GOP state leaders in Michigan are warning that they plan to find a “solution” to the problem of teachers’ pensions. This is the DeVos legislature, commanded by Republicans who salute when the DeVos family calls.
GOP state leaders in Michigan are warning that they plan to find a “solution” to the problem of teachers’ pensions. This is the DeVos legislature, commanded by Republicans who salute when the DeVos family calls.
Peter Greene, who teaches in Pennsylvania tells us about the educationally-challenged state representative who compared democratically elected school boards to Hitler. Hitler’s blamed everything on the Jews, and local school boards blame everything on charter schoools. Got that?
“Brad Roae’s district is just up the road from me and just down the road from Erie, where the schools have made some headlines with their economic issues, to the point that their board was seriously considering closing all of its high schools. Erie is one of several school districts that highlight the economic troubles of school districts in Pennsylvania. It’s a complex mess, but the basic problems boil down to this.
“First, Pennsylvania ranks 45th in the country for level of state support for local districts. That means the bulk of school district funding comes from local taxpayers, and that means that as cities like Erie with a previously-industrial tax base have lost those big employers, local revenue has gone into freefall, opening up some of the largest gaps between rich and poor districts in the country.
“Second, Pennsylvania’s legislature (the largest full-time legislature in the country, one of the most highly paid, and one of the most impressively gerrymandered) decided in the early 2000s that they would let local districts skimp on payments to the pension fund because, hey, those investments will grow the fund like wildfire anyway. Then Wall Street tanked the economy, and now local districts are looking at spectacularly ballooning pension payments on the order of payments equal to as much as one third of their total budget.
“Oh, and a side note– the legislature also periodically goes into spectacular failure mode about the budget. Back in 2015 districts across the state had to borrow huge chunks of money just to function, because Harrisburg couldn’t get their job done.
“Third, Pennsylvania is home to what our own Auditor General calls the worst charter laws in the country. There are many reasons for that judgment, but for local districts the most difficult part is that charter school students take 100% of their per-capita cost with them.
“So Erie City Schools, despite some emergency funding from the state, will run up as much as a $10 million deficit this year, with a full quarter of their spending going to charter and pension costs. Meanwhile, the legislature is trying to phase in a new funding formula (or, one might say, its first actual funding formula). This is going to be a painful process because, to even things out, it will have to involve giving some cities a far bigger injection of state tax dollars than richer communities will get. Politicians face the choice of either explaining this process and making a case for fairness and justice, or they can just play to the crowd and decry Harrisburg “stealing our tax dollars to send to Those People.” Place your bets now on which way that wind will blow.
“Oh, and that formula is supposed to get straightened out over the next twenty years!!
“Meanwhile, guys like Roae want to blame teachers and school districts. You can’t give teachers raises and benefits. If Erie (and school districts like it) want state aid, then they should cut costs and stop blaming charter schools. Meanwhile, Roae has been lauded by the PA cyber industry as a “champion of school choice.”
Roae, who graduated from Gannon in 1990 with a business degree and worked in the insurance biz until starting his legislative career, ought to know better.
“When hospitals throughout Northwest PA wanted to cut costs, they didn’t open more hospitals. If you are having trouble meeting your household budget, you do not open a second home and move part of your family into it.
“Education seems to be the only field in which people suggest that when you don’t have enough money to fund one facility, you should open more facilities. Charters are in fact a huge drain on public schools in the state. If my district serves 1,000 students and 100 leave for a charter school, my operating costs do not decrease by 10% even if my student population does. In fact, depending on which 100 students leave, my costs may not decrease at all. On top of that, I have to maintain capacity to handle those students because if some or all come back (and many of them do) I have to be able to accommodate them.”
David Sirota and a team of investigative reporters have discovered that the pension funds of teachers in Massachusetts are being tapped by Wall Street financiers to underwrite Question 2, which will authorize an expansion of non-union charter schools. Unions are spending millions of dollars to defend the public schools of Massachusetts against privatization. Meanwhile, their own pension funds are financing the campaign to increase privatization.
“When Massachusetts public school teachers pay into their pension fund each month, they may not realize where the money goes. Wall Street titans are using some of the profits from managing that money to finance an education ballot initiative that many teachers say will harm traditional public schools.
“An International Business Times/MapLight investigation has found that executives at eight financial firms with contracts to manage Massachusetts state pension assets have bypassed anti-corruption rules and funneled at least $778,000 to groups backing Question 2, which would expand the number of charter schools in the state. Millions more dollars have flowed from the executives to nonprofit groups supporting the charter school movement in the lead-up to the November vote. Republican Gov. Charlie Baker, himself a former financial executive, is leading the fight to increase the number of publicly funded, privately run charter schools in Massachusetts — and he appoints trustees to the board that directs state pension investments….
