Alternative investments or hedge funds line the pockets of the well connected, not the public sector retirees that invest in them. Politicians like alt investments because they connect them with the monied class. I like the idea of investing public sector pension money in risk free Treasuries. But the Federal Reserve’s zero percent interest rate policy has made that impossible. For one it would unmask the real unfunded liabilities. San Jose, CA has the highest income per capita and is drowning in pension debt. Does anyone see a problem here? Al-Jazeera America reports here.
Andy Paul, 32, works as a library assistant for the city of San Jose, Calif., supervising circulation at the Willow Glen branch. In 2013, he earned $48,000.
If a measure to cut pensions for city workers is ultimately upheld in court, Paul and San Jose’s 6,868 other employees will either have to pay an additional share of their salaries toward their pensions (up to 16 percent) or receive less-generous benefits upon retirement. “I feel disrespected,” Paul says. “Many of my co-workers have decided to stop working for the city.”
The city’s political leaders say the pension cuts are a necessary step to save San Jose from bankruptcy. The Silicon Valley city spends one-fourth of its $1.1 billion budget on pensions and retiree health care. To help meet those costs, say officials, San Jose has cut more than 20 percent of its staff since 2009. Many libraries that used to be open six days a week are now open four, while fire and police departments have shrunk, pushing up response times.
But experts and an Al Jazeera examination of the city’s two pension funds suggest that the San Jose’s investment strategy — shifting money from stocks and bonds to high-risk, low-transparency “alternative investments” such as private equity, hedge funds and real estate — may be a bigger factor in the financial crunch.
“The missing link in debates about pension reform is poor investment performance,” says Edward Siedle, president of Benchmark Financial Services and a former attorney with the Securities and Exchange Commission. “San Jose’s officially reported 2012 and 2013 performance was absolutely atrocious. Any discussion about the unsustainability of benefits must come after discussion of radical market underperformance.”
In the aftermath of the 2008 financial crisis, 48 states have passed legislation to reduce benefits for new workers. A handful of state and city governments, with Rhode Island and San Jose the most prominent examples, have cut benefits for current employees. Rhode Island has also come under fire for its foray into alternatives. Those investments, meanwhile, make up a growing proportion of public pension-fund portfolios nationwide.