Kentucky Fried Pensions is a book written by Chris Tobe who is currently auditing the Chicago Police Pension Fund because it is one of the lowest funded pensions. He was hired to investigate why it is so poorly funded and uncover any corruption.
If you want to know how corrupt public pensions are and how much is being stolen from our pensions, this is a must-read book. I believe it was self-published because the publishing industry in not interested in exposing something that shows exactly how corrupt our system is.
“The reason that Illinois and Kentucky have the most poorly-funded pension funds is that, for many years, they have only paid half of the Actuarially Required Contribution (ARC),” Tobe writes. “It stands to reason that in this ‘culture of coverup and corruption,’ state governments that would ignore the payment of only half the ARC; would look the other way when investment corruption and placement agent hiring are going on in their plans.”
Tobe is an insider who served as a Trustee on the Kentucky Retirement Systems and blew the whistle to the SEC about the corruption where pay to play placement agents are stealing millions of dollars from people’s public pensions.
My eyes lit up in the very beginning of the book where he explained many people don’t know that the FBI tapes which exposed former Gov. Rod Blagojevich trying to sell Pres. Barack Obama’s former Senate seat was a result of an investigation of placement agents who were deeply involved in public pensions.
Stuart Levine, a trustee of the Illinois Retirement Systems (TRS) - which at one point was talked about merging with the Chicago Teachers Pension Fund! - was indicted and went to prison with Blagojevich after he testified that he and Antoin Rezko “agreed to divert to Rezko and his associate $250,000 out of a $375,000 finder’s fee paid by an investment firm that received $50 million in investment funds from TRS, on whose board of trustees Levine served.”
“Rezko and Levine arranged to split among themselves and others nearly $5 million in kickbacks from six different investment firms then seeking funds from TRS and another state pension fund. Rezko and Levine also allegedly agreed to tell a seventh firm that it would only receive a $220 million allocation from TRS if it either paid $2 million to a consultant who would funnel the money evenly to Rezko and Levine, or made a $1.5 million political contribution to a certain public official.”
Hopewell Ventures, founded by David Wilhelm, Gov. Blogojevich’s former campaign chief and Bill Clinton’s 1992 campaign manager, secured a $10 million investment from TRS. One of those charged in the Levine case had demanded a $850,000 kickback from a Virginia investment firm, declaring, “This is how things are done in Illinois.”
In 2005 the Illinois Teachers’ Retirement System (TRS) barred money managers from paying finders’ fees to middlemen after the Carlyle Group, a Washington private equity firm, paid $5 million in fees to Robert Kjellander, a lobbyist. Rob was known as the ‘Pension Pirate’ and was mentioned repeatedly in Blagojevich’s charges.
A forensic audit of the Chicago Teachers Pension Fund could uncover the exact same corrupt kickbacks.
The Securities and Exchange Commission (SEC) tried to ban placement agents in 2009, but Tobe writes that the private equity industry was able to kill this regulation by pressuring the Obama administration to water down this ban.
Ultimately we pay the price - taxpayers and workers’ pensions!
“I fear that the SEC has already started to sabotage its own whistleblower program with public pensions in spring 2013 by refusing to fine Illinois officials or related vendors who worked to cover up pension liabilities from municipal bond purchasers,” Tobe wrote.
The California Public Employees Retirement System or CalPERS was able to negotiate $215 million in fee reductions from alternative asset managers. But in Kentucky only one board member supported a review and the other eight members opposed it; so Tobe commissioned an independent counsel report which was ignored by the local media.
CTPF also uses a lot of alternative asset managers. It was independent Trustee Maria J. Rodriguez, like Tobe, who pushed for a forensic audit of the Pension Fund. So far only Second City Teachers has reported on this, while Chicago’s local media that is so concerned about the city’s burgeoning pension payments has paid little to no attention.
A Forbes piece feels that there is pay to play at almost every public plan with private equity.
New York which has one of the best funded public teacher pension funds was the only state to completely ban placement agents.
“The Wall Street lobby is so strong that placement agents still run rampant, cutting backroom deals in state capitals and city halls all over the country.”
The mismanagement of the Detroit pensions by investment firms has robbed them of hundreds of millions of dollars.
Tobe quotes Ted Siedle, the public pension fund whistleblower, who said that investment expenses to outside money managers in Rhode Island may amount to $100 million annually - an amount far above the $5 million cost of conservatively indexing or passively managing the Fund’s assets.
Placement agents are middlemen who serve both as marketers for money managers and advisors. They have escaped detection for many years because they are not paid directly by the public pension funds. Placement agents tend to show up in alternatives such as hedge funds, private equity and real estate with high fees, which are not disclosed and do not go through a transparent competitive bidding process. We pay for their excessively high fees that we can’t see (which a forensic audit should uncover!).
Tobe wrote that he joined the Kentucky Retirement Systems (KRS) as a trustee in 2008 as the only one of nine board members with any investment experience.
“As an investment committee member, I immediately started asking questions about placement agents, but the staff and other trustees looked at me with dumbfounded expressions.”
At the KRS August 2009 board meeting they passed a bylaw on placement agent disclosure, and then in a secret meeting they also voted Tobe off the Investment Committee, even though he was the only trustee with investment experience. He was also threatened by placement agents who were upset that he was exposing them.
