OPINION:
Where the public sector is in financial crisis, it’s because what goes out is continually more than what comes in.
You’d think the politicians would have figured it out. Well, the clock’s ticking — with all kinds of bombs waiting to explode and take the economy down.
Consider the defined benefit plans that big blue states such as New York, California and Illinois offer to the employees on their payrolls. They’re supposed to guarantee large enough pension payments sustain a comfortable, secure retirement.
Many of those plans are badly underfunded, some at near-critical levels. According to a Pew study, the nation’s public employee pension plans were a staggering $1.25 trillion in debt as late as 2019.
In the quest to produce greater returns, the bureaucrats who administer these plans are becoming creative. Some are making investments in private equity, hoping the most robust yields these kinds of firms generate will put underfunded plans on more solid financial footing.
In fact, more than 10% of public pension dollars are invested in some kind of private equity venture. It’s a sensible but still risky move. Not all firms are the same. And there’s always the problem of the greater the return, the greater the risk.
High inflation has made matters worse. If a big state employee plan fails, the calls for a federal bailout would be deafening — and politically risky. Why should congressmen or senators. who are naturally concerned with getting reelected, vote to redirect tax dollars to make affected pensioners in another state whole?
Consider the District of Columbia, where the D.C. Retirement Board is making a $100 million investment in a fund managed by Paine Schwartz Partners. It’s a controversial play, with critics calling for caution over fears the firm might not be the best place to make an investment.
In furtherance of that argument, they note that it took the nation’s largest peach grower and distributor from profitability to bankruptcy over a short period. They also suggest it has shown an utter lack of transparency with investors. A precipitous overnight drop in the rate of return on this particular investment hints, they say, at the firm having hidden the accurate picture of its performance as it was persuading the D.C. Retirement Board to invest.
This matters because, despite home rule, Congress still has oversight of the District of Columbia. This special relationship means that if the retirement board’s due diligence in this investment were inadequate (as some say it was in this case), a federal bailout would surely follow.
That sets a precedent that should be avoided. Investing and risk go hand in hand. As trustees responsible for producing the greatest return on investment possible for their clients, fund managers have the responsibility to ask tough questions and make tough decisions. But are they as vested in the process as the people on whose behalf they’re acting?
In California, for example, the state’s Public Employee Retirement System took the plunge into private equity a few years ago, only to see returns drop in 2022. On the other hand, Oregon’s public employee pension system, which is also in the public equity market, did quite well.
The problem isn’t with the public equity market. For people who understand it, or who work with trusted advisers who do, it’s fertile ground that can produce generous returns. The real issue is the distance that separates public employees from the management of their retirement funds.
Instead of continuing to offer defined benefit plans, states and localities would do well to move to defined contribution plans like the ones that proliferate through the private sector.
It’s a simple solution even if it is politically tricky to implement. Offering new hires on the public payroll the option of enrolling in private accounts like IRAs and 401(k)s would save tax dollars in the long run, provide workers better returns in plans they own and have a say in managing, and eventually get the taxpayers of the hook if a big plan goes bust.
America’s public sector economy is riddled with debt, loaded with unfunded obligations, and teetering on the brink of insolvency, yet the politicians do little to take it on. Sooner or later, they’re going to have to face facts. Public pension reform is an excellent place to start doing the heavy lifting.
• Peter Roff, a former UPI senior political writer and U.S. News and World Report columnist, is a senior fellow at several public policy organizations. Contact him at RoffColumns@gmail.com. Follow him on social media @TheRoffDraft.
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