“This report is the latest in an IBT/MapLight series examining how anti-corruption laws are circumvented or unenforced. The cash flowing to the Massachusetts school initiative spotlights more than just a fight over education policy: It exemplifies one of the ways in which the securities and investment industry can get around a federal rule that was designed to restrict financial executives from giving campaign cash to governors with the power to influence state pension business.
“In the case of Massachusetts, since the federal rule does not cover money donated to governors’ policy initiatives, executives banned from donating directly to Gov. Baker are able to give to a constellation of groups that are pushing his pet cause — and that in some cases are advised by Baker’s political associates. Meanwhile, Baker’s appointees at the state pension board are permitted to continue delivering investment deals and fees to those same donors’ firms.”
The New York Times reported the crisis now gripping Chile. During the heyday of Pinochet’s love affair with free-market forces, when Chilean economists trained at the University of Chicago loved Milton Friedman’s libertarianism, Chile privatized social security.
President George W. Bush, like other conservatives, admired Chile’s solution. Eliminate guaranteed defined-benefit pump signs and direct a portion of employees’ wages to the stock market, where they were sure to win greater growth even as they fed the stock market. Bush tried to privatize Social Security, with Chile as a model of success. But now we learn that Chile did not succeed. Its privatization has been a disaster for workers.
Another epic fail for privatization.
“SANTIAGO, Chile — Discontent has been brewing for years in Chile over pensions so low that most people must keep working past retirement age. All the while, privately run companies have reaped enormous profits by investing Chileans’ social security savings.
“The bubbling anger boiled over in July when Chileans learned that the former wife of a Socialist Party leader was receiving a monthly pension of almost $7,800 after retiring from the prison police department. That figure dwarfs the average monthly pension of $315, which is even less than a monthly minimum-wage salary of $384.
“In a country already battered by widespread political and corporate corruption, this was the last straw.
“Hundreds of thousands of people marched through Santiago, the capital, and other cities to protest the privatized pension system. More than 1.3 million people, according to organizers, turned up in August, the largest demonstration since Chile’s return to civilian rule in 1990.
“One protester was Luis Montero, 69, whose monthly pension is about $150. Like many Chileans, Mr. Montero has mainly worked informal jobs without a contract at wages too meager for him to save enough for retirement. He still does maintenance work at a school to make ends meet.
“I’ve worked my entire life and I’d like to stop and rest, but I can’t,” Mr. Montero said. “I have no idea what I will do when I get older.”
“In 1981, the military dictatorship of Gen. Augusto Pinochet privatized the old pay-as-you-go pension system, in which workers, employers and the government all contributed.
“Under the privatized system, which President George W. Bush hailed as an example to follow, workers must pay 10 percent of their earnings into accounts operated by private companies known as pension fund administrators, or A.F.P.s, the initials of the term in Spanish. The administrators invest the money and charge workers a commission for transactions and other fees. Employers and the government do not make any contributions to the workers’ accounts.
“Chileans were given the option of keeping their old plan or switching to the new system. Most switched. But those entering the work force after 1981 had to invest in the privatized system. (The armed forces and the police were exempted from the change and today enjoy pensions several times higher than those available in the privatized system.)
“The money invested by the administrators bolstered Chile’s capital markets, which stimulated economic growth and yielded reasonable returns. Today six A.F.P.s — half of them owned by foreign companies — manage $171 billion in pension funds, equivalent to about 71 percent of Chile’s gross domestic product, according to the office of the supervisor of the pension funds.
“But the pioneering privatized system has failed to provide livable pensions for most retirees. If the stock market dips or investments go awry, workers’ savings and retirees’ pension checks decline.
“The pension system is unfair,” said Romina Celis, a 28-year-old teacher who marched in one of the protests. “I don’t know what formula we can use, but there has to be more state participation. We must continue protesting. The thought of reaching old age so precariously is scary.”
“Women fare worse than men do because they earn less, are more likely to work intermittently, retire earlier (the retirement age is 65 for men and 60 for women) and have a longer life expectancy.”
The Wall Street Journal reports that Randi Weingarten is taking union pension funds away from hedge funds that attack teachers’ pensions. Leading hedge funds have contributed to organizations that want to eliminate defined-benefit pensions and substitute 401k plans for them. The hedge fund billionaires have also taken the lead in funding nonunion charter schools.
Randi has pushed the investment committees of unions to withdraw their pension funds away from hedge funds that are subsidizing attacks on teachers’ pensions.
Defenders of the hedge funds say that the unions should seek the best return on their funds, without regard to the politics of the hedge fund.
Randi has the better side of this dispute. Why should teachers invest their pension funds in a company that wants to take away their pensions?
Daniel Loeb, Paul Singer and dozens of other hedge-fund managers have poured millions of dollars into promoting charter schools in New York City and into groups that want to revamp pension plans for government workers, including teachers.
