Why are many state and local public pension funds putting more taxpayer assets into hedge funds and other “alternative” investment vehicles – inviting not only overall high fees for humdrum returns, but also instances of pay-to-play corruption and accusations of misgovernance? Because public pension funds are desperate for high returns -- or at least the illusion of high returns.
The reason public pensions need outsized profits is that they have promised far more in benefits to current and future retirees than they can possibly pay. Good-government advocates can't fix public pensions until they go to the source of the problem and pare back unsustainable promises to retirees.
Yes, governments can act in the short term. Federal, state and local governments can expand traditional pay-to-play rules that constrain political donations to officials in charge of public pension funds.
Governments can begin disclosing the performance goals that its investment managers are supposed to meet in return for their fees. They can disclose, too, how, and how much, investment managers are paid for that performance. Big public pension funds in New York City, New York State and California could bring more work in-house instead of contracting it out.
Still, though, one reality will remain: The people who oversee and administrate public pension funds will always know that if they play well with Wall Street, they can get good jobs there after they're done in the public sector.
And a second reality, too: even in-house managers will face pressure to take undue risk to earn high returns, and thus avoid asking taxpayers to shell out more money each year for public-sector pensions.
The real long-term solution, then, is for state and local leaders to be more honest about what kind of retirements they can finance for their workers. In many states, including New York, public-sector retirees can still retire in their fifties – and uniformed workers in their forties – with a guaranteed middle-class income as well as cheap or free healthcare for life. And that's after supposed pension reform.
It's time for state and local leaders to be honest: Yesterday's public-sector pension promises are no longer affordable. In turn, leaders at all levels of government should talk about how to make everyone's retirement more secure.
Working-class and middle-class Americans should be able to save and invest more money, tax-free, than they currently can. In fact, nobody who earns under $250,000 should have to pay any taxes on investment or savings income.
Washington should supplement the savings of lower and lower-middle income families, perhaps by matching workers' own contributions to savings and long-term investment accounts on a sliding scale based on income.
And Washington needs to work harder to fix Wall Street, so that opaque fees and sudden losses do not consume so much of Americans' hard-earned retirement income.
Fixing public pension funds – and retirement savings for everyone isn't that hard. But when the government and the Wall Street firms that do its bidding can continue to accrue power and money maintaining the poisonous illusion that impossible promises to retirees are reasonable, it won't happen.
Original Source: http://www.nytimes.com/roomfordebate/2014/05/11/secret-pension-fund-deals/attack-the-motive-for-improper-investments