Yves here. As railroad speculator Jay Gould said, “I can hire one half of the working class to kill the other half.” The stoking of jealousy among members of the 99%, to keep their eyes off the 1%, seems to be working out according to plan in efforts to undermine one of the last vestiges of security for the middle class, that of the defined benefit plans at public pension funds.
What goes unsaid is that the fallback, of having workers fend for themselves by trying to save and invest personally or rely on employer 401 (k) plans, will result in far more income for Wall Street at the expense of workers. Public and private pension funds have vastly lower costs than retail investors. Any student of John Bogle knows that paying higher fees over the twenty to thirty-five year investment time horizon of most investors makes a large difference in results. So the sleight of hand is that the general public is being successfully manipulated to press for a race to the bottom in terms of retirement security, when we should be demanding better (such as strengthening Social Security).
And unfortunately, CalPERS is playing into the hands of its opponents. For decades, it has been buying the rope that is being used to hang it from private equity. Not only have private equity firms been systematically cutting and eliminating pension benefits at companies they buy, making public pensions harder to defend, but they’ve also been cutting wages and employment, which hurts municipal and state tax bases, again making the cost of government services of all sorts relatively more costly. As reader beth wrote in comments two days ago:
I watched PE destroy the middle class jobs on an entire city of 250,000 or 300,000 in the ’80s. At the beginning of the ’80s this city had 7 fortune 500 companies headquartered there. All were broken up with some remnants left by 1990. Talking to research engineers whose good/great ideas ignored and dropped was painful. Also, these firms had their over-funded pension funds raided.
CalPERS, as the most visible public pension fund, is becoming a magnet for attacks. Unfortunately, the public pension system seems to have forgotten how the cognitive bias called the halo effect works. People have a strong propensity to see institutions as all good or all bad. So when CalPERS insists being one of the plans that Bogle describes as “idiotically” sticking to a 7.5% return target, and repeatedly has staff caught out lying in board meetings (for instance, general counsel Matt Jacobs on public comments, or chief operating investment officer Wylie Tollette last year on whether CalPERS could obtain carry fee data), it prejudices observers to think the worst of CalPERS in other contexts.
Two weeks ago, we took apart a New York Times article on CalPERS that was so error-fillled that it was the first time in the history of this site that we’ve called for a retraction. We weren’t alone in that view. Several economists wrote us to tells us they’d complained about the story to the Times’ public editor.
The piece grossly misrepresented how the California public pension fund treats agencies who contract their pension fund management to it and later decide to leave the system. As we showed, documents on CalPERS’ website disproved the main assertions in the article.
Similarly, a breathless Los Angeles Times article the same weekend, which I did not have the time to debunk, was similarly false in its major claim, that a 1999 bill SB 400 was a large culprit in CalPERS’ underfunding. While SB 400 did increase benefits for workers who retired relatively early (in their mid-40s, typically cops), that group is small and the impact on total system costs is marginal. The big reasons for CalPERS underfunding is that it was politically impossible to charge ongoing contributions during the dot-com bubble, when CalPERS was overfunded, and the system took a big hit as a result of the financial crisis. An additional, not as significant cause of its current woes is that it’s made a bad investment bet. It put 50% of its public equity portfolio, or roughy 25% of its total investment, in foreign stocks, and they’ve been laggards in recent years.
Via e-mail, reader and CalPERS beneficiary Sluggeaux flagged another hit job and identified its larger context:
Arnold Family Foundation stooge, former San Jose mayor Chuck Reed, has an op-ed in the San Francisco Chronicle this morning criticizing CalPERS for underfunding. Of course the piece fails to mention that, as mayor, Reed drove San Jose’s city-operated pension fund into near bankruptcy via the classic Arnold strategy of bringing in private managers to steer investments into the hands of cronies, racking-up the worst performance of any public sector pension plan in the state of California. Al Jazeera America ran an excellent Matthew Cunningham-Cook expose on this classic “Shock Doctrine” play in 2014. However, that was a feature not a bug, because Reed (funded by Arnold) then attacked police and fire pensions in San Jose, causing a mass exodus of experienced police officers to the point that the current mayor (a Reed crony) has had to declare an “emergency” suspension of the police labor contract and has rushed a repeal of Reed’s “pension reform” onto the November ballot.