The leader of the American Federation of Teachers, Randi Weingarten, sees some of the proposals, in particular the pension issue, as an attack on teachers. She also has influence over more than $1 trillion in public-teacher pension plans, many of which traditionally invest in hedge funds.
It is a recipe for a battle for the ages.
Ms. Weingarten started by targeting hedge-fund managers she deemed a threat to teachers and urged unions to yank money from their funds. Then she moved to Wall Street as a whole.
Her union federation is funding a lobbying campaign to eliminate the “carried-interest” tax rate on investment income earned by many money managers. It is trying to defeat legislation that would increase the charitable deduction in New York state for donations to private schools. And it has filed a class-action lawsuit accusing 25 Wall Street firms of violating antitrust law and manipulating Treasury bond prices.
‘Given your strong support…for an organization which is leading the attack on defined benefit (DB) pension funds around the country, I was surprised to learn of your interest in working with public pension plan investors.’
—Randi Weingarten, in March 15, 2013, letter to hedge-fund manager Daniel Loeb
Some pension funds have withdrawn money from hedge-fund managers criticized by the teachers union. And some hedge-fund managers stopped making donations to advocacy groups targeted by Ms. Weingarten.
Hedge funds, reluctant to buckle to the pressure, say Ms. Weingarten is doing a disservice to the teachers she represents, because funds should aim solely to earn the highest possible return on their assets. The personal beliefs or donations of hedge-fund managers, they argue, shouldn’t be a factor in that decision. At least one manager, Mr. Loeb of Third Point LLC, has increased his donations to a charter-school group, citing Ms. Weingarten.
Sander Read, chief executive officer of Lyons Wealth Management, which hasn’t been targeted, likened what Ms. Weingarten is doing to “hiring a dentist because of their political beliefs. You may see eye to eye on politics, but you may not have great, straight teeth.” None of the hedge funds targeted by the teachers unions would discuss the matter publicly, a sign of how sensitive the battle has become.
Ms. Weingarten said in an interview: “Why would you put your money with someone who wants to destroy you?”
The battles are rooted in a political fight over how to improve public education. Republicans have long sought major changes, such as creating new competition for public schools, including charter schools. Democrats largely have supported solutions backed by the unions, particularly increased spending for existing schools.
About a decade ago, some liberals joined conservatives in pushing to expand charter schools. Those efforts received financial support from hedge-fund managers including Mr. Loeb, Mr. Singer of Elliott Management Corp. and Paul Tudor Jones of Tudor Investment Corp., who together kicked in millions of dollars.
Some of those involved in the effort cast public-school teachers and their unions as obstacles to improving education. The reputation of the teachers union took a beating.
When Ms. Weingarten was elected president of the American Federation of Teachers in 2008, she aimed to restore public trust in public-school teachers and their unions.
As she rose in the union, she got close to Bill and Hillary Clinton. Last summer, the federation became the first union group to endorse Mrs. Clinton’s presidential campaign. Ms. Weingarten sits on the board of the super PAC supporting her candidacy, and the American Federation of Teachers has donated $1.6 million to the Bill, Hillary and Chelsea Clinton Foundation.
Ms. Weingarten’s federation represents about two dozen teachers unions whose retirement funds have a total of $630 billion in assets, a big chunk of the more than $1 trillion controlled by all teachers unions. The federation doesn’t control where that money is invested; the unions themselves do. But Ms. Weingarten can make recommendations.
She instructed investment advisers at the federation’s Washington headquarters to sift through financial reports and examine the personal charitable donations of hedge-fund managers. She says she focuses on groups that want to end defined-benefit pensions. Many of the same entities also back charter schools and overhauling public schools.
In early 2013, the union federation published a list of roughly three-dozen Wall Street asset managers it says donated to organizations that support causes opposed by the union. It wanted union pension funds to use the list to decide where to invest their money.
The Manhattan Institute for Policy Research, a think tank that supports increasing school choice and replacing defined-benefit pension plans with 401(k)-type plans for future government employees, is one of the groups to which donations were viewed unfavorably.
Lawrence Mone, its president, says the tactics amount to intimidation. “I don’t think that it’s beneficial to the functioning of a democratic society,” he says.
After KKR & Co. President Henry Kravitz made the list in 2013, Ms. Weingarten got a call from Ken Mehlman, an executive at the private-equity firm and former chairman of the Republican National Committee.
Mr. Mehlman said KKR had a record of supporting public pension plans, according to Ms. Weingarten.
Ms. Weingarten agreed, removed Mr. Kravitz’s name from the list and invited Mr. Mehlman to talk about the firm’s commitment to public pensions at a meeting in Washington with 30 pension-fund trustees representing 20 plans that control $630 billion in teachers’ retirement money.
