Home Corporations and Industry Hedge Fund Managers Are Coming for Your State Pension Funds.

Hedge Fund Managers Are Coming for Your State Pension Funds.


One of the most serious and largest scams now being perpetrated by the Republican Party on the American public is the “unfunded liability” state employee pension debate. The true story is essentially quite different from what they would have you believe.  The Republican governors have figured out that the best way to steal from the states is to go where the money is—to the state pension funds. There is substantial evidence for this. The public understands very little about managing pension funds. The corporate-owned media has kept the public in the dark about exactly what the pension “crisis” involves in each state. The same Wall Street swindlers who bankrupted many a pension fund in the private sector are now ready to loot public pensions.

The failure to fund pensions in the private sector became so common that the government set up a new agency in the 1970s to deal with it, the Pension Benefit Guaranty Corporation, whose function was simply to pay benefits to individuals whose pensions fail for lack of corporate funding. Is this a problem? In 2010 alone, the PBGC paid out $5.6 billion to the retirees of 147 corporations who failed to fund their pension programs. But that may not go on forever. The PBGC has a huge deficit of somewhere between $25 and $50 billion. What will happen long term seems to be anybody’s guess. In the meantime, many of these corporate raiders, men who borrowed against corporate assets and pocketed the money became rich. The funds that should have gone to retirees of private firms went to the investment brokers and so-called “turnaround” specialists. Companies like Romney’s Bain Capital simply borrowed money, bought failing companies, sold off assets, dumped the pensions on the PBGC and pocketed tens of millions in fees. Many of the new Republican governors people, like Romney and Rauner and Snyder of Michigan and Kasich of Ohio all came from Wall Street. They are in office for only two reasons—to break public unions and loot public pension funds.

So the current attacks have been directed at public pensions, particularly state pensions, usually accompanied by attempts to decertify public employee unions. One man, John Arnold, a former ENRON executive and billionaire, who was involved a top level with ENRON, scamming some people, while others were bankrupting the company and its employee pensions seems to have taken a particular interest in this. He maintains that his interest in solving the pension program by essentially not paying what is owed to public employees is purely “philanthropic,” That is like saying that John D. Rockefeller Jr. saved the national parks by turning them into his own personal parking lots.

In 2011, the state Treasurer of Rhode Island, a highly accomplished and very ambitious politician and former venture capitalist, Gina Raimondo, Ivy-league educated (and a Democrat,) hired John Arnold, by then a billionaire hedge fund owner, to help her solve the problem of “unfunded liabilities.”  Within two years, Raimondo, with Arnold’s help, and that of the Pew investment trust had put into place drastic cuts to public pensions embodied in the Rhode Island Retirement Security Act.

After years of paying into a retirement system that promised fixed annual payments in their golden years, Rhode Island’s public workforce was told to take a new, totally unattractive option or lose their pensions altogether. Raimondo’s policy is what’s known as a “hybrid pension,” where the system of guaranteed payments to retirees was replaced by a combination of individual investment accounts and a much smaller version of the traditional pension payments. The change amounted to a large cut in benefits for many thousands of government workers.

Arnold’s counsel, as a former ENRON scammer and hedge fund price manipulator in oil and gas plus Raimondo’s previous Wall Street experience didn’t give the workers a prayer. They lost to a deluge of publicity and propaganda. Then Raimondo turned over the management of the funds to three firms all of whose CEOs were on the Board of Directors of the Manhattan Institute. The Manhattan Institute is a Koch Brothers-sponsored Right Wing organization dedicated to the decertification of unions like the very ones from whose pensions these three CEOs would be taking home hundreds of millions of dollars in fees. In other words Raimondo was hiring the very people who were using the funds she gave them to try to destroy the organizations from which they were earning their fees. Remember, it was hedge funds like those that Raimondo was hiring whose naked short selling and creation of fraudulent securities caused the crash that reduced state revenues, created layoffs, and created the huge shortfall in state pension funds in the first place.

