Friday, July 22, 2016
The Government Accountability Office's decision to investigate the Central States, Southeast and Southwest Areas Pension Fund's investment decisions was in response to a request from 51 Democratic members of Congress, including 10 senators.
The lawmakers asked the GAO to probe the fund's investment decisions going back to 1982, when the fund came under the supervision of a court-ordered consent decree.
Charles Jeszeck, the GAO's director of education, workforce, and income security, told Bloomberg BNA June 28 that his agency expects to make staff assignments and begin work on the project soon.
The lawmakers said they hoped the GAO would determine if there was any wrongdoing that led to the fund's severe financial woes. The fund has projected it will be insolvent in 10 years or less.
The Treasury Department on May 6 rejected the fund's application to cut participants' benefits in an attempt to avoid insolvency.
One goal of the inquiry is to determine whether Goldman Sachs and other investment advisors caused the Fund to lose money, endangering the future pensions of retired truck drivers and other Teamster union members.
Rep. Marcy Kaptur (D-Ohio) hailed the GAO action as a victory for workers, many of whom have been pressuring Congress to take action on behalf of the pensioners.
“It’s astonishing to now read about how Wall Street firms hired by Central States invested retirees’ pension funds in Iraq in 2008, right in the middle of a full-scale war in Iraq. Or how they invested in unstable Russian banks, when the economy there is in shambles, or how they sunk $1.4 billion into risky Single A-rated mortgage-backed bonds in the middle of the housing meltdown. Something is simply wrong, and the GAO will get to the bottom of this,” she said.
Behind the GAO review is the conviction by some of the retirees that investment advisors like Goldman Sachs and the Chicago-based Northern Trust Corporation profited off the Fund by pushing questionable investment strategies while raking in exorbitant management fees. If true, a full accounting might lead to a return of some of the money lost and partial repairs to the damaged finances of the Fund, pension activists say.
And when the global financial markets crash struck in 2008, an astonishing $11.8 billion—or 40% of the plan’s total investments—disappeared that year alone. What remained and was recovered afterward couldn’t cover the fund’s long-term obligations.
Today, the Treasury Department is weighing Central States’ application to cut the retirement benefits of two-thirds of the plan’s more than 400,000 American workers, retirees, dependents and survivors who’ve have waited a lifetime for them.
The pain unfolding at the Central States fund is a cautionary tale for all Americans because it underscores the reality that no social safety net is secure.
Pension administrators in Rosemont, Illinois, made the benefits-slashing proposal under a law they themselves helped get Congress to pass. Norman Stein, a senior policy advisor at the Pension Rights Center in Washington, says House legislation authorizing the reductions was passed with “no committee vote or debate” in December 2014, as part of a much larger funding bill, and that any Senate amendment “would have resulted in a closure of the federal government.” In a letter to Treasury Secretary Jacob Lew opposing the plan, Stein argues “it is unlikely” the measure “could have survived any open and transparent legislative process.”
A quarter-century later, the professionals who replaced them—Central States Pension Fund administrators; the Goldman Sachs & Co. and Northern Trust Global Advisors fiduciaries; and Department of Labor regulators—stood watch while the financial markets accomplished what the mob had failed to: which was to smash the fund’s long-term solvency with massive money-losing investments.
The debacle unfolding at the $16.1 billion Central States fund in Rosemont, Illinois, is a cautionary tale for all Americans dependent on their retirement savings. Unable to reverse a decades-long outflow of benefits payments over pension contributions, the professional money managers placed big bets on stocks and non-traditional investments between 2005 and 2008, with catastrophic consequences.
When the experiment blew up, rather than exhume the devastated portfolio to better understand the problem—and perhaps seek accountability—Central States administrators lobbied Congress to pass legislation giving them authority to cut retirement benefits by up to 50% after Treasury Department approval.
That’s close to Central States’ astonishing 42% drop in assets—and a loss of about $11.1 billion in seed capital—in just 15 months during 2008 and early 2009. And while the investment losses are not the source of the retirement plan’s unsustainability today, they accelerated the pension’s problems, and almost certainly made the benefits cuts deeper. The professionals made more money disappear in a shorter period of time than the mobsters ever dreamed of.