Thursday, January 07, 2010

Public Pension Fund Blues

Matt Yglesias blogs for the Blue credentialed Center for American Progress, a John Podesta outfit. Podesta headed President Obama's transition team.

Yglesias noted public pension underfunding in several posts. Prior to his diatribes, I noted the one-two punch of underfunded pensions and a new GASB accounting rule on retirement health benefits, effectively requiring they be treated like pensions.

But back to Matt, who had this to say in his first post:

the viability of high-tax political units is driven by a belief among citizens that they are receiving valuable public services in exchange for their taxes. Paying off pension obligations to now-retired public employees, however, doesn’t fit that bill.

Translation, Matt believes government entities should welsh on their pension obligations. That or, dramatically improve returns by swinging for the financial fences. Private equity underwriters shill their latest offering with historical returns of 25-30% return on equity. Is Matt backdoor shilling for the PEU boys or offering a straight up punch to the retirement balls of public sector workers? Neither is promising from a Blue blogger.

Recall the last time CEO's sought to launch every investment pitch out of the ballpark. America got the Wall Street meltdown.

Matt wasn't done, he issued round #2. The first sentence cited:

the habit of giving public sector employees deferred compensation in the form of guaranteed benefit pensions rather than higher salaries, and then under-funding the investment plans that are supposed to pay the money out.
Yglesias referred to historical public sector compensation decisions as a "habit," implying something that can easily be broken. He misses the impact of economic cycles on pension plans, which cycle from overfunded to underfunded. The pension fund was a favorite for corporate raiders, which evolved into the more elegantly named private equity.

Most corporations ditched defined benefit pension funds the last few decades, transitioning to 401k's and 403b's. When times got tough, those same companies ditched the employer match, leaving employees literally on their own to fund their retirement.

Public pensions became majorly underfunded when the financial conflagration happened in 2008. Many own the same toxic junk as banks. How these instruments come back over time and their impact on pension funding status remain to be seen.

CalPERS received $652 million in capital calls from The Carlyle Group, according to Bloomberg. That sum was required for the California pension fund to simply hold onto its Carlyle Group stakes.

An Yglesias poster noted the state of New Jersey used their "overfunded" public pension to finance tax cuts. Elected officials imitated corporate raiders with this move.

Matt returned to take a personal shot at the motivation of public sector workers, implying that malingers would hang on for decades for the rich pension benefit. He said people doing work for purely monetary reasons should go to the private sector, after saying public sector workers should be paid more up front to properly motivate them.

He missed the role of leadership in motivating people. He whitewashed the commitments elected leaders made to public sector pay and benefits. Yglesias greased the skids for the next major dump of employment benefits onto the individual.

According to CBO projections and the latest Census data, 43.3 million Americans will lose workplace health insurance between 2008 and 2019. The one-two punch of underfunded pensions and retiree health care changes will force government entities to cut worker headcount, pay or benefits in the very near future. The public sector will look like the private, where employee job satisfactions sits at an all time low.

It's already playing out in San Angelo. The city cut retiree health benefits, while promising to cut worker health insurance benefits in the very near future.

The Blues are the Reds. The Reds are the Blues. From our hallowed halls of government to corporate board rooms, America suffers from abysmal leadership. Unfortunately, no one has your back.

Aside: Economic Policy Journal reported John Podesta will present at Michael Milken's annual meeting. Junk bond king Michael Milken was active during a period of corporate raiding. He was convicted 98 counts of racketeering and securities fraud. A number of private equity underwriters (PEUs) will also speak at the meeting, including Leon Black of Apollo Management and David Bonderman of TPG.

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