On Thursday, we previewed a critical court ruling involving Chicago mayor Rahm Emanuel’s effort to cut pension expenses and plug a yawning budget gap. Here’s a brief recap of the story so far:
Back in May, the Illinois Supreme Court set a de facto precedent for lawmakers across the country when a bid to cut pension benefits was struck down in a unanimous ruling. Anyone who might have been confused as to the significance of the decision got a wake up call from Moody’s when the ratings agency, citing the read-through for Chicago’s fiscal situation, downgraded the city to junk. This is part of a larger fiscal crisis in the country which has left almost half of US states facing funding gaps for the upcoming fiscal year. All told, the total pension shortfall across states and cities is anywhere between $1.5 trillion and $2.4 trillion depending on who you ask.
“Moody’s, which in 2013 began using a lower rate than governments do to calculate future liabilities, has estimated that the 25 largest U.S. public pensions alone have $2 trillion less than they need”, Bloomberg reports.
Angry pensioners have hit the streets of the Greek capital, protesting against the reports of a new austerity plan being ushered onto them. It comes as Greece and its lenders debate the nation’s €240 billion debt.
Demonstrators say they feel betrayed by the measures of the upcoming deal, which, according to AP, suggests increasing the contributions that employees pay for pensions, and phasing out the right to early retirement. It does, however, spare any cuts to pensioners’ incomes.
By now it has become abundantly clear that the biggest hurdle in the Greek negotiations is the topic of pensions, and specifically whether they should be cut, as the Troika demands, or boosted, as a Greece top court recently did when it reversed a 2012 ruling to cut pensions.
At the heart of this argument is a simple question: is it political, as Greece claims, or simple math, as the IMF and its Troika peers assert.
I have been warning for some time that government was eyeing up pensions.The amount in private pension funds is about $19.4 trillion. The question that has been debated in secret behind the curtain is how to justify to the people taking that over. I have been warning that if this is seized by government, it will come after 2015.75. Just how that is to be accomplished was finally settled by the Supreme Court without any justification constitutionally.
The US Supreme Court ruled last week in the unanimous, 8-page decision in Tibble v. Edison holding that employers have a duty to protect workers in their 401(k) plans from mutual funds that are too expensive or perform poorly. That is simply astonishing since there is no constitutional requirement for even government to provide social benefits. The Supreme court held in HARRIS v. McRAE, 448 U.S. 297 (1980) it was explained that the constitution is negative not positive. There is no duty imposed upon the state to provide a program for that would convert the constitution from a negative restrain upon government to a positive obligation to provide for everyone. Continue reading »
To be sure, Greece has been “running out of money” for quite some time. Given the incessant media coverage surrounding the country’s cash shortage and the fact that Athens somehow seems to scrape together the funds to make payments both to lenders and to public sector employees against impossible odds, it’s tempting to think that as dire as the situation most certainly is, the country might still be able to ride out the storm without suffering a major “accident.” Having said that, some rather alarming events have unfolded over the past week or so, including a government decree mandating the transfer of excess cash reserves from municipalities to the central bank. As it turns out, that didn’t go over well with local officials and as we reported on Tuesday, the government finally hit the brick wall, coming up some €400 million short on payments to pensioners.
Here’s what we said then:
According to Bloomberg, the Greek government is €400 million short of the amount needed for payment of pensions and salaries this month, citing a Kathimerini report.
Surprisingly, this takes place even as Greece’s IKA, OGA pension funds have been informed by the government that amount needed for payment of pensions will be deposited today, while the Greece’s OAEE pension fund has said payment of pensions won’t be a problem.
In other words, someone is not telling the truth: either there is enough money or there isn’t. And if the latter case is valid, then either the government or the pensions are now openly lying to the population.
Fast forward to Thursday and we learn that sure enough, the government ran out of money earlier this week. Here’s FT: Continue reading »
“We asked a simple question: Are we getting value for the fees we’re paying to Wall Street?” Mr. Stringer said. “The answer, based on this 10-year analysis, is no.”
The party is over.
At great political risk to his own ambitions (given the local campaign-funding base), New York City Comptroller Scott Stringer took a look at how much the city’s been paying to Wall Street (or Greenwich) to manage its money over the last decade and what they’ve gotten in return.