When Cliff Asness of hedge fund AQR Capital Management LLC found out Mr. Kravitz had gotten off the list, he called Mr. Mehlman, a friend. Mr. Asness also hired a friend of Ms. Weingarten’s: Donna Brazile, a vice chairwoman of the Democratic National Committee who has been a paid consultant to the American Federation of Teachers.
Ms. Brazile arranged a lunch meeting between Mr. Asness and Ms. Weingarten, where they discussed ways to work together. Not long after, Mr. Asness’s firm paid $25,000 to be a founding member of a group that KKR’s Mr. Mehlman was starting with Ms. Weingarten to promote retirement security.
Mr. Asness was removed from the list. A year later, when Ms. Weingarten noticed he continued to serve on the Manhattan Institute board, she considered putting him back on.
In September of last year, when the California State Teachers’ Retirement System, or Calstrs, considered increasing its hedge-fund investments, Ms. Weingarten saw another chance to apply pressure.
Dan Pedrotty, an aide to Ms. Weingarten who runs the hedge-fund effort, spoke to a Calstrs official about Mr. Asness’s continued service on the Manhattan Institute’s board. The Calstrs official then called Mr. Asness.
In December, Mr. Asness said he would step down from the Manhattan Institute board. His spokesman says he already had made the decision at the time of the call, after reassessing time spent on the boards of several nonprofit groups.
“Randi is committed to helping hard working employees achieve the secure retirement they deserve,” Mr. Asness said in a written statement.
Mr. Loeb, founder of the $16-billion Third Point fund, has been more combative. He is a donor to the Manhattan Institute and chairman of the Success Academy, which operates a network of charter schools in New York City.
‘I can appreciate that it may be frustrating for the certain plan sponsors to invest with managers who have different political views or party affiliations, an issue they must come to terms with due to their fiduciary responsibilities.’
—Daniel Loeb, in March 22, 2013, email to union leader Randi Weingarten
In a March 2013 letter to Mr. Loeb, Ms. Weingarten noted his support of a group “leading the attack on defined benefit pension funds” and said she was “surprised to learn of your interest in working with public pension plan investors.” Seeking business from union pension funds while donating to the group, she wrote, “seem to us perhaps inconsistent.”
The two agreed to meet.
Mr. Loeb emailed Ms. Weingarten, noting his fund’s average annual return of 21% over 18 years. “I completely respect the political considerations you may have and understand if other factors dictate how funds are allocated,” he wrote.
A week later, Ms. Weingarten wrote back to reiterate that unions were wary of investing with Mr. Loeb “given the political attack on defined benefit funds.”
In response, Mr. Loeb asserted that it must be “frustrating” for unions to invest with funds that “have different political views or party affiliations.” He added: “At least we can rejoice in knowing that as Americans we share fundamental values that elevate individual opportunity, accountability, freedom, fairness and prosperity.”
The meeting was called off, and Mr. Loeb was added to the list.
At a fundraising dinner that May for his charter-school group, Mr. Loeb stood up and said: “Some of you in this room have come under attack for supporting charter-school education reform and freedom in general.” He called Ms. Weingarten the “leader of the attack” and pledged an additional $1 million in her name.
“Both Randi and I believe America’s children deserve a 21st century education, and I hope the day comes when she embraces the positive change created by public charter schools,” Mr. Loeb said recently in a written statement.
In late 2013, state union officials pressed a Rhode Island pension fund to fire Third Point. The following January, the pension fund did just that, pulling about $75 million from Mr. Loeb’s fund. A spokeswoman for the state treasurer said at the time that Mr. Loeb’s fund was too risky.
Roger Boudreau, a member of the teachers union and an elected adviser of the Rhode Island fund at the time, says the donations played a role. “It’s fair to say that those kinds of donations are going to be looked at very critically,” he says.
Around that time, a giant billboard appeared above Times Square. “Randi Weingarten’s Union Protects Bad Teachers,” it read above a picture of her scowling face.
Ms. Weingarten immediately assumed the hedge-funders were behind the attack. The entity listed as the billboard’s sponsor is the Center for Union Facts, a Washington-based advocacy group. The group declines to disclose who paid for the billboard.
“We all guessed it had to be people like Dan Loeb,” Ms. Weingarten says. Mr. Loeb declined to comment.
The billboard kicked off a campaign against Ms. Weingarten by the Center for Union Facts, including radio and newspaper advertisements. “She’s the head of the snake, so it was appropriate to go after her personally,” says the group’s president, Richard Berman.
The ads directed people to a website that said she oversaw a “crusade to stymie school reforms and protect the jobs of incompetent teachers.” It listed her salary and called her a “member of the elite.”
