Report: Pension Fund Mismanagement Cost State Billions
Connecticut’s state employee pension funds were among the worst performing of any state over the last decade according to a Yale School of Management report.
The report says mismanagement of $40 billion in fund assets compounds the state’s chronically unfunded pension liabilities, one of the highest per capita in the country.
“While many attribute Connecticut’s pension woes to irresponsible fiscal decision-making 20, 30 years ago; even more importantly, Connecticut’s pension funds have long delivered underwhelming investment returns,” the report’s authors note.
“Connecticut’s investment performance is chronically one of the worst of any state in the nation.
“As of June 30, 2022, Connecticut has the second worst performance of any state in the nation on a three-year and five-year annualized basis, and is the fifth worst on a 10-year basis.”
In a May 9 op-ed published by Hearst Connecticut Media, Yale senior associate dean Jeffrey Sonnenfeld and Steven Tian, CEO of the Yale-affiliated Leadership Institute, documented the costs of mismanaging the state’s pension funds.
“If Connecticut had even average annual investment performance from its underwhelming pension funds, our tax burden would dramatically decrease,” the pair wrote.
“While the legislature battles over thousands of dollars or even millions on needed expenditures, billions of dollars were lost on terrible investments—investment errors that 49 other states somehow avoided.
“if Connecticut’s investments had yielded just the median returns of all 50 states … Connecticut would have reaped a whopping $27 billion more over the last decade—practically enough to fully fund Connecticut’s pension obligations while simultaneously dramatically reducing taxes.”
The report cites “unusual asset allocation decisions and poor external investment manager selection” as the two main factors driving the poor performance of Connecticut’s pension funds.
“Prudent efficient public administration is great, but this is a different problem—incompetent investment for decades,” Sonnenfeld and Tian noted.
“We just have among the worst performing asset managers regardless of how they are classified. We need some investment managers who know what they are doing or at least who can provide us with average if not top performance.”
The report’s authors wrote that the state “Connecticut’s pension funds “should be leveraging the collective networks and reach of the state’s top business leaders to secure access and placement into top-tier blue-chip funds with strong, established track records of success.”
In sharing best practices from peer states, the authors also outline “recent promising changes” implemented by state Treasurer Erick Russell, who took office in January, and the Connecticut Investment Advisory Committee.
“Connecticut has made some poor and costly decisions over the past decade—many of which are now smartly being unwound by current leadership,” Sonnenfeld and Tian note.
In their op-ed, Sonnenfeld and Tian shared five reform recommendations:
- Careful and accountable asset manager selection—picking top-tier asset managers and dropping worst performers.
- Change the asset mix. “Connecticut has made some poor and costly decisions over the past decade.”
- Consider shifting into more low-cost index funds. “Unfortunately, Connecticut’s highly compensated professional asset managers got dramatically worse returns for the state’s teachers, firefighters, and public employees than if these individuals had just invested their savings themselves.”
- Increase the transparency of performance. “While the treasurer’s office commendably posts aggregate performance to its website on a monthly basis, releasing semi-annual manager-by-manager breakdowns of performance would help fortify accountability and transparency.”
- Enhance the talent recruitment into the treasurer’s team. “Connecticut recently churned through eight chief investment officers and four interim CIOs. By contrast, all the top 10 performing states have long-tenured CIOs.”
CBIA president and CEO Chris DiPentima called those proposals “thoughtful, viable recommendations for reforming management of Connecticut’s pension funds that deserve immediate attention.”
“It’s extremely discouraging to learn that the failure of fund investments to yield even the median returns of all 50 states in the last decade has proven so costly,” he said.
“Connecticut’s taxpayers deserve better.”
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