Pension Funds and the Ultimate Hedge, Taxpayers

Edward Ring

Senior Fellow

Edward Ring
March 17, 2015

Pension Funds and the Ultimate Hedge, Taxpayers

“We’re trying to make these guys’ money toxic because, as we’ve seen, their money is toxic,” Jonathan Westin, the director of New York Communities for Change, told Business Insider on Thursday. “I think it’s connecting the dots that many people don’t always connect.”

–  “Activists think they found a way to convince Democrats to stay away from ‘toxic’ hedge fund money,” March 13, 2015

There’s nothing new about this talking point, courtesy of the labor funded ACORN successor “New York Communities for Change.” If you don’t like an idea, don’t attack by arguing its merits. Just attack the “dark money,” or the “toxic money,” that funded whomever had the inspiration and did the work to develop the idea.

The long list of causes whose advocates may or may not have accepted “toxic money” just got longer, since the New York Communities for Change – and their inevitable spawn in other states – are now accusing Charter Schools of being financed by “hedge fund billionaires.”

Here in California, charter school advocacy, and, more significantly, charter schools themselves, are indeed supported by many wealthy individuals, but the vast majority of them are self-made entrepreneurs who earned their riches by actually creating something of value to society, from high-tech innovations to office parks and housing developments. Others earned their money in the entertainment business, or through providing legitimate financial services including managing investments on behalf of clients. The idea that “hedge fund billionaires” are the primary force behind the charter school movement is a convenient myth.

With that out of the way, let’s “connect the dots that many people don’t always connect.”

When union activists accuse the financial industry of being overbuilt and riddled with corruption, they’re right. But they are unable to distinguish between honest advisers who manage investments for their clients with integrity and prudence, and rapacious predators whose unchecked greed and insatiable appetite for risk literally threatens to crash the global economy. And the most salient method to distinguish between good and bad investment managers? The good ones are personally accountable for their losses, and the bad ones depend on government bailouts.

There’s no defense for investment managers who use supposedly risk free, low yield consumer deposits as collateral to make high risk investments, and then collect taxpayer bailouts to restore solvency to their client accounts when their schemes fail. Financial bailouts are bad. Financial firms that take risks because they know they will get bailed out are bad. We agree. So why are the pension funds for government workers not included? Why aren’t they at the top of the list? Why aren’t the unions who pay for reinvented former ACORN activists to identify “toxic money” not including pension funds among their targets?

Why aren’t those dots being connected?

Back in 1999, California’s pension funds lobbied California’s politicians to increase pension benefits. California’s all-powerful government unions were quick to hop on that bandwagon. Pension benefits weren’t just enhanced, they were enhanced retroactively. And since the market was roaring, nobody thought it would cost a penny more to fund all of this.

Fast forward to 2015, after years of market volatility, pension funds in California, collectively, are only about 75% funded. With the debt fueled bull market of the past few years beginning to sputter, pension funds are midway through imposing a roughly 100% increase in required contributions by cities and counties. That is, by taxpayers.

Pension funds, which control over $4.0 trillion in assets on behalf of state and local government employees in the United States, are the biggest players in American finance. They invest in anything that will get them a rate of return, after inflation, that averages 4.5% per year – that’s currently 7.5% before taking inflation into account. They invest in hedge funds, they invest in private equity, along with real estate and public equities. And when they don’t hit their numbers, taxpayers bail them out.

Why aren’t those dots being connected? Pension funds rely on taxpayers to hedge their bets. They can make whatever promises they want, take whatever risks they wish, indulge in optimistic projections and lobby for excessive benefit formulas, because taxpayers will bail them out. How deep is the hole? We’re talking trillions, not billions.

Connect the dots. Government pension funds and “hedge fund billionaires” are cut of the same toxic cloth. Perhaps taking money from taxpayers to fund government unions and their activist “volunteers,” and taking money from taxpayers to bail out government pensions are the bigger “toxic” threats to our democracy and our economy.

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Ed Ring is the executive director of the California Policy Center.

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