Editorial: Some Dreamers of the Golden Dream

From aiCIO Magazine's Fall 2011 Issue: Editor-in-Chief Kip McDaniel on the public pension uproar.  

To see this article in digital magazine format, click here.  

Joan Didion, in the 1966 article from which the title of this comment is plagiarized, wrote of a California outside the mainstream, of “not the coastal California of the subtropical twilights and the soft westerlies off the Pacific but a harsher California, haunted,” where “the future always looks good in the golden land, because no one remembers the past.” The drive from San Francisco to Sacramento to meet with CalSTRS’ CIO Chris Ailman reminded me of Didion’s desperate imagery—although what I encountered there was quite the opposite of a haunted land sans memory.

Ailman and his colleagues remember quite well, in fact, the criticism that public pension funds received this past year. Both politicians and, more surprisingly, asset managers have lambasted public pension benefits in some form or another. Blackstone chief strategist Byron Wien famously stated that taxpayers “literally can’t afford the benefits we have given our retirees in state and local governments and we have to change that” and, regardless of the claim’s veracity, Ailman and other CIOs resent such statements—especially in light of the stellar returns seen at public funds across the country. According to the Wilshire Trust Universe Comparison Service, the fiscal year ending June 30 saw American public plans outperformed both their corporate and endowment peers, bringing in an average 21% return. One year does not a model make, but such quantitative measures throw some amount of cold water on the heated rhetoric surrounding public sector benefits.

In truth, the problem was never the investment side of the equation. It can be argued that it wasn’t even on the benefits side of the equation. Instead, the problem lies with those willing to promise something and then complain about it. The early spring laments over government worker benefits foreshadowed, in hindsight, the July debate in Congress over the debt limit. Lost amidst Washington’s clamor was the fact that the politicians had already spent the money; the debate was over whether the President should be allowed to pay it. Regardless of political affiliation, the debate—when put in these terms—had a hint of the absurd.

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Politicians are one thing. Managers who want to work with public plans are another. Asset managers such as Blackstone have made their millions, billions even, managing public sector money. To reap the rewards of such relationships and then turn—unofficially even, as Wien’s comments surely were—against the source of such largesse shows a ludicrous lack of common sense. One New York-based asset manager told me the story of sitting across the table from a public fund and being read the riot act over comments made by one of the firm’s analysts. The manager was incredulous that a public fund representative would do this. I was incredulous that the manager didn’t understand that the hand that feeds him might be angered by such biting.

A 20% year will not quiet the critics—and, if public pensions are truly the albatross around America’s collective financial neck that leaders such as New Jersey Governor Chris Christie believe, it shouldn’t. However, facts are a stubborn thing: Benefits have been promised, and the teams established to manage those assets have proven that they are not the less-than-stellar-investors that some anonymous commentators make them out to be. The dreamers, then, are not Ailman and other CIOs such as Joe Dear. The dreamers are the ones who think they can promise benefits without paying them, who can criticize public employees and keep doing business with them.

—Kip McDaniel 

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