My proposal is simple. I am surprised to be the first to offer it.
Indiana’s Public Retirement System (INPRS), according to its most recent Comprehensive Financial Report, paid Wall Street and international denizens of finance $106.48 million in investment management fees for fiscal year 2012. As a civic-minded Hoosier, I hereby offer to manage those same funds for just $5 million per year – a savings of over $100 million.
Now, I know there will be skeptics who will ask with a sneer, “How can you compare your knowledge of the markets with the best and brightest on Wall Street?” They will be right; my understanding of international currency exchanges, complex hedging strategies and the inverse correlation between bond prices and yields pales in comparison to the Ivy Leaguers who annually pull down multimillion-dollar bonuses.
I would ask you to compare the results. Again, during FY 2012, INRPS paid those financial wizards $106.48 million for their market “expertise,” and our public pension funds suffered a total loss of $191.55 million in net assets, or about 0.7 percent. If I had invested those same assets in an exchange-traded fund that tracked the performance of the S&P 500 (which I could have purchased for $7 on Scottrade), our pension funds would have generated a market gain of about $75 million, or 0.3 percent.
True, this would have been slightly lower than the 0.7 percent market gain generated by the Wizards of Wall Street. However, it must be remembered that INPRS actuaries assumed a 6.75 percent annual growth rate.
As a result, the unfunded liability of the combined state employee and teachers pension funds actually increased by almost $1.3 billion last year – raising the current shortfall to over $16 billion.
Therefore, the difference between a 0.7 percent and 0.3 percent returns is a mere rounding error in the grand scheme of things. So why pay to sit at Wall Street’s high rollers table when I can achieve nearly the same payout playing the penny slots?
Others may point to these figures as justification for ditching public pensions altogether and moving state employees and teachers into the same type 401(k)-styled defined contribution system offered to those employed in the private sector. I have made the same argument to state legislators for several years to no avail.
Our political leaders, though, seem committed to the notion that if we just keep pulling that Wall Street lever enough times, the stock market will eventually bail them out and cover the lavish retirement benefits they have promised to state employees.
But rather than sending millions of dollars out of our state each year, let’s pay a Hoosier citizen (me) a small pittance of that amount.
Just think of all the great things our political leaders could do with the savings.