New Study Exposes Cronyism within State Pensions
The ALEC Center for State Fiscal Reform just released Keeping the Promise: Getting Politics Out of Pensions, the second publication in the Keeping the Promise series on public pension reform. The first volume, Keeping the Promise: State Solutions for Government Pension Reform, authored by former Utah state Senator Dan Liljenquist, describes and analyzes major pension reforms in Utah, Alaska and Michigan and discusses alternatives that will assist legislators in being able to offer real solutions to pension challenges.
Pension fund cronyism has run rampant throughout the country, as some policymakers and pension trustees recklessly put political agendas ahead of what is best for workers and retirees. Cronyism further threatens financially distressed state and local pensions by injecting more risk into the system through investment schemes that do not set focus on the highest, long-term rates of return for pension dollars. The newest volume, Getting Politics Out of Pensions, reviews the current $5.6 trillion underfunded status of public pension funds, examines the causes of this problem and presents research on the three primary forms of pension fund cronyism which significantly contribute to the poor performance of public pensions: economically targeted investments, political kickbacks and political crusades. The report concludes by presenting workable solutions for state and local policymakers that can help get politics out of pensions, and help them keep their promise to workers and retirees alike.
Economically targeted investments (ETIs) are local investments selected for their supposed economic or social benefits in addition to the investment return to the pension fund. ETIs are another prominent cause of underfunding in public pension systems. ETIs are a form of cronyism because they favor local investments over broad-based investing, and unfortunately, they consistently underperform broad-based, diverse investments. The losses ETIs generate are significant for any pension system to sustain, and compound over time.
Another variety of cronyism comes in the form of political kickbacks, where pension trustees direct pension investment dollars to politically connected businesses, individuals and other interests. These investments also correlate with lower returns and poorer fund performance. California’s Public Employees Retirement System (CalPERS), the nation’s largest state-administered pension system, in the past has been one of the most egregious offenders in the realm of political kickbacks.
The last type of pension cronyism the report discusses is political crusades, which occurs when trustees use pension investment dollars to advance certain viewpoints or causes. These crusades, frequently surrounding environmental, or income inequality issues, are waged through divestment initiatives and by promoting shareholder resolutions aimed at publicly traded companies. Special interest groups target specific industries that do not support their causes and pressure pension systems to divest from them. Most notably, California recently enacted legislation divesting its pensions from coal, making it the first state to do so. In December of 2012, Seattle became the first major municipality to engage in fossil fuel divestment, with then Mayor Mike McGinn writing “divesting the pension fund from these companies is one way” the city of Seattle can “discourage” them from extracting fossil fuel. Sadly, divestment has proven to be quite costly to pension systems. Yielding substantially lower investment returns and generating higher management costs, divestment is a bad deal for workers, retirees and taxpayers alike.
Unfortunately, some lawmakers and pension plan officials have other priorities besides doing what is best for workers and retirees. Rather than investing to earn the best returns for workers, they see the billions of pension fund dollars they manage as an opportunity to advance their own agendas. They use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t, and bully corporations into silence and behaving as they see fit.
As lawmakers and trustees knowingly make inferior investment decisions, sacrificing better returns in order to advance political agendas, they jeopardize workers’ retirement benefits and leave taxpayers to pick up the tab. This is pension fund cronyism, and it is happening every year in pension systems across the country. This report exposes these dishonest practices and shows state and local policymakers what they can do to get politics out of their pensions and focus on keeping the promise to workers and retirees alike.