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April 27, 2012

Pension Meltdown in Lousiana

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.

Posted in Blue Social Model, Quick Takes
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  • Kenny

    ” …. and retirees will get stuck with it.’

    I don’t want to sound heartless, but it is far better that public-sector retirees get stiffed with the bill than the taxpayer.

  • Richard Treitel

    I do want to sound heartless, and it will be the non-retired taxpayer that gets stiffed. One way or another.

    Am I alone in foreseeing a “death spiral” similar to the one predicated for Obamacare, where everyone who can remotely afford to retire will do so ASAP in the hope that they don’t get stiffed?

    Anyway, the USA can stop feeling smugly superior to 3rd-world countries where people take government jobs so they can extort money from everyone else. The main difference is that the in USA, what they’re doing isn’t even against the law.

  • Glenn

    Buddy Fletcher has had a colorful career. According to Wikipedia:

    Alphonse “Buddy” Fletcher, Jr. (born 1965) is an American trader and money manager. Fletcher began his career as a quantitative equity trader at Bear Stearns but first became noticed when he sued Kidder, Peabody & Co. for racial discrimination and US$3 million in back pay, and $30 million in damages. While his racial discrimination claims were dismissed, he eventually won an arbitration award of US$1.26 million.[1] His hedge fund has been ruled insolvent and has been unable to return funds to investors. His firm is currently the subject of investigations by the SEC and FBI.[2]

  • http://inthisdimension.com alex scipio

    How does this happen? How do these erstwhile custodians of people’s future (their pension) make these crazy decisions?

    Two generations of unionzed public education creates people dumb enough to make this call and dumb enough to trust these bureaucrats with their money.

    Dr Mead could do us all a favor by tracking down an OpEd I read while working in SF in the 1980s (SF Chronicle? WSJ?). It was written by the then-Dean of the Boston College School of Education and made these (very memorable, hence quotable 27 years later) points: That the students in the BC School of Education were the “dregs” of the student population @ BC, that they were the “laughingstock” of those in the academic majors, that “twice as many” schools of education existed than fit the volume and quality of the research they produced.

    Clearly the only way to get voters, politicians and bureaucrats as dumb as ours is to mal-educate citizens for generations. More important than ANYTHING else – we need to fix education. And that does NOT mean throw more money at the union-run, moron-led, School of Ed barrier-controlled school systems we now have. This is the 21st Century world; we need a 21stCentury education system not one designed around the agrarian calendar in the early Industrial Age. To expect better results by repeating this education model….

  • thibaud

    It would be interesting to compare US pension funds with their Canadian counterparts in terms of prudential management and overall financial health.

    If, as I suspect, the Canadian funds are solvent and well-managed, it would undermine this blog’s contention that the fault lies with the entire model of public pensions and state-backed security for citizens’ retirement and health needs.

    Assuming that Canadian pensions, like Canadian universal health insurance, is on reasonably solid ground, the real fault with our system is not its design but its application: decades of corrupt, pay-to-play politicians of both parties over-promising so as to score campaign contributions and support from public employee unions.

  • Richard Treitel
  • thibaud

    Well, my research assistant Mr Google found a through analysis from benefits consultants Mercer that ranked leading nations’ overall pension systems for their financial solvency, sustainability and integrity, and guess what?

    Four “deep blue” countries (Holland, Sweden, Switzerland, Canada) outranked the US by a country mile overall, and on all the individual counts as well.

    http://www.mercer.com/referencecontent.htm?idContent=1359260#What

    So much for the canard that the “blue model,” not the degree of integrity and competence of our public officials, has caused our solvency ratios and sustainability to fall.

    Here’s Mercer’s Global Pension Index rankings:

    Grade B+
    Index Value 75–80
    Countries: Netherlands Australia
    Grade B
    Index Value 65–75
    Sweden Switzerland Canada UK

    Definition of Grade “B+” or “B”: A system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system.

    Grade C+ Index Value 60–65
    Chile
    Grade C Index Value 50–60
    Poland Brazil USA Singapore France Germany

    Definition of Grade “C+” or “C”: A system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.

    Grade D Index Value 35–50
    Japan India China

    Definition of Grade “D”: A system that has some desirable features, but also has major weaknesses and/or omissions that need to be addressed. Without these improvements, its efficacy and sustainability are in doubt.

  • thibaud

    @6 Richard – thanks, superb. Key quote from the Economist article this week:

    “Those seeking to understand how Canadians have pulled it off [ ie succeeded brilliantly in creating sustainable, solvent pensions] are given two answers: governance and pay.