Ironically, Reed’s original strategy was designed to cover-up the collapse of San Jose’s municipal and redevelopment bonds in the wake of Governor Jerry Brown’s winding-up of local redevelopment agencies, which had been used state-wide as piggy-banks by developers. San Jose’s redevelopment agency was run for the benefit of downtown property-owners who had spent 20 years lining their pockets via deceptive bond issues that restructured and laddered previous spending to “develop” their properties in San Jose’s pathetic gang and bum infested downtown.
Reed is a false-flag Democrat who changed his Republican registration in order to run for mayor, and he is now using his “credentials” as cover for his real paymaster, John Arnold. He had worked for years for developers, but branded himself an “environmental lawyer” — a classic piece of truthiness, since (among other things) he was working to keep leaking fuel tanks IN the ground.
The useful idiots on the CalPERS Board are playing directly into the hands of the “reformers” who want to loot what’s left in the bank using the “full funding” canard as their Trojan horse.
Here are the key sections of the Matthew Cunningham-Cook 2014 story on the role of cronyism in the implosion of the San Jose pension fund:
The city’s political leaders say the pension cuts are a necessary step to save San Jose from bankruptcy. The Silicon Valley city spends one-fourth of its $1.1 billion budget on pensions and retiree health care. To help meet those costs, say officials, San Jose has cut more than 20 percent of its staff since 2009. Many libraries that used to be open six days a week are now open four, while fire and police departments have shrunk, pushing up response times.
But experts and an Al Jazeera examination of the city’s two pension funds suggest that the San Jose’s investment strategy — shifting money from stocks and bonds to high-risk, low-transparency “alternative investments” such as private equity, hedge funds and real estate — may be a bigger factor in the financial crunch.
“The missing link in debates about pension reform is poor investment performance,” says Edward Siedle, president of Benchmark Financial Services and a former attorney with the Securities and Exchange Commission. “San Jose’s officially reported 2012 and 2013 performance was absolutely atrocious. Any discussion about the unsustainability of benefits must come after discussion of radical market underperformance.”….
The San Jose case could be precedent-setting. It is the first attempt by a municipal body to cut pensions on this scale while not in bankruptcy. And unlike in Detroit, taxpayers in the San Jose metro area aren’t struggling financially: It has the highest per-capita income in the nation, according to the Census Bureau….
Federated City Employees Retirement System, one of the two funds, returned -3.2 percent at the end of fiscal year 2012, compared with an average of 1 percent among public funds nationwide. This was the worst of the statewide pension funds surveyed by Al Jazeera, and the worst of any public pension fund in California. The S&P 500, meanwhile, returned 5 percent during that same period.
Similar results held for 2013. Nationwide, only one major statewide public pension fund, the Indiana Public Retirement System, underperformed the San Jose Federated City Employees’ 8 percent return. (The stock market rallied that year, with the S&P returning more than 20 percent.)
The Police and Fire Department Retirement Plan, the other San Jose public pension fund, also underperformed funds in other states and cities, returning -0.5 percent in 2012 and 9.6 percent in 2013. The average public pension-fund return in 2013 was 12 percent.
Perhaps more than other types of investments, the city’s holdings in alternatives contributed to poor performance. The San Jose Federated City Employees Retirement System’s investments in “real assets” — indirect investments in real estate, including securities and derivatives — returned -10.9 percent in 2012 and -10.1 percent in 2013. No data is yet available on the performance of San Jose’s hedge-fund investments, but as a whole, public pension funds’ investments in hedge funds have performed poorly.
Public pension funds have plenty of ideological enemies. Underfunding puts the funds in a weak position; behaving in a manner that can be (correctly) depicted as short-sighted or self serving only makes matters worse. CalPERS needs to start thinking and acting strategically, and not tactically, as it has to date. The unions made the same mistake, of thinking the rationale for collective bargaining was so obvious that they didn’t need to make a case for it. If CalPERS fails to learn from the labor movement’s mistakes, it is destined to share its fate, of diminished legitimacy, power, financial resources, and members.