From aiCIO Magazine's June Issue: Editor-in-Chief Kip McDaniel offers a look at the struggles of US public pension funds--and an understanding of how we got here.
To see this article in digital magazine format, click here.
I had wanted to see San Bernardino, but not necessarily out of a desire to visit the county’s pension management team. No, I had wanted to go to the Inland Empire of California since I read, years ago, Joan Didion’s tale of desperation, loathing, affairs, and murder in mid-1960s San Bernardino. Yet these vastly different reasons converged in late April when I drove east from Los Angeles.
Before I took that drive, a friend reminded me of Didion’s opus—Some Dreamers of the Golden Dream—by sending me its opening passage:
“This is a story about love and death in the golden land, and begins with the country. The San Bernardino Valley lies only an hour east of Los Angeles by the San Bernardino Freeway but is in certain ways an alien place: not the coastal California of the subtropical twilights and the soft westerlies off the Pacific but a harsher California, haunted by the Mojave just beyond the mountains, devastated by the hot Santa Ana wind that comes down through the passes at 100 miles an hour and whines through the eucalyptus windbreaks and works on the nerves. October is the bad month for the wind, the month when breathing is difficult and the hills blaze up spontaneously. There has been no rain since April. Every voice seems a scream. It is the season of suicide and divorce and prickly dread, wherever the wind blows.”
Didion’s story of San Bernardino revolves around a murder of a husband by a wife, of a woman drugging a man before faking an automobile accident and burning him to death for insurance money and extramarital lust. Of course, the story is about much more than that. It is about a culture that subjugates meaning to material goods, of a society unmoored. Didion can’t have known—or perhaps she could have, and did—that this problem would persist and spread. If her San Bernardino was about deceit and desire, what used to be this county’s problem is now the country’s. What was once murder for money and lust is now a national bankruptcy, the result of promising something without intent to pay, of wanting something without sacrifice.
I speak, of course, about the public pension issue, and it is with this in mind that I travelled to San Bernardino to see Donald Pierce and James Perry, two bright lights in the rather dim atmosphere that encompasses this topic. The cause of this problem has nothing to do with these two former military men—or, for that matter, other pension investment teams that dot the American landscape. Instead, for years there has been an unholy alliance between two groups—public-sector unions and politicians—that has led us to our current place. One group has asked, the other has acquiesced, both knowing that the bill for those demands would not come due on their watch. Unions currently receive more of the blame—Governor Chris Christie of New Jersey rails against them with a rabidity regularly reserved for soapbox preachers and war protesters. But what the governor often fails to mention is that for decades his state’s politicians agreed to the union’s demands and then failed to uphold their end of the bargain by refusing to contribute the agreed-upon amount.
This marriage of convenience has endured through both Republican and Democratic waves; it knows no party allegiance. I must also stress that this is not nostalgia. This is, if anything, anti-nostalgia. These problems were not sown in the past decade. They were not sown by Masters of the Universe and LBO specialists of the 1980s. There has been no one time where everything was good, where people always paid their way, and all promises were kept. That time never existed. This problem, this creeping concern, has taken decades to unfold.
I went to San Bernardino to find part of the solution. If the conventional wisdom among the general population is that public pensions will bankrupt America, the conventional wisdom among those who know pensions is that there are asset management solutions that can be executed in order to limit the damage. What I wanted to find was a team that epitomized this challenge, a team with limited resources, a typically American governance structure, and with normal pension backgrounds—but that still insisted upon trying to mitigate the havoc wrought by the pathetic interplay that caused the problem. With Pierce and Perry, I found it. Amidst the depressing narrative of decline and fall, you can read about their efforts—and the efforts of a few other public pensions that are marching alongside the likes of Pierce and Perry in this search—in our multi-part cover story on page 28.
We’ve covered this topic before, tangentially. Our spring 2011 issue—for which we were a Neal Award finalist for “Best Single Issue” of a business-to-business magazine—had a towering Michael Bloomberg on the cover. “Can NYC’s Most Celebrated Citizen Revolutionize Its Pension System?” it asked. The answer, one year on: No. While change has happened at New York City’s pension system, that change is only at the margin. A revolution, it is not.
New York’s problems are largely structural. Its governance is messy. If a professional investment board excludes well-intentioned but inexperienced retirees, then New York City, to be blunt, is not as professional as it could be; if a professional governance structure is simple, New York City is again not as professional as it could be. Harsh, but fair. Indeed, based on watching the New York fund operate—and meeting the extremely capable people running the investment side of the equation—I have largely given up on the idea that American public plan governance will change. Having a Canadian-style Crown Corporation structure—which largely removes politics from pensions—is but a pipe dream down here. Thus, I—and aiCIO—have chosen to largely remain focused on what can be done.
On the flight back from San Bernardino, I watched the Oscar-nominated film The Iron Lady. An early scene portrays the British union strikes of 1974, garbage piled high on the streets of London as soon-to-be Conservative Party leader Margaret Thatcher expectedly slams the unions’ motives and demands. In America—with all respect to Lady Thatcher—it is not the unions. It is not politicians. It is instead the potent mixture of these two, combined with a general sense that what we need now can be paid for by others later, that has lead us into this situation. Only when we acknowledge this fact—and also are attuned to the small pockets of competence that exist in places like San Bernardino’s pension fund—can we address the problem that Didion so astutely diagnosed in that ignoble murder in San Bernardino five decades ago.