KRS has been able to use its political clout as a large pension fund to hand out millions in fees in backroom deals because they can bypass the competitive bidding process. Investment fees had increased more than 300 percent. KRS paid 66 money managers more than $56 million in 2013. CTPF today has about 75 money managers and it is difficult to determine their fees and how much money they earned.
Tobe writes that public pensions like CTPF have turned to alternative investments like private equity because they are looking for a miracle to cure their woeful underfunding.
Another area Tobe hits and one that we at Second City Teachers would like to further investigate are the investment conferences our Trustees attend around the country. Pictures of CORE and Members First Trustees under sunny skies in San Diego and Arizona adorn their social media pages. He believes these conferences serve as dating agencies between placement agents and public pension trustees.
Then there is the troubling CTPF vote to investigate investing in the corrupt TIF-funded Lincoln Yards project that the Chicago Teachers Union once protested because it used tax monies to finance high-cost housing on the Northside. Aldermen and others say our Pension Funds should invest in Chicago. However, a Stanford research report suggested public pension funds underperform on their in-state investments by 3.74 percentage points because these projects are selected more for political reasons than investment reasons. CTPF investing in Sterling Bay’s Lincoln Yard development is Exhibit A where investors are bailing because of political pressure to add more affordable housing.
The KRS Board of Trustees passed a gag order that stipulated trustees could not talk to the press. The Chicago Teachers Pension Fund also heavily censors its trustees from speaking to the press.
He noted that the American Federation of Teachers (AFT) - the parent of the CTU - started a campaign against hedge fund managers who support cutting public pension benefits. This may have spurred CORE to stop the CTPF from using hedge funds, although they do cite their draconian fees (except private equity have large hidden fees as well!).
The issue of underfunding the pensions has bipartisan components - Republicans say workers have too generous pensions, while Democrats say they need more revenue. But Tobe believes that the bigger criminals are the rating agencies like Moody’s and Standard & Poor for not uncovering the truth about the underfunding of pensions, especially in Illinois and Kentucky which are among the worst. The rating agency’s corruption was exposed in the 2008 subprime crisis when they rated subprime loans that collapsed as prime investments.
“The dirty little secret of at least fourteen states is that politicians have misled the public as both political parties have conspired to secretly borrow hundreds of billions from their pensions.”
They can do this because there are no federal regulations of public pension funds.
The underfunding of public pensions could lead to a federal bailout.
“Legislators have not been held accountable for underfunding the ARC (actuarially required contribution), thus perpetuating financial fraud on municipal bond holders and the state’s taxpayers.”
With low funded plans like in Illinois and Kentucky, you cannot invest your way out of this, Tobe writes. Moving to riskier assets does little in this situation except create liquidity issues and increased fees. He noted the best funded Ketucky pension fund uses low-cost index funds while the under-funded KRS sends $50 million in fees from no-bid contracts to its Wall Street hedge fund and private equity pals.
He writes exactly what we reported on earlier concerning the Tier 2 crime which dramatically lowered pension benefits to state workers like Chicago teachers after 2011. The fact is people are living longer and the huge number of state workers hired during the baby boomer generation are now retiring and there are less current workers to pay into the pot.
“The underlying demographics are the reason why cutting benefits to new employees has barely moved the needle in twenty years.”
What he wrote 10 years ago still stands true today. The Tier 2 scam cannot hold up in court today because of the diminished pensions and even switching to 401ks (not a regular pension) is just a more drastic version of cutting people’s pensions but does little to move the needle on liabilities for many years.
“No matter how much you deprive future faceless employees - make them work to age 95, give them pitiful 401(k)’s - it does absolutely nothing for the current pension and retiree health liability.”
The Kentucky mainstream media do not want to report on this hard reality for fear they will lose access to angered government officials who they need for information.
If you give politicians three choices - raise taxes, fire teachers or screw pensions - they will pick screw pensions every time.
“There are no magic solutions.”
Tobe writes that the plan should be to get back to fully-funded public pensions in 30 years by paying the ARC, which will include spending cuts and tax increases of about $1 billion per year. An RFP (request for proposal) process for the hiring of money managers could also lower investment costs. The whistleblower laws should be improved to help curb corruption, transparency laws passed and legal action taken against money managers and placement agents who have lost millions in public funds.
“KRS staff seems more concerned with maintaining friendships with their money managers than with saving the taxpayers from exorbitant management fees.”
CTPF - are you listening?
Every state has issued bonds for long-term projects, but almost all states have constitutions that prohibit them from borrowing for general operating expenses. One trick done extensively by Illinois, Kentucky and many other states is to underfund their pensions, which is the same as borrowing. These types of deals involve the governor, legislative leaders and the teachers union, he writes.
“They are debt to cover debt.”
Tobe noted that Illinois had to increase corporate taxes which allowed Indiana with well-funded public pensions to raid businesses.
“Once a system gets below 60% funded, it is tough to turn the tide.”
CTPF is 45 percent funded.
https://www.amazon.com/Kentucky-Fried-Pensions-Cover-up-Corruption/dp/1483964752
So, how do you order the book
JIm