Popping the New Bubble

“Public pension funds account for 9 percent of hedge-fund investments.”

Les Leopold – How to  Make a Million Dollars An Hour

Not private pension funds which theoretically have the same motivations but PUBLIC pension funds.  New Jersey has around 24% of their pension fund assets in alternative investments and is committing to more.  What’s the attraction?

Both hedge-fund operators and public pension funds have an interest in inflating the value of their investments with the former getting 20% of any profits and the latter getting to reduce their contribution requirements by methods other than disavowing them.

We had bubbles in the 1990s and 2000s inflated by a strong desire to illogically believe what was convenient and profitable at the time.  This time it will not only be lost profits but, for public pension plans, lost years of benefits accruing with the expectation that these miracle returns will fund them.  They won’t and the next pop is coming.

13 responses to this post.

  1. Posted by Tough Love on March 27, 2013 at 12:57 am

    The share of Public Sector pensions (the cost of which is) assigned to Taxpayers should be disavowed to the extent it exceeds (as a % of pay) the average pension afforded.Private Sector workers by their employers.

    In NJ, that would be roughly 1/2-2/3 of the promised pensions……unnecessary to attract and retain a qualified workforce, and grossly unfair to Taxpayers.

    Reply

  2. Posted by Javagold on March 27, 2013 at 1:46 am

    Oh boy , they are going to steal that money in the very near future.

    Annnnnd it gone !

    Reply

  3. Posted by My Ignorant Opinion on March 27, 2013 at 3:22 pm

    The gov has many ways to raise cash:

    Old fashioned rate hike by a state monopoly:

    CalPERS rate hike: 50 percent over six years
    http://calpensions.com/2013/03/25/calpers-rate-hike-50-percent-over-six-years/

    Penn turns environmental damage into pension cash:

    Op-ed: Leveraging Marcellus shale to pay for pension reform
    http://www.pennlive.com/opinion/index.ssf/2013/03/op-ed_leveraging_marcellus_shale_to_pay_for_pension_reform.html

    Bogus lawsuit nets RI pension a bundle:

    Google forfeiture cash to boost 2 RI pension funds
    http://bigstory.ap.org/article/apnewsbreak-pension-funds-get-googles-forfeiture

    Reply

    • Posted by Tough Love on March 27, 2013 at 3:55 pm

      Using such money, better used for ESSENTIAL services, to pay for the excessive pensions promised Public Sector workers, is an outrage.

      Not only did our elected representative ignore their obligations to TAXPAYERS (NOT employees) by granting such excessive pensions in the first place, but now, instead of appropriately addressing and FIXING that problem by REDUCING those promises, they steal MORE of the Taxpayers’ money to pay for them.

      Throw the bums out of office and renege on these absurd pension promises.

      Reply

  4. Posted by Tough Love on March 29, 2013 at 1:34 pm

    John, off topic. but a PERFECT example of why so many places are in such a financial predicament due to Public Sector pensions. See:

    http://www.northjersey.com/news/200553201_Leonia_s_Chief_Ziegler_retires_after_26_years_on_force.html

    No offense to the retiring Leonia, NJ police chief. I’m sure he is a hard worker, but his pension is completely absurd …… TOO GENEROUS. … which is the specific point
    I keep bringing up as the ROOT CAUSE of the problem (not “funding” and not the misdeeds of the actuaries and other professional consultants).

    With a 168,250 salary and 26 years of service, his NJ Police pension will be between $110k and $115K. While that’s bad enough (about almost triple what the typical Private Sector retiree gets) the real problem and COST TO TAXPAYERS is that he can begin collecting the full (unreduced pension) at age 50 …15+ years younger than most Private Sector workers who are on the hook to pay for 80-90% of HIS pension.

    Assuming his actual pension is $112.5k the single life annuity factor is just about 15x (using a 5.5% interest rate assumption) meaning that the PV of his pension is $112.5,000 x 15= $1.7 Million. While I’m not sure if NJ does so, if he can add a spouse as a 100% survivor (without the appropriate actuarial reduction) that $1.7 Million will increase by about 15% to over $1.9 Million.

    And if the COLA freeze is reversed, a 2% annual COLA increase will increase the $1.9 million by just about 28% bringing it to $2.4 Million. This is the kind of pension a high level Private Sector senior executive making $500k-$1 million in annual pay might get. What justifies this … on the Taxpayers’ dime ?

    And because he can retire and begin collecting at age 50 we (the Taxpayers) are on the hook for the cost (no Medicare here) of his healthcare (likely $20-$25k annually for family coverage) for the next 15 years….. and worth another $500k (with anticipated inflation in Medical care costs) …. bringing the total value of his retirement package to almost $3 Million.