In September 2014, Mr. Berman sent a 10-page letter to lawmakers, union officials and opinion leaders charging that Ms. Weingarten‘s “ineptitude is a threat against America, against hard-working teachers, and especially against our nation’s children.”
Lorretta Johnson, secretary-treasurer of the American Federation of Teachers, responded in a letter to union leaders that Mr. Berman represented a “front group whose mission is to vilify and destroy unions.”
The Center for Union Facts, led by Richard Berman, is a rightwing, virulently anti-union public relations firm that specializes in demonizing unions; it has also defended the tobacco industry against critics.
New York magazine reports that activists are succeeding in persuading public pension funds to drop out of hedge fund investments.
The pension fund trustees have included that these investments are a bad risk. Their decision making was influenced by an activist group called the Hedge Clippers, which was created by the AFT to embarrass the hedge fund managers.
Part of the anger towards the hedge funds results from their heavy investment in Puerto Rico bonds and their public relations campaign to stop Congress from allowing Puerto Rico to get bankruptcy protection. Certain hedge funds bought Puerto Rico’s bonds at a deep discount and now hope to make billions by getting paid in full. They have been running slick commercials on television featuring a Puerto Rican woman who says she will lose her life savings if Congress allows Puerto Rico to find a solution other than paying the bondholders in full.
Paying the bondholders in full will mean bankrupting the Puerto Rican economy, closing its schools and social services, but paying the hedge funds the face value of the bonds they bought at a deep discount.
Just five days before New Yorkers went to the polls in bitterly contested presidential primaries defined by the widespread sense among voters that Wall Street is indeed “rigged,” the New York City Employees’ Retirement System, or NYCERS, where Garrido is a trustee, voted to pull its money out of all hedge funds. That amounts to about $1.5 billion, or 3 percent, of a $50 billion pension fund.
The perception that hedge funds are a raw deal for everyone but their fee-fattened managers has not only become mainstream with astonishing speed, it has begun to pose a threat to an industry that pretty recently seemed to be on top of the world. The move by the pension for the largest municipal employees union in the U.S., representing 100,000 New Yorkers, to get out of hedge funds is the latest sign that the near $3 trillion hedge-fund industry has peaked, with global assets now slightly lower than they were in 2014, as investor redemptions hit $15 billion after last year’s poor performance. NYCERS was following the lead of another bellwether entity, the $300 billion California Public Employees Retirement System, which exited hedge funds more than a year ago.
But NYCERS pulling its money out of hedge funds is perhaps best read as the biggest victory yet for a burgeoning anti-hedge-fund movement that is fueled by widespread anger at economic inequality and argues for divestment on a wide variety of grounds — most notably right now that prominent hedge funds are squeezing Puerto Rico for debt payments, even as the island spirals deeper into economic depression. At the forefront of that protest effort is a group called Hedge Clippers. About a year ago, the American Federation of Teachers created the organization in response to anti-union efforts and other conservative political actions by various hedge-fund titans. For months the group has been lobbying public pension funds — including NYCERS — to get out of the investment vehicles. Last November, Hedge Clippers published an AFT report showing that 11 big public pension funds that have invested in hedge funds would have done better elsewhere. New York City public advocate Tish James, a NYCERS trustee, gives some credit to Hedge Clippers for the decision to divest. The group’s arguments reached “the minds of a number of individuals who want to be conscious about our public investments,” she says, and likens its efforts to the 1980s campaign to pull money out of apartheid South Africa.
Following on the heels of New York’s move, Hedge Clippers met with Ohio public-pension-fund execs to make its case, and it plans to take its battle to college campuses next, where it hopes to win over liberal-leaning universities, which have invested a huge chunk of their endowments in hedge funds, including those run by the moguls who are their alumni. “We feel confident that more pension funds are going to divest,” says Stephen Lerner, a former organizer with the Service Employees International Union and one of the key architects of Hedge Clippers.
This all comes at a time when many hedge funds have experienced their worst year since the crash of 2008, following a string of disappointing ones. Last spring, New York City Comptroller Scott Stringer (also a NYCERS trustee) released the devastating report that made Garrido so angry: He found that private equity, real-estate, and hedge-fund assets had cost the city’s pension system $2.6 billion in lost value over the prior ten years, in large part due to the hefty fees they charged. Then, in 2015, NYCERS’s hedge-fund portfolio lost 1.88 percent, lagging behind both the S&P 500 and key bond indexes.
The explosive growth of hedge funds — they had one-sixth as much money under management at the turn of the century as they do today — was fueled in no small part by public pensions like NYCERS handing them huge sums of money. Those billions helped transform what previously had been a boutique investment for the Über-rich into an institutional asset class where management fees of 2 percent of the money under management and 20 percent of the investment returns created a slew of hedge-fund billionaires. Even in years their funds lost money or barely broke even, some managers earned hundreds of millions off management fees alone. Castles sprouted up on the Connecticut shore. World-class art collections were assembled. Historic fortunes were made.
