Public Pensions Are Ripe for Corruption

Monday, 14 Jul 2014 04:45 PM

By Ira Stoll

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"By the end of approximately 2007, Villalobos had made, and I had accepted, bribes totaling approximately $200,000 in cash, all of which was delivered directly to me in the Hyatt Hotel in downtown Sacramento across from the Capitol. Villalobos delivered the first two payments of approximately $50,000 each in a paper bag, while the last installment of approximately $100,000 was delivered in a shoebox."
— Plea Agreement, United States of America v. Fred Buenrostro, U.S. District Court, Northern District of California, filed July 11, 2014.
 

The government official who pleaded guilty here, Fred Buenrostro, wasn’t some city council member or state senator, but rather, from December 2002 to May 2008, the CEO of the California Public Employees Retirement System. Calpers, the largest public pension fund in the country, managed assets of as much as $250 billion during that period.
 
The bribing of Buenrostro was part of a successful effort by a New York money management firm (which claims it had no knowledge of the bribe and has not been charged with any wrongdoing) to win $3 billion in business managing pension money for California state employees and retirees.
 
Crooked government officials come along often enough that there’s a tendency to tune them out, but this case is worth pausing to analyze further for a number of reasons.
 
For one thing, there’s the hypocrisy angle. Calpers has been at the forefront of criticizing company boards for practices that are not shareholder friendly. Sometimes it’s right about that, but even when it is, it manages to come off as holier-than-thou. It doesn’t exactly add to Calpers credibility denouncing board-management coziness at big publicly traded companies when its own CEO is taking paper bags full of cash from a representative of a contractor.
 
For another thing, Calpers isn’t the only big public pension fund with a recent scandal. The New York State Comptroller, Alan Hevesi, pleaded guilty in 2010 to a felony in connection with corruption in managing the $125 billion fund that covers New York public employees.
 
What I’ve called the state-pension-industrial complex has deleterious effects on several levels.
 
The current system takes rich money managers, who ordinarily might be a voice for lower taxes and restrained government spending, and makes them beholden, for business, on public pension boards that sometimes include union officials. Instead of arguing for less generous pensions, or for personal accounts that employees would manage individually, the money managers now have incentives to argue for more generous pensions and to avoid upsetting the system that is enriching them.
 
And the current system takes public employees, who if they had personal accounts might be able to invest in corporate stocks and root for their success, and instead makes them reliant for their retirement income on the same state government bureaucracy that now employs them.
 
Naturally, it also breeds corruption. So much money sitting in the hands of government officials is a temptation too strong to resist. It is too strong for the money managers who want to get a piece of it, and it is too strong for the government officials and their friends who want some money or other benefits in exchange for helping the money managers get a piece of it.
 
What should be done? Shut these pension funds down and turn the money over to the individual employees and retirees. Let the government workers open retirement accounts at Charles Schwab, Vanguard, Fidelity, and so on, just like much of the rest of America does.
 
Let the money managers compete for individual business by advertising on the basis of price, service, or performance, rather than by paying off government officials with shoeboxes or paper bags full of cash.
 
Ira Stoll is editor of FutureOfCapitalism.com and author of "JFK, Conservative." Read more reports from Ira Stoll — Click Here Now.
 
 
 
 
© Copyright 2014 Bloomberg News. All rights reserved.
 
 
 

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