In Blue States a Concerning Pattern is Setting Up a Fiscal Nightmare

There’s been a flurry of good economic news over the last few quarters, something for which President Trump has been at pains to congratulate himself over. America has essentially full employment. The economy is growing. The stock market has been kicking booty.

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Public employees’ pension funds have benefitted, too. According to the Wall Street Journal, “Large U.S. systems that oversee retirement funds for police, firefighters, teachers and other public workers earned median returns of 12.4% in the fiscal year ended June 30,” making 2017 a better year than the previous two. The Journal continues, “Funds overseen by the Illinois State Board of Investment earned nearly 12% in the fiscal year ended June 30,” and “[t]he California Public Employees’ Retirement System, the biggest in the U.S., earned 11.2% in fiscal 2017.” The California teachers’ pension fund has done well, too; it “reported a fiscal 2017 return of 13.4%,” while Connecticut’s public pension funds “earned a collective return of 14.3%.”

But don’t get too happy yet—not only are public pension funds still in trouble overall; some activist liberal public pension fund trustees are taking steps that could make the situation worse by prioritizing political agendas over overall returns. If the economy falters even a little, you guessed it: It’s a recipe for big tax increases in blue states.

The probability is that at some point in the next couple of years, the economy will take a downturn. We’re currently in the third-longest economic expansion in the whole of American history (as much as many Americans have only started feeling the effects of that recently). It’s hard to imagine that continuing indefinitely, especially if Congress can’t do things like tax reform or overhauling the health care system so costs come down and you can pay for your doctor’s visit without needing pricey insurance or a $20,000 American Express card.

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And let’s face it; Congress is Congress. The chances of them failing are high, and the chances of them succeeding are low.

That makes what’s going on with pension funds, especially in blue states, look a whole lot less awesome because they’re probably not going to experience the high returns they did this year in 2018, or 2019, or 2020, thanks to the overall economy, but also courtesy of some truly dumb and maybe even legally problematic decisions being made by pension trustees.

CALPERS, the California Public Retirement System, “has just 68% of the assets it needs to pay for future benefits.” An Illinois retirement fund designed to serve a boatload of public employees has only 35% of the total it would need to cover benefits for all future retirees. In Connecticut, the overall state employees fund has about 35% of its future payout costs covered, and the teachers’ fund has 56%. The Journal cites the state Treasurer saying the state should have ponied up more in the past—in other words, Connecticut taxpayers weren’t charged enough to cover future costs. She says this will be dealt with by benefit cuts, but the reality is, it’s going to be dealt with via a raid on taxpayers’ wallets, too, whether she sees that and is willing to admit it, or not.

Blue state liberals are determined to make it worse than needs be. Take for example Letitia James (New York City’s Public Advocate). She’s been calling for JP Morgan to sever financial ties with some private prison companies, because she doesn’t approve of the business they’re in. And she’s threatening to use the City pension fund’s investments with JP Morgan to cudgel them into severing those ties.

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Disregard what you think about private prisons, or even the criminal justice system in general; the reality is that JP Morgan does a pretty good job of making money for people (that’s part of why a lot of people hate them). James is proposing to make a purely-politically-motivated investment decision that could well impact the financial health of the city pension fund, meaning more taxpayer money having to prop it up.

It’s not hard to comprehend that JP Morgan undoubtedly has a better sense of how to make money for city employees and retirees than James does, but no matter. It’s also noteworthy that as a trustee, James has a legal duty to deliver the best financial results for the fund, but that’s less relevant to her than objecting to the fact that non-union, non-government-employed guards are providing correctional services as opposed to a unionized, government-supplied workforce.

James is not the only one pulling this stunt, either: Out in Minneapolis, the City Council “asked city staff to explore ending the city’s relationship with Wells Fargo because of the bank’s investment in the Dakota Access pipeline.”

Meanwhile, out in California, legislators are being dinged for forcing CALPERS and the teachers’ fund to divest from coal stocks—just before a rebound in those stocks occurred. According to the LA Daily News, “CalPERS’ divestments cost it approximately $8 billion over a 15-year period, according to an October 2015 report from Wilshire Associates, CalPERS’ main investment consultant.”

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Golden State legislators have more recently considered forcing divestment from Turkish bonds, Trump Wall construction contractors, and—of course, as usual—firms involved with the Dakota Access Pipeline. The only good news here is that at least in California, some union figures are starting to speak up because all this social justice warrior activist investing behavior is threatening the income streams of their members. In blue states, when unions complain, at least some officials change tack.

Public employees’ unions may often be at odds with good fiscal policy, but in this instance they might help spare taxpayers some of the future pain that’s currently in the cards. Or at least those Americans living in blue states where fiscal solvency is a secondary concern to the latest political agenda had better hope so.

 

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