Financed largely by the AFT and a few philanthropic foundations, Hedge Clippers has quickly morphed into a coalition of more than a dozen labor, civil-rights, environmental, and progressive community groups expanding to ten states and Puerto Rico with a stated mission of “unmasking the dark money schemes and strategies that the billionaire elite uses to expand their wealth, consolidate power and obscure accountability for their misdeeds.” The group’s top dozen organizers work out of the offices of their respective organizations, primarily in Washington, D.C. and New York, mobilizing through a Google listserv. The group protests a variety of issues, some more comprehensible than others: They interrupted investment conferences in New York City, alternately demanding Starboard Value’s Jeff Smith institute a $15-per-hour minimum wage for his fast-food workers at the Olive Garden and blaming Larry Robbins of Glenview Capital for causing cancer by investing in Monsanto. Still, the group knows it’s riding the zeitgeist.
To some extent, the anti-hedge fund movement has its roots in Occupy Wall Street. Lerner, who has been a leading labor political strategist for decades and is now a fellow at Georgetown University, was also involved in that movement. He says the new, laserlike focus on hedge funds grew from seeing billionaires like GOP donors Paul Singer and Dan Loeb battle unions on public education and taxes. When Hedge Clippers shone a light on investments by billionaires Julian Robertson and Steve Cohen in drug company Gilead, which has priced a hepatitis-C-virus drug out of reach for many, that brought AIDS activists and civil-rights groups into the anti-hedge-fund cause.
In New York state, the anti-hedge-fund activists have also hooked up with a group called “Patriotic Millionaires” — which includes some hedge-fund and private-equity managers — in an effort to kill a tax break that allows these managers to pay a lower tax rate on income they earn from managing other people’s money. A bill to abolish the so-called “carried interest” loophole is currently working its way through the New York Senate.
To be sure, hedge funds aren’t going away. The biggest fund, $104 billion Westport, Connecticut–based Bridgewater Associates, which runs an opaque black-box strategy, grew 16 percent last year despite lackluster returns, according to a recent survey by data provider Hedge Fund Intelligence. Funds that are $5 billion or greater in size continue to dominate the industry, and those tend to have fee structures that allow them to survive sizeable redemptions. Moreover, the decade-long boom has made it possible for many hedge-fund billionaires to keep the doors open with just their own wealth if it comes down to that.
But the industry can’t ignore the winds of change. “The pressure on institutional investors to reduce, or abandon, their exposure to hedge funds is growing,” placing the industry at a “tipping point,” says HFI managing editor Nick Evans. Hedge funds will have to deliver results for investors that are not achievable elsewhere to justify their high fees, he says. Between 1990 and 2000, hedge funds had average annualized returns of almost 20 percent, but those days are long gone. “Out of maybe 10,000 hedge funds, only 1 percent are worth their fees on a net basis,” says Michael Hennessy, managing director of Morgan Creek Capital Management, which invests in hedge funds. “There are a lot who are not worthy and should go away.”
To survive, hedge funds will also have to confront the new political reality that has taken hold, as their politics and their investments become more closely scrutinized, thanks in no small part to Hedge Clippers. Nowhere is this clearer than in the case of NYCERS, whose divestment was partly motivated by its hedge funds’ role in the Puerto Rican debt disaster that is still unfolding. Last year, the pension fund learned that at least three of the hedge funds in its portfolio (D.E. Shaw, Brigade Capital Management, and Fir Tree Partners) were among the many that own about 30 percent of Puerto Rico’s outstanding debt. Hedge funds bought into a $3.5 billion junk bond offering in 2014 and swooped in to buy more as prices sank last year.
When Puerto Rico said it might default on its $72 billion debt last summer, Hedge Clippers hammered on the hedge fund connection and staged a protest in front of the office of one of the biggest hedge-fund owners of the debt, BlueMountain Capital. The crisis hit home for the NYCERS retirees as hedge funds pushed Puerto Rico to cut public services and lay off government workers to avoid default. Thousands of those workers are members of AFSCME (American Federation of State, County and Municipal Employees) — the same union that represents NYCERS retirees.
Puerto Rico, now facing a 45 percent unemployment rate, has since devolved into a humanitarian crisis, with power outages and shuttered hospitals as the Island Commonwealth has been unable to push bankruptcy legislation or debt relief through the U.S. Congress. Instead, the bondholders have launched a massive lobbying and advertising campaign accusing Puerto Rico of profligacy and demanding it pay up. The developments nudged NYCERS toward pulling its money. “A significant number of NYCERS retirees are Puerto Rican, and if they were to know we were investing in hedge funds that had a [negative] financial impact on Puerto Rico, they would support the divesting from those hedge funds,” says Tish James.
