Can a Pension Plan File for Bankruptcy?

The news on April 19 included the headline, “In apparent first, a public pension plan files for bankruptcy.” That got our attention.

State Forfeiture Laws Affecting Pensions

Last Friday, April 6, Maine joined 20-plus other states that have pension forfeiture laws for convicted public employees. Forfeiture is the loss of property or money because of a breach of a law.

As is the case with most pension plan components, the laws reflect a wide range of differences.

Where Does My Pension Money Go?

An article in Sunday’s New York Times, “Pensions Find Riskier Funds Fail to Pay Off” by Julie Creswell, focuses on alternatives, pointing out that public pension funds that have made larger allocations to this asset class have the same—or in some cases, lower—returns as pension funds with little or no allocation to alternatives. Meanwhile, since alternatives usually cost more to manage, some funds have spent more in asset management fees than others, yet, according to Creswell, don’t have the returns to justify the added expense.

The chief problem with the article is that it indiscriminately treats these alternatives as a monolithic asset class. And this is misleading as there are big differences between and among the components that comprise the asset class known as alternatives: hedge funds, private equities, and real estate. These differences include variations in historic and projected returns, risk levels, correlation with other asset classes, and others.

Changing the Message About Public Pensions

For the past two years, some in the media have perpetuated the message that public pensions are running out of money – a Bloomberg editorial said so just this week, and countless other media outlets have also repeated this projection. The source of this striking prediction is usually Joshua Rauh, assistant professor of finance at Northwestern University.

He also advocated that failing public pensions could necessitate federal intervention, not once recognizing that states and localities were already in the process of making reforms.

Now it seems that Dr. Rauh is changing his tune.

Grading the Integrity Report

When states buy goods and services, invest their employees’ pensions, hire and fire civil servants, appoint people to regulatory positions, and enforce laws, a system of policies and practices with high integrity is key to serving the interests of people.

It’s a strong and worthy premise, and the State Integrity Investigation’s goal to “inspire policy changes to promote good government practices” is worthy of endorsement.

The investigation is coherent, and as a whole substantial with its analysis of some 16,000 data points. But in the public pension category, the investigation itself didn’t make the grade.