It doesn’t look good.
via the New York Times (emphasis mine):
over the past 10 years, the five pension funds have paid more than $2 billion in fees to money managers and have received virtually nothing in return…
Until now, Mr. Stringer said, the pension funds have reported the performance of many of their investments before taking the fees paid to money managers into account. After factoring in those fees, his staff found that they had dragged the overall returns $2.5 billion below expectations over the last 10 years.
Over the last 10 years, the return on those “public asset classes” has surpassed expectations by more than $2 billion, according to the comptroller’s analysis. But nearly all of that extra gain — about 97 percent — has been eaten up by management fees, leaving just $40 million for the retirees, it found.
It’s bordering on parody. They report investment returns gross of fees and then add the fee information onto their statements as footnotes. Do you know of anyone who can eat their returns gross of fees and taxes? I don’t.
A new report suggests that the government agency in charge of backstopping private-sector pension plans (the Pension Benefit Guaranty Corporation) isn’t entirely optimistic about its own ability to provide an effective safety net for multiemployer plans. In fact, more than half of participants will see their benefits cut if their plans become insolvent and are forced to turn to government guarantees.
“We wonder how the increasingly disenfranchised Greeks will react when they find their savings (whatever there is left) are now being directly plundered to fund the nation’s transfer payments (via The IMF) to Ukraine.”
*GREEK GOVT SUBMITS BILL, ALLOWING USE OF PENSION FUND RESERVES
As Bloomberg reports,
Cash reserves of pension funds and other public entities kept in Bank of Greece deposit accounts can be fully invested in Greek sovereign notes, according to amendment to be submitted in parliament, country’s finance ministry says in e-mailed statement. Continue reading »
Greek short-term default risk jumped over 300bps today putting the odds of a restructuring at 50-50 within the next year as the warnings we issued last week with regard Greece’s imminent default on its IMF loan loom. Seeking to reassure its lenders (and avoid yet more capital flight), Reuters reports the Greek government said it was “exploring solutions,” including delaying payments to suppliers or try to raise up to 3 billion euros by borrowing from state entities such as pension funds. Continue reading »
Rather than buying equity interests in buildings, TIAA-CREF and KTCU are seeking to invest in mortgages backed by office towers, retail properties, warehouses and apartments in major U.S. cities. The venture between the two companies, which manage teachers’ savings in their respective countries, is 51 percent owned by TIAA-CREF and 49 percent held by Seoul-based KTCU.
“You invest in a huge office tower in New York because you want a safe place to put your money and a decent return,” over the long-term, he said. “This is more a capital preservation play than it is a capital appreciation play.”
As soon as I woke up this morning, I saw an email from a very smart friend of mine in the finance industry. He forwarded me an article from the New York Post, about how TIAA-CREF had paid $3,158 per square foot for a building in the Meatpacking area of Manhattan (a record for the area), which isn’t far from where I lived for several years in the mid-2000s.
For those of you who aren’t aware, TIAA-CREF stands for Teachers Insurance and Annuity Association – College Retirement Equities Fund. According to the company’s own website, it: Continue reading »
When societies approach collapse, coercion shifts to outright theft: Stealing money right out of your bank account, for example, like we recently witnessed in Cyprus. Government also routinely target pension funds and even private retirement accounts, attempting to keep itself afloat by any means necessary.
Just like clockwork, that looting of pension plans is now about to commence. “Congress could soon allow the benefits of current retirees to be cut as part of an agreement to address the fiscal distress confronting some of the nation’s 1,400 multi-employer pension plans,” writes Michael Fletcher of the Washington Post.  The Post continues: Continue reading »
The latest assault on private pensions may be coming from the U.S. Congress.
Lawmakers on Wednesday were finalizing a deal to shore up the government’s pension insurance fund with provisions that would raise premiums and allow troubled pension plans covering more than one employer to cut retiree benefits.
As of midday Wednesday, the reform provisions, which drew loud opposition from unions and other groups representing retirees, were not included in the latest version of a massive, $1.1 trillion spending bill, according to a spokeswoman for the House Appropriations Committee. The measure may be voted on as an amendment in the Rules Committee, she said. Continue reading »
Thanks to improving life expectancy and the Federal Reserve’s financial repression lowering yields, US company pension funds have been hit by a double whammy. As Moody’s warns, companies will have to find $110 billion in the next seven years to fund pension liabilities shortfalls. Moody’s adds, “given these increasing liabilities and cash drains, we expect to see an acceleration in lump sum offers,” as firms try to derisk.
