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The Federal Government’s Little-Known Pension Heist

The Federal Government’s Little-Known Pension Heist

“Too big to fail” means one thing for banks and another thing for union pension funds.

When banks are on the verge of collapse, Congress bails them out. When union pension funds are in mortal danger, Congress changes the law to let them shaft retirees.

Did you miss that newsflash? So did many of the 407,000 unsuspecting Teamsters, mainly former truck drivers, who received letters in October announcing whether their pension benefits will be cut.

Two-thirds of them got bad news. The Central States Pension Fund claims it will be reducing members’ retirement checks by an average of 23 percent. Union activists say that figure is much higher, and for some the reductions will top 60 percent.

That means hardship for people who have deferred compensation for their entire work lives in exchange for a pension. Bills won’t be paid and mortgages won’t be met — and it will be through no fault of their own.

It once was illegal to cut promised pension benefits. But at the end of 2014 Congress voted to change that — for some. It did so with no debate and no hearings. The Multi-Employer Pension Reform Act was attached to a must-pass omnibus spending bill. President Barack Obama signed it a few days later.

The law permitted the so-called multi-employer pension plans, run jointly by unions and employers, to apply to the Treasury Department to reduce benefits. And that’s what Central States did in October. Union member will notionally get a chance to vote on the cuts, but the Treasury Department can override that outcome. Count on it to do so.

Multi-employer pension plans are clearly in trouble. They cover more than 10 million workers and they are mostly underfunded. The Pension Benefit Guaranty Corp., the federal agency that backstops pensions, would not be able to withstand the failure of the Central States fund. (The federal program is also in trouble, reporting a $76 billion deficit in mid-November, and its estimated exposure to future losses runs to the hundreds of billions.)

How did the situation get to this drastic point, and what should be done?

First of all, Central States is not in trouble because of mob skimming, as some might presume. Yes, it was set up by the notorious Teamsters President Jimmy Hoffa in 1955, and he was later convicted of improper use of funds from the pension. Courts intervened in the early 1980s, and Goldman Sachs and Northern Trust were set up as fiduciaries.

The main factors in Central States’ decline have been deregulation, de-unionization and demographics. Following the trucking deregulation of the 1980s, numerous companies went under, adding to the pension’s burdens. Over the decades, union membership has declined and retirees have lived longer.

The financial crisis of 2008-09 hurt as well. In 2007, Central States had $27 billion; it has since lost one-third of its assets. It is currently paying out $3.46 in pension benefits for every dollar it receives through worker’s contributions.

However one apportions the blame, the ones who will suffer the most had no part in managing the funds. And the whole point of federal pension guarantees is protecting such people. A more fair resolution would be to bolster federal pension protection.

Sen. Bernie Sanders of Vermont and Rep. Marcy Kaptur of Ohio have introduced companion bills, the Keep Our Pension Promises Act. They would prop up the vulnerable pension funds through changes in the tax code affecting wealthier people.

Not all union-involved pension funds are in such straits. But when they do get into trouble, it’s fashionable for some politicians and opinion-page blowhards to blast the misfortune as just deserts. We need to remember that all benefits are compensation. Workers take them in lieu of wages, and to take them back once they have been earned is, well, theft.

Why is it that no one but the retired workers — the only people who have held up their side of the bargain through their years of labor — are being made to suffer the consequences?

(Mary Sanchez is an opinion-page columnist for The Kansas City Star. Readers may write to her at: Kansas City Star, 1729 Grand Blvd., Kansas City, Mo. 64108-1413, or via e-mail at msanchez@kcstar.com.) (c) 2015, THE KANSAS CITY STAR. DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC

Image: frankieleon via Flickr

Private Equity’s Private Math

Private Equity’s Private Math

To the casual observer, the investment returns recently announced by the California pension system might seem like cause for celebration. The state’s investments in firms that buy private companies generated a 20 percent return in 2014.

California’s $30 billion worth of private equity investments did not come cheap, incurring almost $440 million worth of annual management fees paid to financial firms. But the double-digit gains helped the system generate some of the best overall pension returns in the nation — positive news for taxpayers and for state workers who rely on the system in retirement.

