You don’t want to partner with states. Your hard-earned money is too valuable. When states get in trouble, you—the investing class—are the ones they go to first with palms outstretched. That’s exactly what’s playing out in Stockton, California, as creditors (investors) are getting scalped while the pensions go untouched.
Pensions combine the two most destructive forces—money and politicians. Digging through the minutiae of a pension gives you a front-row seat to observe the destructive forces at work. Take Rhode Island, for example. It has allocated 25% of its plan to alternative investments, or hedge funds and private equity. Enormous fees are paid to these guys for an investment that a) is illiquid and b) has a subjective price.
There are a lot of retired teachers out there who have no idea how poorly their money is being invested. Rhode Island General Treasurer Gina Raimondo is now responsible for overseeing the $7-billion pension. Guess how much she managed before being elected? The answer is $5 million—and it was in private equity. Does anyone care how she did? It doesn’t appear that they do. As Ted Siedle of Forbes reports:
There’s no prudent, disciplined investment program at work here—just a blatant Wall Street gorging, while simultaneously pruning state workers’ pension benefits. It’s no surprise that some of Wall Street’s wildest gamblers have backed her so-called pension reform efforts in the state legislature. Former Enron energy trader emerges as a leading advocate for prudent management of state worker pensions? That’s more than a little ironic.
What’s happened to date in Rhode Island is unprecedented in public pension history and, given the myriad risks involved, should be setting off alarms: A little-known money manager hired by the state’s pension to manage a paltry $5 million succeeded in getting herself elected as state Treasurer. That means she’s now responsible for overseeing the entire $7 billion.
As states continue to run out of money, and they will, private-sector investors will be the first to lose. That’s why I don’t really care how munis are doing. I don’t want to partner with states. But as the money dries up and expected returns aren’t met, states will continue to find money wherever they can. Based on Rhode Island’s fiduciary malfeasance, bankruptcy may come sooner rather than later. And the real kicker is that Rhode Island is being propped up as the template for “good” pension reform.
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