There has been a lot of discussion about the general underfunding of public pensions in muniland. Now credit rater Moody’s is reviewing cities in light of this:
Moody’s has new take on the effect of pensions on ratings, puts cities including Chicago, Cincinnati and Portland on review for downgrade.
— Romy Varghese (@romyvarghese) April 17, 2013
The potential fiscal drag that under-funded pensions can have on cities is very important, but several other issues need to be examined further. First is the level of fees that public pensions are paying to investment managers and hedge funds, and the second is the level of risk in specific assets that the funds hold. Kevin Roose of NY Magazine wrote about the excessive fees that pension funds pay to outside “active managers”:
Private-equity firms and hedge funds, in particular, tend to love pensions, which typically provide a majority of the money they manage. (In fact, many private-equity firms and large hedge funds couldn’t exist without pensions.) But they haven’t held up their end of the deal. Start with their subpar returns, and subtract their onerous fees, and you get a very bum deal for the average pension fund.
But CalPERS — a large and influential fund, which can act as a Pied Piper for lots of smaller pensions — is waking up to the fact that it’s paying too much to active managers and not getting enough in return. After years of pushing for lower and lower fees from the private-equity firms and hedge funds who manage its money, CalPERS is considering saying, “You know what? Nevermind,” and giving up on active management altogether.