Pension Fund Fraud: The Wall Street Journal vs. Unions

The Wall Street Journal posted a story about Orange County's pension fund, gloating that it outperformed the supposedly union dominated California state pension fund: CALPERS.

Jim Carlton and Tamara Audi. 2009. "Orange County Dodged Bullet by a Avoiding Calpers: Southern California Locale Decided to Stick with Its Small Pension Fund in 2006." (16 October): p. A 4.

Orange County had a chance three years ago to join the California Public Employees' Retirement System. Instead, county leaders stayed with a small Orange County pension fund, and now they feel vindicated for their stay-local strategy. While Calpers's investments went on to lose almost 30% of their value during the crash of financial markets last year, the Orange County Employees Retirement System, or Ocers, lost only 21%.

Now that Calpers has revealed that a former board member allegedly reaped $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses, those in Orange County who once lobbied to ditch Ocers are even happier their side lost the debate.

Calpers, whose board is dominated by union ties, has invested much more aggressively in equities.

In fact CALPERS lost big by investing in real estate and hedge funds. Also, Orange County had a curious investment history, when in 1994, its treasurer, Robert Citron, lost heavily investing in derivatives, which he did not understand. The county went bankrupt.

Of course, treasurers were expected to make big bucks as a way to keep taxes down. This sort of pressure still continues.

CALPERS's losses are also worth another look. Why did CALPERS get involved in so many risky ventures? I once confronted a member of the board, asking why they were taking on so much risk. I thought that they were just being foolish, but I had not thought everything through.

Here is a snippet from the Financial Times regarding CALPERS's investment strategy:

Calpers, for example, has invested $21bn in private equity and committed another $22bn. While last year its private equity investments had fallen by nearly a third, Joe Dear, its chief investment officer, expects to allocate more of its assets to private equity. Calpers, like other state pension schemes, needs the higher returns available from private equity if they are to meet the 7 to 8 per cent returns required to fulfill promises to scheme members. But a lot rides on cutting the charges that eat into returns.

Burgess, Kate and Martin Arnold. 2009. "Transparency Vital to Investors' Lobby." Financial Times (29 September).

Part of the problem is that the state does not adequately fund CALPERS -- another self-defeating policy. But the Wall Street Journal suggests that the problem is unions.