Bloomberg: Public Pension Funds Need to Show the Money

Syndicated columnist David Sirota is on a mission to prevent public pension funds from investing in “alternative assets” such as private-equity and hedge funds.

In Salon this month, Sirota criticized these investments as “a transfer of retirement income to Wall Street.” In another column responding to a piece I wrote defending pension-fund investment in such alternatives, he characterized the practice as “con artistry.”

He’s aiming at a big target. For more than a decade, public pension funds have been increasingly seeking returns from alternative investments. One of the earliest and biggest investors is the California State Teachers’ Retirement System, the second-largest U.S. pension fund at $170 billion in assets. According to the Calstrs website, it has committed $40 billion to private-equity managers.

Calstrs portrays this strategy as highly successful. According to the pension fund’s website, its private-equity portfolio has generated a net return of 11.26 percent a year, far surpassing its 7.5 percent objective. Sirota, however, doesn’t trust those numbers.

“Alternative investments are shrouded in secrecy, thus calling into question such vague claims of success,” he wrote at

“The scattered bits of crystal clear evidence we do have about ‘alternative investments’ show that while they have been a boon for Wall Street, they can be a financial disaster for retirees,” he added. “In Pennsylvania, for instance, the state pension’s investment in hedge funds forces retirees to pay a whopping $770 million in fees every single year.”

‘Alternatives Miracle’

Calstrs appears to have paid even more. While it says its net return after fees has been 11.26 percent a year, it separately reports a higher, and presumably gross, return before fees of 13.57 percent a year, a difference of 2.3 percent. That would make sense, because private-equity funds often charge an annual fee of 1 percent plus as much as 20 percent of profit. On $40 billion, that 2.3 percent translates into fees of more than $900 million a year.

Whatever the exact magnitude of the fees, Sirota is right that alternative investments are highly lucrative for Wall Street and very expensive for Calstrs. So why is the pension fund — and its highly regarded management team, led by Chief Investment Officer Christopher Ailman — directing so much money to private equity?

Calstrs’s answer probably would be that, net of fees, it earns more through these investments. This eliminates the need to draw as much money from school districts and the state to meet pension promises. Because defined-benefit pension plans such as those administered by Calstrs provide a guaranteed pension to employees, employers — school districts, local and state governments — must make up the difference whenever a pension fund falls short of its expected rate of return.

In Calstrs’s case, earning more from its private-equity portfolio protects employers from having to raid their hard-pressed budgets. So while Wall Street does make a lot of money from Calstrs’s investments, schools and governments save even more.

But what if Sirota is right and Calstrs hasn’t really been earning such wonderful returns net of the fees it pays investment managers? Sirota cites a report that states “the bulk of U.S. state pension funds praying for an alternatives miracle, buying the hedge fund myth, are doling out huge fees and getting mediocre returns.” He pointed to another report that showed that “had pensions steered clear of Wall Street’s most risky investment schemes in recent years and simply invested in Treasury bonds, ‘their assets would be more than $850 billion greater than they are today.’”

Who’s right, Calstrs or Sirota?

‘Safer Investments’

Sirota argues there is “good reason to consider taking retiree money out of ‘alternative investments’ and putting it into safer investments — the kind which are less risky and don’t incur Wall Street fees.” But he fails to explain how Calstrs would make up the higher yields it says it’s getting that are keeping pension costs lower for school districts and governments. But if Sirota is right, those yields may not be real.

We need an answer, because the implications for state and local budgets are enormous. Calstrs has already asked California’s legislature for a $240 billion, 30-year cash infusion to cover its existing unfunded liability. If the pension fund also has to exit private equity, its demands for cash could grow. That would mean even less money for classrooms, along with tax and fee increases.

My money is on Calstrs (both figuratively and literally, because I’m a California taxpayer), but ultimately we need the principals to address this matter directly. Calstrs should hold a public session about its alternative investments. Sirota should attend and make his case.

(David Crane, a former financial-services executive, is a lecturer at Stanford University and president of Govern for California, a nonpartisan government-reform group. He was an economic adviser to California Governor Arnold Schwarzenegger from 2004 to 2011. Follow him on Twitter.)

To contact the writer of this article: David Crane in San Francisco at

To contact the editor responsible for this article: Max Berley at

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