A new report details the way state pension funds harm workers and taxpayers through cronyism.
Updated to accurately reflect the time period of the targeted investments.
American Legislative Exchange Council (ALEC) has released a report detailing the various ways state employee pension funds are harmed by cronyism. The report may be read at Keeping the Promise: Getting Politics Out of Pensions.
The problem, ALEC reports, is: “Unfortunately, many lawmakers and pension plan officials have other priorities besides doing what is best for workers. They see the billions of pension fund dollars they manage as an opportunity to advance their own agendas. Rather than investing to earn the best return for workers, they use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t and bully corporations into silence and behaving as they see fit.”
One form of pension fund cronyism is Economically Targeted Investments (ETIs). These are local investments “that have been selected for their economic or social benefits in addition to the investment return to the employee benefit plan.” Kansas has its own experience with this type of cronyism. During the first half of the 1980s KPERS, the Kansas Public Employee Retirement System, made numerous targeted investments that led to large losses. One newspaper article reported: 1
It all seemed so easy to many economic development planners.
In an era of hard-to-get money for business start-ups and small business expansion, why not tap into the state’s healthy $3 billion-plus retirement funds as a source for seed capital?
After all, it is there. And much of the profits earned by the Kansas Public Employees Retirement Systems have come from out-of-state investments.
For many Kansas legislators, the lure of using KPERS money for economic development was tempting. So KPERS, under considerable legislative pressure, agreed to target nearly 10 percent of its fund for business expansions in Kansas.
But three years after that decision, it is clear that KPERS money is not a panacea for economic development.
Here is one particularly egregious example of how KPERS did business.2 In this case, the chair of KPERS benefited personally from KPERS investment decisions, and in a brazen manner:
Take, for example, the $7.8 million investment in Emblem Graphic Systems, a company based in Kansas City and Denver that manufactured specialty package labels. According to court documents:
KPERS Chairman Mike Russell was on the Emblem board of directors and had personally guaranteed $200,000 in loans to the company.
Shortly before KPERS invested $5.3 million in Emblem in 1985, Russell resigned from his Emblem seat. The KPERS loan, however, was used to relieve Russell of his obligation to cover the earlier loans totaling $200,000.
KPERS continued to invest in the company until 1988, At one point, KPERS even paid $273,305 to itself to pay back the money it had lent Emblem when the company was sold. KPERS got back only $1.76 million of the $7.8 million it had lent the company.
Russell, however, was able to make a profit on his 3,000 shares in Emblem when the company bought him out for $48,330 — using KPERS money.
KPERS is suing, among others, Russell, the lawyers who approved the transactions, and Kenneth Koger, who managed the Emblem investment and about 70 percent of the investments in question.
Russell was not available for comment.
In 1992, Russell pleaded no contest to one felony count of aiding and abetting securities fraud regarding a different KPERS investment.3
In September 1991 the loss to KPERS was given as $92 million. 4 Lawsuits continued until 2003.
The governor of Kansas during the time of the targeted KPERS investments was John Carlin (1979 to 1987).
- S. Gossett/The Wichita Eagle, F 1989, ‘Disappointing returns the percentage of the KPERS fund given over to new business ventures has been reduced in light of big losses’, Wichita Eagle, The (KS), 16 Oct, p. 7D, (online NewsBank). ↩
- Hobson, G 1996, ‘Full Accountability’, Wichita Eagle, The (KS), 22 Sep, p. 1A, (online NewsBank). ↩
- Press, A 1992, ‘Former KPERS Chief Sentenced To Probation For Securities Fraud’, Wichita Eagle, The (KS), 25 Jun, p. 4D, (online NewsBank).} ↩
- “After six years of investing in small- and medium-sized companies in Kansas, the state pension fund has 87 investments that are worth $231 million less than the fund paid for them, analysts told the fund’s trustees Friday. Considering that KPERS has collected about $139 million from those companies, however, the fund has lost $92 million in cash on its so-called ‘direct placement’ program, according to estimates by the staff of the Kansas Public Employees Retirement System.” Cross/The Wichita Eagle, J 1991, ‘Kpers Losses Put At $92 Million Lawyer Predicts ‘Monumental’ Suit’, Wichita Eagle, The (KS), 14 Sep, p. 2D, (online NewsBank). ↩