Monday, July 31, 2023

Edward Siedle: Republicans Want to Let State Pensions Declare Bankruptcy

Republicans Want to Let State Pensions Declare Bankruptcy

As state pensions run low on money, workers around the world can count on politicians running to legislatures and courts to cut "promised" retirement benefits.
JUL 31, 2023
When Kentucky senior Senator and Majority Leader Mitch McConnell declared in 2020 that he would be in favor of allowing states to use the bankruptcy route to deal with their underfunded public pensions amid the pandemic emergency, state workers and retirees—already struggling with the economic and health crisis—were rightfully alarmed. “Using the bankruptcy route” is code for slashing pension benefits promised to state workers. Under current law, only cities and other local governments can file for bankruptcy and only with permission of the state. 
“Using the bankruptcy route” is code for slashing pension benefits promised to state workers." 
McConnell supposedly represents Kentuckians and Kentucky already had the worst-funded state pension system in the nation—only 16% funded—before the COVID-19 market meltdown. Presumably, Kentucky would have been the first state to use McConnell’s bankruptcy plan to eliminate state worker retirement security. 
Kentucky has over half a million (514,000) current and future pensioners, all of whom would suffer if bankruptcy were ever declared. A staggering percentage (94%) of the state’s 114,000 retirees reside in Kentucky and pump over $1.9 billion a year into all 120 counties. Cutting pension benefits would undoubtedly depress the local economy.
To be clear, McConnell is not opposed to all federal bailouts of pensions. A few months earlier in 2020, he joined a bipartisan group  group of senators in introducing a bill to secure the pensions for nearly 90,000 retired coal miners as a recent wave of coal company bankruptcies threatened the solvency of the federal pension fund. 
Evidently McConnell finds state workers less deserving than coal miners. 
This is hardly the first time letting states file for bankruptcy to escape trillions of dollars in promised retirement benefits has been proposed by Republicans. In 2011 former governor of Florida Jeb Bush and former House Speaker Newt Gingrich opined in the Los Angeles Times  that federal bankruptcy law should be changed to allow states to “reorganize their finances.”  
Since 2011, Republicans have proposed letting state pensions go bankrupt.
“If government employee union bosses know that they could have all their contracts annulled under federal bankruptcy law, either through a plan of reorganization voluntarily entered into by state leaders or by the voters through proposition, they may be far more accommodating with state governments to restructure government employee union workforces, pensions and work rules.  
Thankfully, McConnell’s bankruptcy proposal during the height of the pandemic went nowhere. But as I cautioned readers in my book Who Stole My Pension? “Workers in government pensions around the world can count on politicians and taxpayers running to legislatures and courts to cut benefits workers have been “promised” when these already struggling government pensions start to run out of money.
“Workers in government pensions around the world can count on politicians and taxpayers running to legislatures and courts to cut benefits workers have been “promised” when these already struggling government pensions start to run out of money.”
Slashing retirement benefits promised to government workers is not a problem unique to the United States.
For example, French President Emmanuel Macron's unpopular plan to raise France's retirement age from 62 to 64 was enacted into law earlier this year—a day after the country's constitutional body approved the change.
After Croatia’s parliament  approved a government proposal to raise the retirement age from 65 to 67 and trim pensions for people who retire early in 2019, three top trade unions revolted and the government backed down.
Read the rest of the article here

Sunday, July 30, 2023

Rudy Fichtenbaum enlightens further us on private equity; bottom line: "Essentially, private equity managers earn their high fees by concealing risk for pension staffers. And because everyone is getting paid, except the pension beneficiaries whose money it is, the show goes on."