    “There is little political interference in the funds’ operations. They attract people with backgrounds in business and finance to sit on their boards, unlike American public pension funds, which are stuffed with politicians, cronies and union hacks.

    “Just as important is their approach to compensation. In order to recruit the best executives, Canadian pension funds have ensured their pay is competitive with Bay Street, Toronto’s version of Wall Street. They pay a base salary, annual bonus and long-term performance award (which many pension funds elsewhere do not) to make their employees take a long-term view of investments. ”

    /end quote

    Governance, ie integrity and competence, is what matters, not the degree of government social spending. The evidence is accumulating that America is extremely badly governed and that many of the northern, heavily interventionist societies such as Canada, Holland and Sweden are by contrast well governed.

    This is why their health systems are excellent, their pensions solvent, their economies strong, their currencies sound. They are growing faster than we are – in fact, Sweden’s growth rate since 1997 is far higher than ours, both before and after the crash – and have lower unemployment than we do.

    There is much that we could learn from the Canadians, Dutch and Swedes – if we’d just get out of our cocoon and eat a bit of humble pie.

  • Larry, San Francisco

    On the other hand there are the deep blue countries of Greece, Spain, France, Portugal and Italy. How are there finances working out? Alabama or Louisiana may not be in as good fiscal shape as Sweden (although they are richer) but they are a lot better then the comparable area in Europe (say the Mezzogiorno in Italy) Taking policy options from well governed, relatively homogeneous small countries with high social trust and saying all we need to do is apply their policies to a large, heterogeneous and more corrupt US is a recipe for disaster.

  • Mogden

    It should be illegal for public entities to expect rates of return greater than the “zero risk” rate of return from Treasury bonds of the appropriate duration.

    Better yet, defined benefit retirement packages backstopped by the taxpayer should be illegal.

  • thibaud

    @ Larry – look at the Mercer list above, and tell me what kind of correlation exists between pension solvency and the (non-governance) factors you mention such as social homogeneity, country size and social trust.

    The short answer is, no correlation. The list of nearly-insolvent, struggling pension systems includes homogeneous, high-trust nations such as Japan and small nations such as Singapore.

    The list of solvent, well-managed pension systems includes heterogeneous nations such as Australia and large nations such as the UK.

    If you want a good pension system, then staff it with honest, competent, well-regulated and well-compensated smart people, period.

    There’s nothing stopping us from having better governance on the Canadian-Dutch-Swedish model. Trashing the entire system as “collapsing” of natural causes is unwise and irresponsible.

  • Mark Michael

    Re: Switzerland as a “blue” state; Canada as a “blue” state moving “red”

    Switzerland has a very decentralized form of government with much decision-making localized, hence I wouldn’t view it as a socialist country or having a socialist economy. In some sense it’s less centrally-controlled than even the U.S. It also has laws that prevent running major budget deficits – help to keep their finances under control

    Canada also has reduced the scope of its government from 53% to 38% of their GDP since 1995. Conservatives currently run the Canadian government. The Liberals who ran the country for half a century for some odd reason decided they had to devolve power to the provinces, and – believe it or not – downsized their federal government for several years in the late 1990s. They then were exposed as being amazingly corrupt (well, by Canadian standards), and the voters tossed them out. Conservatives took over and continued to shrink the federal government.

    So Canada doesn’t really qualify as a true blue country, either, anymore. They’ve learned that “blue” socialism is a dead end.

    One can say some similar though less dramatic things about Sweden also. Their “”socialism” was layered on top of a deeply ingrown work ethic that kept some world-class companies operating successfully. Had lots of foreign business earning profits overseas. They, too, had a decision point in which they decided to scale back some aspects of their cradle-to-grave nanny-statism. They have introduced substantially more school choice than we have in America, for example.

    Bottom line, trying to paint some of these European countries as clear-cut true blue states overlooks the messier details of who they really are today.

  • Richard S

    Two points. One: another big danger with public pensions is that friends of politicians are chosen to run the fund, and collect the fee, rather than finding the best people for the job.

    And there’s the multicultural question. Americans are not good at bureaucracy. There’s no reason to think that one model should work in every country. To be sure, there are certain problems in all bureaucracies. But culture also matters. Some cultures are better at minimizing those problems.