Rhode Island was not Arnold’s first involvement with pension fund “reform.” Before he was involved in Rhode Island, John Arnold was involved in the controversy over the Phoenix Pension Reform Act. He donated a reputed $1 million to the project to “reform” public pensions in Phoenix. Had the plan he supported passed, which it did not, it would have changed the defined pension plans of Phoenix public employees to 401K plans. Apparently, this is how John Arnold sees philanthropy. He sees it as a plan to eliminate pensions and substitute worthless 401K plans. Arnold is partnered with the Pew Investment Trust, so he and Pew would have earned tens or perhaps even hundreds of millions of dollars in fees. Since 2008, according to pension sources, Arnold is estimated to have funded anti-pension legislative plans by as much as $50 million of his own money. If you can change the law and set a precedent, as he did in Rhode Island, to show that pension funds need to be converted to far less costly and less valuable 401(k) plans, you can then go on to manage pension funds. The hedge fund managers whom Raimondo handed control of only a handful of Rhode Island’s billion dollars in pension money, are making hundreds of millions a year…annually. It is a huge business.

According to Arnold, the losers are the taxpayers. Of course they are. But not for the reasons he says. First of all, not only do taxpayers pay for the shortfall (and the interest on that debt that goes to Wall Street banks) but what about the workers who are both taxpayers and contributors to the pension funds  who have been hired with the stipulation that part of their compensation would be deferred, long term, that is, retirement, income. The Wall Street boys want to eliminate that income because part of their plan for the states is to a) do away with unions and b) give large tax breaks to corporations. They can advance both those goals by taking over management of state pension funds and using that money to fund their union-busting activities.  One example among many is the Wall Street group that wants to destroy the wealth of the Middle Class is the “Secure Oklahoma” group that wants to turn pensions completely into worthless 401K plans. John Arnold supports that plan.

The proponents of these anti-pension moves hide behind a little understood term “unfunded liability,”  But the term is meaningless. Let’s look at it rationally. Here’s an example. Stan has a government job, after he works for 30 years, and always pays his pension dues, which can be substantial. He does so in order to earn his pension of, let’s say, for argument’s sake, $2,000 per month. If the state does not kick in its share, over time, that “unfunded liability” is greater than the amount that will be there to pay it. So if the amount that would be owed John is $24,000 a year, times, say 10 years before Stan kicks off (he’s a smoker) the unfunded liability is half of $240,000 or $120.000. Remember, Stan has already paid in his half, so at worst, the liability would be $120,000. So, theoretically, Stan would have $1,000 per month. But that isn’t the case. States haven’t completely failed to pay into pension funds. And in those years when they didn’t meet the requirements, it was often because the investments were so good, that the needed funds were met. Or at least that was the rational. But let’s say that they may have missed four or five years. In most of those cases they did pay something. So if Stan has worked for 30 years, he might lose one-sixth of his pension…at worst. So in our hypothetical example, Stan would still have something like $220,000, or roughly $2,200 per month instead of $2,400

The gigantic amounts that the Republican Governors are talking about include all the payments that the workers have yet to pay. Stan has had no problem paying his share. The idea of calling in “experts” to decide just how much is owed is a part of the scam. Various organizations will tell the Republican governors and the people whatever they are told to say. Just like Arthur Anderson in the Savings and Loan fraud cases. The Republican governors don’t want answers. They want their answers. They want a crisis, so that they can justify converting pensions to 401(k) programs. These 401(k) programs are not the answer. In order to get even close to the amounts they now are owed, retirees would need a 401(k) of over a million dollars. The governors want to keep that money and give it to the rich and for corporations in tax breaks. Forget the fact that tax breaks never have and never will create more jobs. This is simply a scam to make the rich richer.

Why would anyone be surprised. The voters of Illinois, supposedly rational Democratic voters, elected a man, Bruce Rauner, who not only ran horrible long-term care facilities but actually paid millions of dollars in fines because people were incompetently supervised and allowed patients to die. He said he would–and now wants to–reject federal money for Medicaid patients under the new Affordable Care Act for people unable to get health care any other way. He wants to prevent any increase in the minimum wage. He fired 15 people from the state-run health care exchange. The man is a vicious, vindictive, dangerous, arrogant multimillionaire and the people of Illinois in a gross act of stupidity elected him. So he is not to blame for being a Fascist. That’s just what he is. The people of Illinois are at fault.

