Tuesday, December 18, 2012

Inflaming the Debate on Public Pensions

Inflaming the Debate on Public Pensions

Bloomberg News is running an inflammatory series entitled, “America’s Great State Payroll Give Away.”  The third part of the series is called “Pension Funds Make Managers Rich[1],” which I thought would be about the amount of money investment managers are making off of public pension plans.  Instead the article is about the one million dollar salary and bonus paid to the Chief Investment Officer of the Teacher’s Retirement System of Texas.  According to the Bloomberg article, four other CIOs are making more than $500,000.  The article tries to demonstrate that investment performance is wholly unrelated to the salaries paid to public investment officers.  The article dutifully reminds readers that teachers haven’t had a raise in years.  By the way, public fund CIOs don’t get rich, unless they cross over to the private sector.  Moreover, CIOs don’t get to keep their jobs for very long.  An average tenure is about four or five years.

Boston Meeting (1999)

Only the money managers hired by the Texas System are getting rich.  For the year ended October 31, 2012, the $112 billion pension plan paid out $471.9 million in various fees to money managers and investment funds.  They paid another $58 million in brokerage commissions to Wall Street.  Just to give you a flavor of the management fees in the private equity sphere, the Texas System paid fund expenses of  $19 million to KKR, $14 million to Blackstone,  $11 million to TPG, and $9 million to both Apollo and Carlyle.  Of course, most of these firms and their money management brethren count on similar financial rewards across dozens of public pension plans.

The article notes that the CIO, Britt Harris, and a group of his associates make multiples of Governor Rick Perry’s $150,000 salary.  I am not disputing that a million dollars is a lot of money, but this is the wrong comparison.  The football coach for the University of Texas makes $5.4 million per year, and his counterpart in basketball earns $2.4 million.  The gentlemen coaching students in pads or shorts make multiples of Mr. Harris’s salary, and he’s got a $112 pension plan to worry about.  As far as I know, Mr. Harris doesn’t have a shoe contract or television show to supplement his income. 

My aim in this post is broader than defending Mr. Harris.  In fact, I’m not in a position to evaluate his performance, even after reading the System’s annual report and a small mountain of reports submitted to the System’s investment committee.  The simplistic approach taken by Bloomberg, which compares salary to 3 and 5-year investment performance, makes great copy but lousy analysis.  I’d expect this type of approach from an unsophisticated investor, not a business publication.

It’s great sport to find the outliers and exceptions and publicize them.  There are, undoubtedly, examples of public officials “spiking” their final year’s salary to boost their retirement benefit, and former-police officers with large retirement allowances.  And, of course, there have been occasional abuses by the people managing the investment of pension plans.  However, the picture painted by the Bloomberg and many other similar articles isn’t really aimed at the exceptions.  Rather, it helps to undermine the public pension system that is critical to retaining and attracting teachers and public servants.

Do we need reform?  Absolutely.  The funding of the public pension plans represents a long-term problem for state and municipal taxpayers.  We need to have a detailed look at the eligibility standards and formulae that underlie these plans.  And, we need to scrutinize the money managers who are getting rich off these plans.  Nearly half a billion dollars in fees were paid out of the TRS last year.  Similar amounts were doled out from California to New York.  These payments went to the so-called “best and the brightest” who swore they could meet the pension plan’s investment requirements.  Of course, they failed to deliver.

Rather than placing the spotlight on a group of investment officers at public pension plans, I suggest we look more closely at the money managers.  However, those money managers have given lavishly to governors, PACs, and presidential candidates so they’ll be protected.  The investment staff, on the other hand, is fair game, since they haven’t purchased political immunity.

In tomorrow’s post, I’ll revisit by own moment of fame when my compensation hit the pages of North Carolina’s newspapers.

[1] http://www.bloomberg.com/news/2012-12-13/texas-pension-manager-paid-1-million-trails-peers-who-make-less.html

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