The Real Truth About Private Equity and Diversification

Rudy Fichtenbaum
July 30, 2023
Some people, including Executive Director Bill Neville, think that private equity is negatively correlated with public equity, or at least he made this statement in his presentation to STRS members in Toledo. Less than perfect correlation between “asset classes” is how portfolio diversification works to lower risk. It implies that when one asset class is down, another asset class is likely to be up; this reduces what is known as portfolio volatility, aka risk. Since diversification is one of the main arguments used in favor of owning private equity, we should look more closely at this argument.
Before, doing that however, it is worth noting that Callan, STRS’s investment consultant, shows the correlation between public equity and private equity is 0.79. Although I am just a retiree living on a fixed income, (think Hyman Roth in the Godfather) and no longer teach econometrics, I don’t think that much has changed in the last eight years. The fact is that 0.79 is a high positive correlation. But let’s return to the world where we get to make up our own facts.
Recently Matt Levine wrote a column in which he showed that if you take the quarterly returns of the S&P 500 Index and lag them one year and then correlate them with the current year’s returns, the correlation is -0.23, which is a small negative correlation. In his column he points out that the underlying idea is a dumb one because you can’t buy last year’s stock market. At the same time, he believes the idea is instructive.
Consider the argument that private investments (private equity, real estate and private credit) are just like public stocks and bonds, except that the prices get updated less frequently. This means they intrinsically have a smaller realized standard deviation, which is how risk or volatility is measured. Think about it this way: stock prices change every day. In the long run there is an upward trend that reflects the growth of the economy, but along the way there are constant ups and downs. [If you gave your students only a midterm and a final exam, their scores would be more consistent than if you gave them a quiz each day.]
Private markets get marked-to-market (think Enron) on a quarterly basis. Exactly what is mark-to market? It means using an industry methodology to assign a value to an asset; i.e., they make up a number. If you think I am joking, think about the way real estate appraisals work. Appraisers are experts; they have a method or methods they use to come up with a value for a house. I just looked up the value of a house using Zillow, Credit Karma, Smart Zip,, and Not surprisingly, I obtained five different values, but the spread between the highest and lowest values was more than $100,000! I also looked up the price the last time the house was sold. If I pick the lowest appraisal, the value of the house went up 41%. But if I pick the highest appraisal, the value increased 70%. These are actual industry accepted numbers; I am not making them up.
If I want to convince someone they should give me their money to invest in real estate because I am a real estate investment guru, which value will I pick?
Now let’s get back to the differences between public and private markets. Imagine something is priced only once a year. It will have lower volatility than something that is priced daily. But does that really mean that it entails less risk? Public equities can make people nervous because they are always going up or down. Is this an argument for buying private equities which apparently have more stable pricing? An apt analogy is seeing something that upsets you and closing your eyes. As the famous Japanese author Haruki Murakami said, “Closing your eyes isn't going to change anything. Nothing's going to disappear just because you can't see what's going on. In fact, things will even be worse the next time you open your eyes.”
If you are a pension director, you go to your Board and tell them diversification has reduced volatility in our portfolio because we have invested in two asset classes which are uncorrelated. Why are they uncorrelated? The reason is the misalignment in measurement periods between public and private markets. Translation: you are on a roller coaster. You can keep your eyes open or keep your eyes shut. In one case you can see you are going up and down and in the other case you cannot. But that does not change the objective reality that if you are on a roller coaster, you are going up and down.
Ultimately, what drives the value of something is what someone is willing to pay for it. For a company, whether it is public or private, a main driver is cash flows. If people think cash flows are going to be down in the future, stock prices will drop. But private investments in effect get to wait and see what happens to actual cash flows and then then put the best possible spin on things with mark to market.
When the stock market is declining, the value of private investments can appear to remain unchanged, so stocks and private equity appear to be uncorrelated, and many investment consultants will tell you that this is reducing risk. But if they simply opened their eyes, they would see that if there is a public business selling widgets and a private business selling widgets, and the market for widgets is tanking, they are both going to be in trouble. The only difference is in the case of public investments your eyes are open and you can see what is happening in real time, but with private investments your eyes are closed giving you a false sense of security. This is what as known as volatility laundering.”
In his column Levine points out that for the first time since 2008-09 financial crisis, returns for private equity are down and were negative for the year ending March 31, which is used for year end reporting by pensions with a fiscal year that ends June 30. CALPERS (California Public Employees Retirement System, the nation’s largest pension system) reported that both private equity and real estate lost value last year.
Here is the last paragraph in Levine’s article which is the spin, i.e., the attempt to put lipstick on a pig. “Sure it’s bad that the private valuations are down now, but they are offset by the stocks being up. And last year they were up, which partially offset the stocks being down. It all works out great, even if private equity does not actually outperform stocks.” Ask yourself if this sounds familiar. Levine calls it a “stupid model,” and I agree. Essentially, private equity managers earn their high fees by concealing risk for pension staffers. And because everyone is getting paid, except the pension beneficiaries whose money it is, the show goes on. Let me know what you think.