    There is only one reason our elected representative grant such grossly excessive pensions and benefits to Public Sector workers ….. in exchange for for campaign contribution and election support. In any other venue, this would be criminal bribe giving and accepting.

    Prospectively (for Future service) these pensions (and benefits) need to be AT LEAST halved … and for CURRENT, not just new workers. Funding issues are secondary. Stop the ridiculous generosity and funding become more manageable.

    Reply

    • The problem is that he’s got a $2 million benefit package that he and his employer have accrued maybe $500k for. The math doesn’t work but you can’t blame the guy for not complaining about the actuarial soundness of the system. It’s the actuaries who should know better – and make some noise – at least to warn the guy that what he’s getting now won’t be there at 60 (or 55).

      Reply

      • Posted by Tough Love on March 29, 2013 at 3:38 pm

        John, I’d love YOUR opinion on the following …

        You said ..”…at least to warn the guy that what he’s getting now won’t be there at 60 (or 55).”

        We both know that we will run Plan assets down to only active employee contributions, vested terminator contributions, and yet unpaid-out retiree contributions in a few years, and w/o changes, to zero in another 5 years, but WHAT is your guess as to what will happen then?

        Do you believe we we continue to pay full promised benefits pay-as-you-go out of general revenue, and if so for how long before something (taxpayer revolt ?) forces significant Pension cuts …… noting that the usual response (a few added % points of pay from the workers will do next to nothing to address the issue). How will it play out in steps ?

        I see us heading for a civil war brewing between the Taxpayers and the Public Sector workers.

        Reply

        • I have no idea. I think they’ll trick whoever is most vulnerable when the time comes and it’s likely easier to go after the guy in Florida on what he thinks is a secure pension and health benefit package.

          But the problem with predicting what politicians will do is those same politicians don’t grasp the extent of the problem because they’ve been dealing with toadies at best and charlatans at worst. The NJ actuarial reports come out showing the official hole getting $5 billion deeper and Christie fronts as if it were all planned. It’s not and once these guys face the real truth it’s hard to predict who they’ll screw.

          Reply

          • Posted by Tough Love on March 29, 2013 at 4:07 pm

            You’re right… how it will shake out can’t be predicted with much certainly.

            But is sure will get ugly… and quite quickly.

  5. Posted by My Ignorant Opinion on March 31, 2013 at 2:45 pm

    “Popping the bubble” should really read “Ending the Ponzi scheme”. You might be seeing this in the wealthy town of Strongsville OH. Strongsville probably could have afforded what the teachers wanted, but chose not to. My guess is Strongsville public safety pensions get paid at the cost of teachers.

    Striking Strongsville teachers obtain documents they say detail district expenditures

    http://www.cleveland.com/metro/index.ssf/2013/03/striking_strongsville_teachers.html

    Apparently Strongsville hired a staffing company to supply substitute teachers or temporary teachers, or scabs depending on your world view. This has become a surprisingly long and even nasty strike for such a high class wealthy area.

    Reply

    • Posted by Tough Love on March 31, 2013 at 3:20 pm

      Public Sector “Total Compensation” (cash pay plus pensions plus benefits) in comparable jobs (or jobs with comparable skill sets and comparable risks) should be EQUAL in the Public and Private Sectors. Right now EVERYWHERE, they are far greater for Public Sector workers …. primarily via FAR FAR greater pensions & benefits.

      This need to stop … or at least stop on the TAXPYERS’ dime.

      Reply

      • Posted by Anonymous on March 31, 2013 at 5:42 pm

        I guess that Chris Christie would like that kind of equity, since CEO pay has risen to 300% of their average workers pay.

        Reply

        • Posted by Tough Love on March 31, 2013 at 6:48 pm

          While Corporate CEOs are indeed pigs (and don’t deserve such a huge multiple of their avg, worker’s pay) that excess is paid for by customers (who can shop elsewhere if the company’s prices are too high) and by shareholders who have CHOSEN to invest in that company.

          Taxpayers have no choose to shop elsewhere for municipal and state services and all too often, the politicians who grant excessive pay, pensions and benefits, ignore taxpayer interests in lieu of their OWN interests … getting elected (or re-elected) by voting for greater pay, pensions, and benefits in exchange for campaign contributions and election support.

          There is ZERO justification for ANY (yes ANY) greater TAXPAYER-supported pay, pensions or benefits than those of taxpayers in comparable positions.

          Reply

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