Matthew Cunningham-Cook: Investment patterns to blame for pension problems

This commentary is by Matthew Cunningham-Cook, who lives in Brattleboro and Philadelphia. He is a public pension and capital markets expert for labor unions who led the Communications Workers of America's public sector pension work for 140,000 public-sector workers across 20 states. He is also an award-winning investigative reporter.

Vermont’s legislative leaders, Becca Balint and Jill Krowinski, State Treasurer Beth Pearce, and Gov. Phil Scott have undertaken a dangerous road: proposing to cut pension benefits. 

Krowinski said in a commentary March 7, “Our state pensions are in critical need of reform to stabilize the system and get it on track for long-term stability.”

The cuts, it seems, must come on the back of workers who get an average pension of $24,000 from the state. But the push obscures some key facts about our state’s pensions: Under Beth Pearce’s leadership over the past decade, Vermont has invested in high-risk foreign stocks, private equity, and “private debt” that have dragged down the pension fund’s performance. 

Instead of pursuing a prudent fiduciary approach of low-fee index funds tied to the S&P 500 and Bloomberg bond index — an approach pursued by countless pension funds — Pearce and the Vermont Pension Investment Committee have gambled the retirements of hard-working teachers, firefighters and other public employees on risky and high-fee Wall Street investment strategies. 

The results are astonishing. Had Pearce and the pension investment committee invested Vermont’s pension funds in a 70% S&P 500, 30% Bloomberg bond index fund over the past decade — much lower risk than the current approach — there would be over 30% more in assets in the state’s pension funds, a total of $1.5 billion. 

This is real money, unlike the oft-bandied-around bogeyman of “unfunded liabilities,” which obscures that they can be paid off over 30 years or more and that they are dependent on assumptions about future performance. 

The pension funds had lowered those assumptions, the assumed actuarial rate of return, from 7.5% to 7% because of the Vermont Pension Investment Committee’s subpar performance in managing the funds. 

That $1.5 billion in lost returns is a massive transfer of wealth from both the pension funds and from ordinary Vermonters whose tax dollars contribute to the plans to some of the wealthiest people on the planet. It is an outrage that Vermont’s leaders are seeking to cut benefits before they know the facts about the investment management of the pensions, and are indicative of a sad reality in our state where the interests of high finance come before good governance and a public education system that retains high-quality teachers and employees. 

As of 2020, the pensions had $590 million invested in “real estate and private partnerships,” which are very difficult to value, often based in tax shelters like the Virgin Islands and Bermuda, and have attracted a host of scandals in their wake due to the enormously lucrative fees that they generate for Wall Street. This portion has grown from about 6% of the pensions’ portfolio in 2010 to about 10% today, according to state pension reports. 

These investments are also known as “alternative investments” and include real estate, private equity, and hedge funds, and they have 30,000% to 60,000% higher fees than index funds. 

The former CEO of the nation’s largest public pension fund, CalPERS, was found guilty to have received kickbacks from alternative asset managers, as did the former head of New York state’s pension fund. Federal investigators began to investigate Illinois Gov. Rod Blagojevich around his selling of access to the state’s pension funds to alternative investment managers. 

The worst performing of all alternative investments are so-called funds of hedge funds, which add layer after layer of fee on them. While Vermont’s investments in funds of hedge funds were made prior to Pearce’s appointment as treasurer, under the tenure of Jeb Spaulding, she and the pension investment committee quietly exited hedge funds years after performance issues were first apparent, and never conducted a full audit of the investments. 

The main actor pushing cuts for thousands of state and school district workers and retirees is David Coates, the former managing director of KPMG’s Burlington office. He has donated $7,000 to Pearce’s various campaigns for office, and has routinely bandied about the unfunded liabilities canard. 

During Coates’ time as a CPA, he has invariably witnessed the rise of hard-to-value assets like alternative investments, and no doubt is aware of the enormous fees paid to relevant asset managers. Yet he insists that the problem is Vermont’s pensioners? Why is that? Coates has his own consulting firm. He should disclose who his clients are when advocating draconian cuts that could cripple our ability to run public schools and state government effectively. 

The Legislature must take an immediate step back. There is no crisis in the state’s pensions that the Legislature must solve this session. The best thing it could do is to mandate an independent investigation into the investment management of the state’s pension funds, one that specifically audits the evaluation and performance of alternative investments, and restricts future investments to S&P 500 and Bloomberg bond index funds and government securities going forward. 

If the Legislature does move forward with unnecessary cuts that enable further wealth transfer to Wall Street, Vermont’s teachers and public employees should take note of who stood with them and who didn’t and whether or not they deserve reelection.


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