In North Carolina, managing the retirement savings of teachers, police officers, firefighters and other public employees is big business. As the sole fiduciary of the state’s $90 billion pension fund, Treasurer Cowell, a Democrat, was recently named the world’s 18th most important institutional investor by the Sovereign Wealth Fund Institute. The State Employees Association of North Carolina (Seanc) estimates that North Carolina is on track to spend a billion dollars a year of retirees’ pension money on fees to private financial firms. Roughly half of all North Carolina pension deals involve placement agents, and Seanc estimates that has generated roughly $180 million in placement agent fees — costs that are effectively paid by the pension fund, according to critics.
Credit Suisse’s own internal regulations say the company aims to “establish a management organization that avoids the creation or appearance of conflicts of interests.” But the North Carolina agreement (the provisions of which were secret until Seanc’s open records request earlier this year) explicitly allows Credit Suisse to engage in “actual and potential conflicts of interest.” The agreement noted Credit Suisse could receive “placement fees” from the firms in which it invests North Carolina pension money.
– From David Sirota’s excellent piece in Investors Business Daily: Pension Deal Spotlights ‘Placement Agent’ Business, Raises Conflict-Of-Interest Questions
When it comes to how the U.S. economy of fraud functions in 2014, the following article has it all. A government official, a global investment bank and a businessman/politician, all working together to enrich themselves at the public’s expense. It demonstrates how big bucks are really earned by insiders in the new American Dream, characterized by extreme cronyism and corruption. Continue reading »
Phantom wealth cannot possibly fund unprecedented retirement and healthcare promises.
The narrative that Social Security, Medicare and pension funds invested in stocks and bonds can fund the retirement of 65 million people is a misleading fantasy. The sad reality is we can’t fund the enormous expense of retirement/healthcare for 20% of the populace out of our national earned income, and the savings that have been set aside are either fictitious (the Social Security Trust Fund) or based on phantom wealth created by speculative asset bubbles in stocks, bonds and real estate.
Flint may be Michigan’s second city to plunge into bankruptcy unless retirees accept cuts in health benefits that threaten to unravel a balanced budget. As Crain’s Detroit reports, Emergency Manager Darnell Earley (Flint’s third emergency leader since it was placed under state control in 2011) warned “If we have no ability to mitigate the cost of retiree health care, that’s going to make it very difficult for the city to remain financially stable over the next few years.” As Eric Scorsone notes, “Flint’s at the forefront, but a lot of cities are on the same train, and that train is headed for the cliff.”
As Detroit draws worldwide attention for its record $18 billion bankruptcy, Flint demonstrates the plight of U.S. cities where unfunded post-retirement costs rival or exceed pension liabilities. In Michigan alone in 2011, municipalities had nearly $13 billion in health-care liabilities for retirees, compared with about $3 billion for pensions. Flint is among 17 cities and school districts under some form of state control. Continue reading »
The following story by David Sirota at PandoDaily is simply excellent. It zeros in on the secretive and rapidly expanding relationship between private equity firms and the public pensions that invest in them. It shows a crony capitalist love affair greased by lobbyist influence peddlers known as “placement agents,” as well as non-public agreements between PE firms and public pensions chock full of conflicts of interest, extremely high fees and underperformance. Unbelievably, in many instances the trustees of the public pensions are not allowed to know what funds the “fund of funds” invest in. This makes due diligence impossible, and in one particularly egregious example it led the Kentucky Retirement Systems to unknowingly invest in SAC Capital despite the fact it was under SEC investigation at the time.
Furthermore, with the Wall Street Journal reporting back in 2011 that $37 of every $100 dollars invested in Blackstone’s investment pool coming from state and local pension plans, it appears that taxpayers are once again being fleeced by the financial oligarch class. Additionally, it appears to answer a recent question I posed in my piece: Is the Credit Bubble Popping? Carlyle Group Warns on Frothiness and Junk Bond Deals Get Pulled. After reading about a growing pool of insane “dividend deals” and payment-in-kind” notes being issued, I wondered who in their right mind was buying these deals. Well, based on the complete lack of competence and due diligence happening at public pension funds, I think we have solved part of the mystery.
The Workers Inquiry into the Bankruptcy of Detroit and the Attack on the DIA & Pensions was held Saturday February 15 at Wayne State University. The WSWS published an initial report on the meeting on February 17. Today we publish an edited version of the report to the Inquiry delivered by Larry Porter, assistant national secretary of the Socialist Equality Party and chairman of the Workers Inquiry.
Video coverage of Lawrence Porter’s full report to the Inquiry