Across the United States, similarly robust returns have proven key elements in the Wall Street sales pitch that has persuaded state and city pension overseers to entrust vast sums of money to private equity managers. The private equity industry has successfully portrayed itself as no less than a savior for underfunded pension systems. By one estimate, $260 billion of public money is now under the management of these firms.

But as Congress now considers reducing regulatory scrutiny of private equity firms, one problem complicates the narrative: A lot of the gains the private equity industry purports to have achieved are of the on-paper-only variety. Far from cash in the bank, they are instead estimates of the value of assets that have yet to be sold. Not only that, the estimates are largely self-reported by the private equity firms themselves — and new research suggests that the firms may be embellishing those estimates.

That is the conclusion of a paper by investment banker Jeffrey Hooke and George Washington University researchers. They essentially created a portfolio of publicly traded companies that they say closely resembles the kinds of privately owned companies that private equity investors buy. They then weighted their portfolio’s returns to reflect the same level of debt that private equity firms typically impose on their portfolio companies.

The researchers argue that their portfolio should show roughly the same returns as the private equity industry. Yet the private equity industry’s stated returns were noticeably less volatile than the publicly traded companies’ returns. The researchers assert that this suggests the private equity industry uses its latitude to self-value its own portfolios in order to make its returns look “smoother” than they actually are.

“Investors may have been unfairly induced into placing monies into these investment vehicles,” they conclude.

None of this should be particularly surprising. After all, allowing Wall Street firms to self-value their investments is akin to a homeowner being invited to make up her home value estimate when applying for credit. And unlike a professional home appraisal, private equity firms’ estimates are difficult to verify — as the California Public Employees Retirement System notes on its website: “There are no generally accepted standards, practices or policies for reporting private equity valuations.”

Considering the new research, the situation would seem to warrant more objective scrutiny of the investment industry. Yet, that’s not the direction of today’s legislative debate. House Republicans have criticized increased government oversight of private equity firms and lately have been pushing legislation to exempt those firms from SEC oversight that could more seriously scrutinize self-reported valuations.

Of course, if this were just an issue affecting rich investors, then perhaps it would be an example of the wealthy bilking the wealthy. But this is about billions of dollars’ worth of public money. If the books are indeed being cooked, then untold numbers of public employees could see their retirement savings evaporate, and taxpayers could be on the hook for some of the losses.

As the Enron debacle and the 2008 financial crisis proved, failing to strengthen oversight in the present could set the stage for a disaster in the not-so-distant future.

David Sirota is a senior writer at the International Business Times and the best-selling author of the books Hostile Takeover, The Uprising, and Back to Our Future. Email him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.

Photo: Sebastian Alvarez via Flickr

JPMorgan Faces Suit Over $10 Bn In Mortgage Bonds

JPMorgan Faces Suit Over $10 Bn In Mortgage Bonds

New York (AFP) — JPMorgan Chase will face a U.S. class-action lawsuit over the sale of $10 billion worth of allegedly falsely valued mortgage bonds before the financial crisis, a judge has ruled.

Late Tuesday New York federal district judge Paul Oetken dismissed the bank’s objections to the suit, first filed in 2009, opening the way for pension funds and others to claim losses on the mortgage-backed securities (MBS) they bought before the crisis.

The plaintiffs in the case accused the bank of packaging mortgages into the bonds that did not meet stated underwriting standards, had false appraisals and false loan-to-value ratios.

That led to sharp losses as the MBS market plummeted following the crash in the U.S. housing market.

The class of plaintiffs, private buyers of the bonds, are led by two California pension funds.

But Oetken refused to set a possible level of damages the plaintiffs could claim, saying they needed to provide more evidence supporting their claims.

Contacted by AFP, JPMorgan declined to comment on the situation.

Last November JPMorgan agreed to pay $13 billion to federal and state agencies for losses related to falsely marketed MBS.

AFP Photo/Chris Hondros

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