The stalking horse for the Republican campaign to do away with public pensions, John Arnold, recommends, as an “expert” that states not make up that difference of what is owed workers and falsely claims “unfunded liabilities” of much larger amounts in order to scare the people into voting for worthless 401K programs. In many cases, the unfunded part, that which the state should have kicked in, is minimal. In those cases, it could be handled with a small surtax of some kind rather than punishing every single retiree. The numbers sound large because the number of individuals involved is large. The fact is that pension funds, despite the hue and cry, need only be funded at about 80% anyway. One other cost, not mentioned by John Arnold or any other hedge fund manager is that hedge funds say that they will produce a higher rate of return for pension funds. But they do not and have not…at least not consistently.

Yet they charge far more than other kinds of fund managers. Of course, when states use hedge funds to manage their resources, the management fees are excessive (but presumably so are the kickbacks.) Hedge funds charge 2% plus 20% of gains, which can be minimal. Hedge funds charge as much as six times what regular stock fund management charges. The share of funds that Raimondo of Rhode Island gave to the three fund managers was only a small part of the total Rhode Island pension funds, but would still earn something like $200 million. This is big, big business, mixing politics with the specific goal of stealing pension fund money, reducing the retirement and therefore the net worth of state and city employees.

In Detroit, where workers were simply doing their jobs and negotiating for the best deals that they could get, the Governor’s appointed (not elected—the Governor of Michigan is now a dictator, a “boss” if you will) a city manager to settle the problem of pensions. Governor Snyder put Detroit into bankruptcy and now the city’s workers have met face-to-face with disaster and they lost. Poor management of funds and poor management of a collateral voluntary savings plan has cost Detroit public workers massively. Some pensioners have had their pensions reduced, their health insurance increased and have been forced to kick back to the city substantial sums from their savings plan. Because the managers calculated their savings based on a much higher than normal interest rate paid on their savings, they now have to kick back to the city of Detroit large sums that they had counted on but are not really theirs. They did not make the mistake. The money managers did, yet the workers must pay. We have to ask because it is a question that, based on our history must be asked, did the fact that most Detroit workers are African-American have anything to do with it? Because government workers do not pay into Social Security and instead pay into their own retirement plans, when their pensions are lowered, they have nothing to fall back on. This is why the conversion of these “underfunded” (not “unfunded”) plans is so harsh.

According to some estimates, the growth in the economy, even at current rates, and corresponding growth in the Stock Market will greatly reduce the shortfalls in pension funds now so vigorously attacked as a serious problem by the Wall Street gang. The economist Dean Baker says that normal growth will fund the pension funds by the minimum necessary, around 70% by 2017. The Center for Retirement Research says that the number will more likely reach 80%. Experts on retirement and pension plans all seem to agree that this is not such a drastic problem as Arnold and Pew seem to think. Perhaps that is because they have an axe to grind.

Arnold and Pew and other hedge fund managers stand to make tens or hundreds of millions of dollars managing future retirement funds for states. But 401(k) programs like the ones that Arnold and Pew and others of their kind are trying to foist on workers can end up worthless. A 401(k) plan is basically a tax free investment in what should be secure long-term securities or bonds. But the public saw what can happen to so-called secure investments in 2009 after the financial crisis of 2008 wiped out over $3 trillion in net worth. In a fixed-annuity retirement plan, the worker would normally be pensioned as a percentage of the highest wage attained. So a worker who earned wage increases would lose the value of all those raises and of any cost of living allowances under a 401(k). But in a 401(k) the amount a worker makes or his or her value to the company means far less. And yet CEOs earn huge amounts from stock options. Switching to a 401(k) which is more like a basic savings plan matched by an employer’s 3 or 4 percent, is not enough to handle retirement. And for those who are switched out of a fixed-benefit plan, it is disastrous, especially after a severe economic turndown or a stock market crash.