Toledo Blade Editorial: Angry teachers correct

Editorial: Angry teachers correct

By The Blade Editorial Board
July 30, 2023

Ohio State Teachers Retirement System Executive Director Bill Neville deserves a lot of credit for traveling to Maumee and spending time in the lion’s den of irate educators who are angry over their pension’s performance (“Area educators sound off on Ohio teacher retirement fund,” Wednesday).
Some 500,000 teachers see 28 percent of their compensation devoted to the STRS pension system (half of it paid by taxpayers). That is way more than the 12.4 percent paid to Social Security.
Ohio is one of seven states that assume total retirement risk and does not participate in Social Security. Retired teachers are angry because they see STRS investment staff collecting millions in annual bonuses even when they have gone without cost of living adjustments. An $11 million staff bonus is up for a board vote in August.
STRS is one of the largest pensions in the United States because it collects $4 billion a year from teachers and their school districts. But the fund pays more than $7 billion a year in benefits, so investment performance is crucial.
Because STRS has not consistently earned enough money to close the gap, the teacher’s retirement fund is asking to increase taxpayer contributions to the pension by 28.5 percent.
STRS is not alone.
The Ohio Police and Fire Pension Fund is seeking a 22 percent hike in the taxpayer contribution to the retirement fund. It is fortunate that STRS reports investment results for their last fiscal year of 7.5 percent and did not add to the gap between obligations and assets.
OP&F, with a risky, high leverage portfolio The Blade red-flagged in September, lost $2.1 billion on a negative 8.73 percent investment return last year (“Ohio’s out of the box public pension,” Sept. 18).
Storm clouds are gathering over these Ohio pensions that will hit every taxpayer or place more cuts on public retirees as years of political neglect become evident.
Wall Street investment managers reap hundreds of millions from Ohio, pension employees pocket six-figure bonuses, and politicians collect campaign contributions laundered through organizations created for that purpose. Benefits to retirees and costs to taxpayers are the last priority at the Statehouse.
STRS retirees have repeatedly spoken out in opposition to the lavish fees collected by Wall Street whales from their pension and the bonuses to STRS employees.
Their voices will surely be joined by Ohio taxpayers when the process begins to try for massively increased pension contributions.
The ignorance-is-bliss malfeasance of state politicians will end if taxpayers join beneficiaries in awareness that Ohio pensions have been overserving insiders and creating a monumental liability for future generations.
The STRS retirees seeking a change in the investment portfolio to fully transparent index funds are precursors of the coming debate. The activist teachers are right, regardless of sophisticated sounding claims made by STRS investment experts to defend the status quo.
Mr. Neville claims STRS cannot move the 31 percent of the investment portfolio devoted to high-cost alternative investments because the fund needs to be diversified.
Nationally recognized public retirement fund expert Richard Ennis has recently released a white paper concluding these investments are “highly correlated with stocks” but cost 10 times more on average.
Because of the high costs, the alternative investment portfolio actually causes STRS to fall short of potential return by 1.2 percent every year.
That is about a billion dollars and far more than the cost of an annual 3 percent COLA to STRS retirees. The investment expense monitoring company used by STRS, CEM Benchmarking, has written that only half the true costs of alternative investments are known to their pension clients.
The Securities and Exchange Commission is attempting to change their regulations to force alternative investment managers to reveal all of their costs and STRS is supporting the effort.
But it begs the question, why is Ohio investing with firms that aren’t trusted by the SEC or investment industry experts?
A portfolio filled with alternative investments doesn’t diversify the fund but it does allow asset values to be set by fund managers without input from a market.
Accounting fiction — fraud — lets the pensions claim asset values supplied by fund managers who use unsubstantiated performance claims to dupe more pensions into investing.
The Equable Institute, a think tank devoted to public pension research, recently concluded “valuation risk” from alternative investments is a clear and present danger to most of America’s public pensions.
Read the rest of the article here.
Larry KehresMount Union Collge
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