add lefty NPR to the list of voices raising the alarm on the soundness of some public pensions. It’s all part of a familiar story: the benefits promised to retirees assume a level of annual growth which is hard to hit with a prudent investment strategy during a time when interest rates are low. Thus, pension managers are pushed to consider higher return vehicles, such as hedge funds:

Most public pension funds are not investing heavily in hedge funds, according to data from Wilshire. But some of the funds definitely are.

The Teacher Retirement System of Texas is investing 10 percent of its money in hedge funds. The state of New Jersey’s pension system is investing around 12 percent. For the Ohio school’s pension fund, it’s 15 percent.

Farouki Majeed is the chief investment officer of the School Employees Retirement System of Ohio. By last year, the fund had nearly $2 billion invested in hedge funds. That means the pension fund was paying about $35 million a year in fees to those hedge funds. That’s money that could have been used to pay retired school employees’ pensions. […]

So why is he investing so much money in hedge funds? To be fair, Majeed took the top job after these decisions were made. He’s now reducing hedge fund investments — and pushing back on the high fees.

But he says it’s tough right now to make a good return. Supersafe securities such as long-term Treasury bonds offer very low returns. And so, he says, he has to “try to be more creative.”

If we were teachers in Ohio, this is not necessarily the kind of creativity we would welcome. At the same time, fund managers are not doing this for sport: Promises made to future retirees demand a certain level of return, and public sector unions across the country have been fighting tooth-and-nail to prevent the kinds of corrections that would put pension funds on a firmer footing.

And so this unpleasant game of musical chairs goes on.

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  • Boritz

    “Add lefty NPR to the list of voices raising the alarm on the soundness of some public pensions.”

    The time to raise such an alarm is when the fund is established and anytime concessions are made to union demands for more and more. The left is happy to blame GM managers who caved to union demands for unsustainable retirement benefits but has nothing to say to the unions who made the demands in the first place. Those who are so fixated on sustainability when it comes to power consumption, fuels, and cod fish might be expected to consider sustainability when teachers or whoever are demanding more and more from systems that can’t possibly give them everything they want. The bitter end is too late to find in one’s liberal soul an interest in pension sustainability.

  • Andrew Allison

    There are two issues here, the irresponsibility of the promises made to public employees and the flagrant disregard for their fiduciary obligations to said employees by the fund managers. Let’s not confuse them.

  • FriendlyGoat

    “If we were teachers in Ohio, this is not the kind of creativity we would welcome.”

    AND YET, conservatives in general recommend the 401(k)/IRA model for workers in general—-where individuals are to find themselves stuck with the exact same problem of far-too-low returns on prudent investments.

    Tax cuts blew up the financial world to the point of crisis—-and now central banks are screwing every little saver for years (or decades) to compensate for the mess that tax cuts caused.

    What to do? Blame the greedy workers and their unions? Well, that IS what conservatives are doing.

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