October 27, 2013
MEGAN MCARDLE: The Great Pension-Bonus Giveaway Fiasco.
The difference between me and Taibbi is that I see public pension officials making bad decisions not because they’re deluded right-wing ideologues, but because they and their predecessors, and the legislators who made the pension laws, made a bunch of awful decisions that have left them with few good options. Plunging pension assets into hedge funds and similarly risky investments was a Hail Mary pass to save a failing system.
The problem is that, unlike most Hail Mary passes, this one could actually make the pension situation much worse. Hedge funds took huge fees for their troubles, and riskier investments can underperform as well as overperform. Those desperate pension managers may have — and in some cases, definitely have — taken a bad situation and made it worse.
For that, I do think we can blame the professionals, as well as the pension managers — and not just the hedge fund managers. I’ve been shocked to find out how common “extra payments” or “13th checks” have become among public pension funds. Basically, when returns were higher than the projected average return (generally around 8 percent), they funneled off the extra into a bonus check. This is … well, gee, profanity is too weak. It is an insane mangling of the concept of an “average return.” As should be obvious to anyone who sat through high school math, that average is composed of some years when the return will be higher than the average, and some years when it will be lower. You can’t siphon off the “excess” returns from the up years unless you also put in extra cash during years when the market underperforms. It goes without saying that they did not top up during the bad years. The result is the current mess in Detroit, and elsewhere.
Read the whole thing.