And then the question arises….is there a problem at all? The incidence of huge shortfalls is almost non-existent and even where there are large shortfalls, they have been exaggerated by those who would use the actual size of pension funds, Most estimates place the pension shortfalls in the range of .2% to .5% of gross product. In the vast majority of cases, the amounts involved in shortfalls were less than 1% of gross product of the states. So the problem is highly exaggerated. According to many economists the problem of back-funding pension funds involves some adjustment or tinkering with the methodology, but in any case requires simply a longer term view of the situation. According to many economists who deal in pension and actuarial matters regularly, there is nothing even approaching a crisis.

So why make a big deal out of a bad financial situation when one really does not exist? For a good reason. The same people making the recommendation to switch out of fixed pensions want to manage the state pensions. The money involved in managing pensions is huge. Fixed pensions require that a greater share of the public dollar go to securing them. The hybrid or 401(k) system costs less. The people backing the new, less expensive systems are hugely wealthy billionaires who want their tax bills reduced and corporations who want to continue to get more and more tax breaks from state governments. State budgets are a zero-sum game. Many state issues, like pensions, fall under the radar of public scrutiny. In all, the annual state pension obligations amount to payments of about $46 billion per year.  The annual tax breaks for corporations already in place, and they want more, amount to $80 billion per year. So, by reducing pensions, (which 401(k) plans would do,) and reducing state participation, which they would also do, investment firms see a windfall by reducing that part of the state accounting ledger, while saying to hell with the state employees.

Now comes the truly scary part. In Illinois, Governor Bruce Rauner, who had never held public office before but a man in the investment business, decided to buy the governorship of Illinois by exaggerating the pension crisis. He used it to unseat a man, Governor Dan Quinn, who was attempting to do something about it by raising something like $3 billion in taxes while negotiating some alternatives to the existing costs.  By exaggerating an already serious situation,  and by spending about $40 million of his own money and those of other Wall Streeters, to triple the amount Quinn could spend, he won. And why spend $40 million to win an election? Rauner says that he did it to help the state with its pension problem. But the fact is that Rauner was the manager of the state’s largest public pension fund at one time. He made enormous amounts of money on Illinois public pensions. Those fees helped to buy him homes in New York City, on Central Park, an oceanfront home in Key Largo, a ranch in Wyoming, a luxury condominium in Deer Valley Resort, Utah, two condominiums on East Randolph Street in Chicago, a home in Winnetka, Illinois and a second ranch in Montana. Yet he shows no concern for the average worker, merely the business owner. Within the first 90 days, he had granted tax breaks to the rich that gave him personally a tax break of $450,000. That is now how much he paid, but how much he saved himself. He has cut benefits in his budget plans for the poorest, those with the least power to defend themselves. In the meantime, he has created tax breaks for himself and his friends. Is it necessary to allow Bruce Rauner to bankrupt each and every public employee, teacher, nurse, fireman, administrator before we say enough? And who are his friends? Well, Ken Griffin, for one. Griffin, like Rauner is a hedge fund manager, a billionaire, who gave $2.5 million to Rauner’s campaign. He’s a hedge fund manager. What do you think he wants in return. He wants to manage Illinois pensions. And he’s a friend of the governor who wants to convert them to 401(k) plans. So what do you think Griffin will recommend if asked?

So what is the point? The point is that in many states and we’ve pointed out a few, pensions are a large pile of cash that Wall Street would like to get its hands on, just as it tried to do unsuccessfully with Social Security—thank God. These guys have bankrupted many a private pension fund. Now, thanks to Governors Walker and Snyder, they think they have the political power to divide public workers and private workers and take over pension funds for themselves. Then, just the way they have done it in private industry, they will loot the system and walk away, as clean as Dick Cheney and George W. Bush.

If you don’t want this to happen, you need to step up in your state and make it clear that you stand with public employees. If you don’t, the next time it will be Social Security and it will be your turn in the barrel. Wake up.





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