State Pension System Underfunded Because of High Risk Investments (w/high fees to firms)
If you have a mutual fund (such as in a retirement account) and you left it in place during the length of the Great Recession, you would find today that it is probably higher in value than it was before the Recession started. While it would have been nice to see higher gains, at least most people who played it conservatively have not lost money.
Now, let's take a look at the PA. State Employee Pension Fund. It was well-funded before the Recession, but now it is severely underfunded. According to a recent two-part article by a Phila. Inquirer Business Reporter, the reason is because the Board made bad investments in real estate, venture capital funds, corporate buyouts, and hedge funds. Many of those investments earned high fees to the investment firms that were selected, but lost money for taxpayers.
He provides an example of $250 million of state pension funds given to Tiger Asset Management. Tiger bet heavily on the price of gold and lost. However, the firm still made $10 million of fees from the state on that bet.
http://www.philly.com/philly/columnists/joseph-distefano/20130915_PhillyDeals___A_real_mistake__on_Pa__workers__retirement_plan.html
http://www.philly.com/philly/columnists/joseph-distefano/20130916_PhillyDeals__Pa__retirement_system_makes_a_real_estate_bet.html
http://www.philly.com/philly/blogs/inq-phillydeals/Pa-state-pension-plan-tries-real-estate-hedge-funds-to-fill-gap.html
Excerpt:
"The $25 billion Pennsylvania State Employees' Retirement System, chaired since 1992 by former State Rep. Nicholas Maiale, D-Phila., was solvent on paper as recently as 2007, but now has less than 60 cents invested for every $1 it expects it will have to pay current and future retirees. How do the political appointees on its Board of Trustees plan to cope? With higher taxpayer contributions -- which is why no-new-taxes Gov. Tom Corbett has called SERS a "tapeworm" -- but also with more of the same kind of illiquid private investments that have been a hallmark of SERS under Maiale."