Last November NYCERS appealed to the hedge funds to help solve the Puerto Rican crisis. When that failed, trustee Garrido — who had previously complained that hedge funds’ high fees combined with lousy returns were a “rigged system” — went on the attack at a December 3 press conference on Capitol Hill. As Latino political activists pressed Congress for help, he criticized hedge funds for profiting from the economic crisis while demanding austerity policies that hurt the island’s working class. Four months later, NYCERS voted to dump its hedge-fund investments.
Howard Blume reports that charters in Los Angeles are trying to avoid the cost of paying pensions by advising teachers who near retirement age to go to work for the public school system.
His fascinating story begins:
“A Woodland Hills charter school recently made an unusual offer to its veteran teachers: We’ll give you $30,000 if you return to the Los Angeles Unified School District before you retire.
“It wasn’t the teachers that El Camino Real Charter High School wanted to get rid of. It was the cost of their retirement benefits.
“The school’s cost-shifting strategy is one of many flashpoints between traditional public schools and the independent charters they compete with for students and money.
“In this case, it’s a battle over who should pay for an employee’s health benefits after retirement — the charter school or the larger school district.
“Financial challenges are all-but-universal in the education world, and retiree benefits are particularly costly. L.A. Unified’s unfunded liability for employee benefits has escalated to $13.6 billion.
“The El Camino plan would add from $2.5 million to $4.2 million to that deficit, based on district estimates. The idea is that teachers would spend their careers in the charter school, but later transfer to LAUSD to qualify for the huge institution’s retirement benefits.
“Except the district has decided not to play ball.
“Teachers who return to the district, simply to retire, are not entitled to district retirement benefits, general counsel David Holmquist said.
“This would be an obligation that in my view would be the charter’s responsibility,” Holmquist said.”
Blume points out that this decision raises interesting questions about Eli Broad’s plan to open 260 new charter schools, which will require some rethinking when they can’t dump their pension obligations on the public schools.
Guess Eli’s charters will have to stick with Teach for America, whose teachers are usually long gone before qualifying for a pension.
Pasi Sahlberg, author of “Finnish Lessons,” teacher, scholar, and defender of childhood, won the LEGO prize for his work in fighting the global effort to standardize children and crush the joy of learning. The award comes with a gift of $100,000.
He certainly belongs on the honor roll of this blog for his tireless efforts to present a vision of what real education is and how to make it happen.
“Former schoolteacher and current scholar and author, Finnish Pasi Sahlberg, wins the LEGO Prize 2016 for his work to improve the quality of children’s education worldwide. Hanne Rasmussen, CEO of the LEGO Foundation, presented the prize at the annual LEGO Idea Conference. The prize is accompanied by a cash award of USD 100,000 to support further development of quality in children’s learning.
The LEGO Foundation has taken on the ambition of re-defining what we mean with play and its role in learning, and of re-imagining how we best stimulate children to learn. This ambition is shared by Pasi Sahlberg, who believes that testing alone is the wrong way to quality education.
“Today, curiosity, creativity and ultimately genuine learning are at risk anywhere high-stakes testing, Big Data and punitive accountability are the dominant drivers of what teachers and students do in schools. This is a direct consequence of the current global education reform movement. Schools around the world have become places of standardized routines that aim at predetermined attainment targets in the name of improving competitiveness. Our children are therefore subjects of frequent assessments and tests that measure and divide them based solely on how they perform on these external expectations,” says Pasi Sahlberg.
Society needs creative and lifelong learners
These days, the LEGO Idea Conference hosts 300 academics, practitioners and representatives from educational organizations, who will discuss what quality learning is and how it can be put into action. According to Hanne Rasmussen, CEO of the LEGO Foundation, Pasi Sahlberg is a forerunner when it comes to improving the quality of children’s education worldwide.
The LEGO Foundation said in its announcement:
“Pasi Sahlberg wins the LEGO Prize 2016 for his enormously dedicated work to improve the quality of children’s education globally. Pasi Sahlberg is a forerunner in the efforts to ensure quality in children’s learning, which he believes must build on the natural curiosity and collaboration between children. The LEGO Foundation shares this view. A child’s inherent ability to play is paramount in the early years and a catalyst for learning competencies that prepare the child for formal education, creativity and learning. Quality learning supports a respect for children’s playfulness and does not only focus on curriculum that mirrors later educational experiences.,” says Hanne Rasmussen.
“The LEGO Foundation believes that learning through play is essential in children’s learning and development. The LEGO Foundation has taken on the task of re-defining what we mean with play and its role in learning, and of re-imagining how we can stimulate children to learn. Skills like problem solving, creativity, empathy, communication and teamwork are all rooted in play, which involves a constant process of “try, fail and try again” – helping children to develop and fine-tune the creative and critical thinking skills.