  • Shocked Investor

    The article failed to mention that the Trustees made the investments with the oversite and direction of their investment consultant, Consulting Services Group of TN (CSG) who has just as long a list of RED FLAGS going back to the Bayou fraud in 2005 as Fletcher. Yet The La Trustees continued to take un fetted advice from CSG. The CSG RED Flags which include other fraud accusations and SEC sanctions raise furthur questions of integrity that have yet to be fully disclosed of the Consultant,CSG relationship and the La Trustees.

  • thibaud

    @ Mark #12 – agree totally that there are hybrid models that work well. More school choice + universal health insurance is one. Fiscal discipline + close regulation of the banksters is another. I’m sure there are plenty of other blue-and-red examples drawn from our northern cousins’ success that we could emulate.

    What’s missing from the discussion is a recognition of the importance of CULTURE, which is at least as important as the degree of state intervention.

    Where America falls short these days is in its political culture, American cultural attitudes toward savings and mutual provision, American definitions of the good life and the proper role of consumer goods and possessions within it.

    We’ve lost the yankee ethos, ironically, at the same time that our “bluer”, or “purple”, northern protestant cousins seem to have discovered it.

    If you examine closely looking at the success achieved over the last 15 years by Sweden, Canada, Holland, Denmark, the cultural aspect leaps out: their economies are much less weighted toward debt-fuelled consumer consumption than ours; their politics are far less corrupt; and they rate social cohesion and social provision more highly than they do openness to poor and unskilled immigrants.

    We used to have a northern, frugal, yankee ethos that included provision for each other. It’s not too late to get it back.

  • http://www.theparenttrigger.com Bruno Behrend

    To all my conservative friends,

    Thibaud is the best critic you will have to point out the flaws in your libertarian meanderings.

    There is a rational basis for a well-run “welfare state” (safety net), and unfettered free markets gamed by individualist scum who privatize profits while socializing risk don’t qualify as “free markets.”

    I’ve attempted to point out that the recent financial crisis is not financial, but moral.

    A moral nation will be better at managing capitalism, as well as socialism, and neither model will work when operated by value-free miscreants pounding their chests over their preferred ideology.

    America has ceased to be a moral nation, at least at the higher levels of leadership. Re-read Codevilla’s piece about the ruling class. The top is as rotten as it gets.

  • thibaud

    @ Bruno – well put. We need a new political class.

    The amazing thing about the last 20 years is how many money-grubbing scoundrels and hucksters our national political life has attracted – to BOTH parties. The symbol of our age is the politician-turned-venture capitalist, or media entrepreneur.

    It’s as if the huge increase in private fortunes during the spree era, 1981-2000, caused our politicos to believe that they too deserved a $30m private account and a passel of 10,000 sq. ft houses.

    People like Gore, jim Johnson, Edwards and Mr. Tereza Kerry on the D side and Gingrich, Palin, and Trent Lott on the other side have decided that the gold is out there for the taking, and it might as well as be them that takes what the Parsee man bakes.

    It’s unbelievable that we tolerate the spectacle of a former VP steering 9-figure sums of public money to his own investment portfolio. Or that Kerry and Wife Tereza’s frenzied trading in their own portfolio – 100 trades! – just after Hank Paulson’s private briefing, before the financial crash in 2008 has not resulted in an indictment.

    And then we have the media entrepreneurs, the Weiners and Palins and Gingrichs for whom politics is just an exercise in lucrative narcissism.

    It wasn’t always like this.

    Back in the era of sensible, moderate public servants like Moynihan, Bentsen and Bayh for the Dems and Baker, Danforth, Hayakawa, and Lugar for the Repubs, our ambitious people did not enter national politics with an eye toward becoming gazillionaires and hanging with monied celebrities drawn from Hollywood, Wall Street and Silicon Valley.

    Sure, there was corruption, but in the Rostenkowski era was petty stuff like the $20k franking filch, or flings with Argentine Firecrackers. Even the Keating Five look tame compared to the grand larceny at Fannie and Fred during the 1990s and early 2000s, or the steering of billion-dollar energy loans to crony capitalists at VC firms.

    As bad as it is on the national level, our state politics have become a carnival of corruption: self-dealing, pay to play, spending half the operating budget on pension giveaways to the unions that brung ya into office….

    A pox on both houses. We need a new political class altogether. I miss people like Daniel Pat Moynihan and John Danforth.

  • thibaud

    One more priceless example of our current class of pols going for the gold: former HHS Sec’y Donna Shalala joining the board of – get this – United Health. Which is not only a leading member of the private health insurance mafia but also the poster child for horrific corporate governance and CEO piggishness.

    Unbelievable.