In the first installment of Pando’s still-ongoing investigation of the New Jersey pension system, one thing seemed to stick out: many readers couldn’t believe that the texts of the agreements signed between public pensions and alternative investment managers (read: hedge funds and private equity) are almost always secret.
Yes, that’s right: though they are public pensions that taxpayers contribute to and that public officials oversee, the exact terms of the deals being done in the public’s name with public money are typically not available to you, the taxpayer.
To understand why that is such a problem, read the part of our previous story where former Securities and Exchange Commission investigator Ted Siedle explains how secret terms of such agreements could allow a pension fund chief to quietly benefit from investments his pension board is making. Better yet, read Siedle’s shocking new report out this morning about the notorious North Carolina Teachers’ and State Employees’ Retirement System – the same system that was a few years back the subject of a scathing Forbes report entitled “Pensions, Pols and Payola.”
Siedle, now a forensic financial investigator, conducted his investigation for the union representing the current and future retirees who are relying on the pension fund for their retirement. The first big problem, according to Siedle, is that those retirees can’t even see how their money is being managed:
Today, TSERS assets are directly invested in approximately 300 funds and indirectly in hundreds more underlying funds (through fund of funds), the names, investment practices, portfolio holdings, investment performances, fees, expenses, regulation, trading and custodian banking arrangements of which are largely unknown to stakeholders, the State Auditor and, indeed, to even the Treasurer and her staff.
As a result of the lack of transparency and accountability at TSERS, it is virtually impossible for stakeholders to know the answers to questions as fundamental as who is managing the money, what is it invested in and where is it?
Remarkably, there are no audited financial statements for TSERS, the seventh largest public pension in the nation. We are unaware of any other public pension that completely lacks financial statements audited by either an independent accounting firm or the State Auditor, or both.
Before you claim this is just a minor problem because such opaque alternative investments are just a small part of the system’s portfolio, consider some other numbers from Siedle’s report.
Consider, for example, that this huge pension system now has, according to Siedle, 35 percent of its assets in alternatives. That’s about $30 billion.
Consider, too, that Siedle’s report shows that with such a large allocation in these risky alternatives, the fund “has underperformed the average public plan by $6.8 billion.” The result?
The limited investment fee information provided by the Treasurer indicates that disclosed fees have skyrocketed over 1,000 percent since 2000 and have almost doubled since FY 2008/2009 from $217 million to $416 million. In the past fiscal year alone, disclosed fees have climbed from $295 million to $416 million — a staggering increase of more than over 40 percent.
Worse still, according to Cowell, annual investment fees are projected to increase about 10 basis points — another almost $90 million — due to the allocation away from low-cost internally managed fixed income to high-cost, high-risk alternative funds managed by Wall Street.
In summary, the total investment fees as disclosed by the Treasurer are projected to climb to over $500 million. Thus, we estimate total TSERS annual fees and expenses will amount to approximately $1 billion in the near future.
The details get worse from there, which makes Siedle’s report a genuine must-read for anyone who wants to understand the story of public pensions.
It is a story that isn’t some small sidebar – on the contrary, the fight over that $3 trillion pot of money is fast becoming one of the most important economic, business and political stories of modern times. The only question is whether the story can even be told – or whether those profiting off secrecy can keep their schemes hidden in the shadows.