“The mission of the LEGO Foundation is to inspire and develop the builders of tomorrow. The aim is to build a future where learning through play empowers children to become creative, engaged lifelong learners.
“The LEGO Foundation focuses on children aged 0-12 with a special emphasis on early childhood. This is the period when children develop most rapidly and when play is instrumental in building skills essential for the rest of their lives. As documented by several studies, investing in early childhood provides exceptional returns for the individual child and for the society, as it will lead to less crime, higher high school graduation rates and higher incomes.”
Superstar principal Troy La Raviere in Chicago steps back to assess the deadlock between the mayor and the Chicago Teachers Union.
He recalls a recent conversation with Paul Vallas. He writes:
“I’m not an admirer of his education policy, but Vallas was the last Chicago Public Schools CEO to leave the district with a structurally balanced long-term budget. He also left CPS with a fully funded pension system, and over $1 billion in reserves. When Vallas returned to Chicago this past August, I was fortunate enough to have an hour-long conversation with him a few days before we both participated in a panel at the City Club of Chicago. During our conversation—and during the panel—Vallas outlined the financial rules that kept CPS budgets balanced during his tenure. Those practices included the following:
“He did not add programs without identifying additional revenue to pay for them.
“He did not borrow for operational expenses.
“He did not spend on new schools when there was declining enrollment. Building new schools should be based on demographics, not school reform ideology.
“He did not redirect funding for pension payments toward other spending projects.
“After Vallas’ departure, the mayor’s appointees to CPS lost all fiscal discipline and consistently violated every one of these sound budgeting practices. As a result of their mismanagement, CPS now claims they need “shared sacrifice” from teachers. Teachers union officials don’t seem to have the kind of consistent and concise messaging the Mayor’s office has, so the average news consumer may not notice that within CTU’s response are the keys to solving CPS’ fiscal crisis. I will take the liberty of fine-tuning CTU’s message and speaking as the Chicago public school teacher and union member I once was, before becoming an administrator nearly a decade ago.”
LaRaviere then describes what is necessary to fix the budget. And he identifies who must share in sacrificing to put the system in a sound financial footing.
Here is a hero. Dr. Randy Weick, a high school history teacher in Kentucky with a degree from the London School of Economics, has filed a class action suit against some of the nation’s largest investment firms for the danger they have inflicted on the pensions of Kentucky teachers.
A columnist in Forbes writes that Wieck has taken on “the titans of private equity”:
Wieck has filed a class action lawsuit in the United States District Court of the Western District of Kentucky claiming that mismanagement of the investments of the Kentucky Teachers Retirement Systems (KTRS) has resulted in the worst-funded state teacher plan in the U.S—forcing teachers to contribute more of their salaries (up from 9% to 13%).
Wieck has no lawyer—he’s representing himself—in a Herculean effort to save his own and other Kentucky teachers’ retirement.
You might expect that powerful, well-funded national and local public unions would rally behind Wieck to hold Wall Street accountable for undermining teachers’ retirement security. To date, in Kentucky and nationally, public sector labor organizations have been mighty reluctant—even when pressed—to recognize that how the money in a pension is managed is at least as important as how much goes into it and is paid out in benefits.
Labor should be embracing a new role—providing meaningful independent oversight of pension investments. Every public pension needs an outside Inspector General, in my opinion. Organized labor could and should make it happen.
Private Equity firms mentioned in the Wieck complaint include Blackstone, Carlyle and KKR. Excerpts from the case referring to Private Equity investments include:
“As late as 2007 KTRS had no alternative investment managers listed in their Comprehensive Annual Financial Report; by 2013 there were 31 alternative managers listed and KTRS continued to add alternative investments in 2014 and 2015—despite the filing of a lawsuit against another Kentucky State Pension plan challenging the legality of purchasing alternatives.”
“KTRS has failed in their fiduciary duty by selecting investments and investment managers not permitted by statute of the Commonwealth of Kentucky. KTRS has invested in high-risk alternative investments not appropriate for fiduciaries under the common law. Many of these alternative investment entities have not documented in their contracts that they adhere to investment ethics and disclosure rules as required by statute. KTRS Trustees have allowed numerous alternative investment managers to violate Kentucky state law on ethics and disclosure – which also constitutes violations of the Investment Advisers Act of 1940. KTRS (in Fiscal Year 2014) admitted to paying $9.2 million to alternative investment managers in secret no-bid contracts. KTRS managers who have hired lobbyists in Frankfort include KKR, JP Morgan (Highbridge) and Blackstone – which has 16 listings on the executive branch lobbyist list (all affiliates and placement agents combined).”
Dr. Randy Weick joins this blog’s honor roll, fighting for all teachers in Kentucky.