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‘Pay-to-play’ a widespread problem in public pension funds

Posted By Mark Scarp

By ERIC TSETSI, SABEW Staff

PHOENIX, June 3, 2011 — Public pensions are facing deeper troubles than the battle to stay fully funded today.  In many states, pension funds are suffering from scandals including “pay-to-play” schemes that have lost millions, and in some cases, billions of dollars in investor money.

SABEW’s “Covering Public Pensions” special reporting institute participants delved into the interconnected web of pay-to-play schemes investigative reporters have uncovered in recent years.

In the complex and volatile realm of public pensions, “pay-to-play” refers to when an overseer of a pension fund makes investment decisions or other policy choices based not on their merits, but on whether or not they personally stand to benefit from those decisions.

Mary Williams Walsh, The New York Times

“There’s this constant beauty pageant going on in the public pension world,” said Mary Williams Walsh of The New York Times, who’s been covering pension issues in-depth since 2005.

The “beauty pageant,” as Walsh describes it, is the scramble by private equity firms to attract the large sums of public money for investment. Often times, those investment decisions are not based on objective, sound investment reasoning.

According to Walsh’s reporting, there’s “a far-reaching web of friends and favored associates: political contributors, campaign strategists, lobbyists, relatives, brokers and others” that are capitalizing on their connections to determine where large sums of public money are funneled for investment.

Jason Grotto, an investigative reporter for the Chicago Tribune, has seen similar issues in his state. But unlike in New York where former state attorney general and now Gov. Andrew Cuomo acted as a watchdog over pension funds, Chicago has had no such watchdog other than the journalists covering the issue.

“It’s really important to have state and federal watchdogs watching over this stuff and you don’t always have that,” he said.

Marc Lifsher, Los Angeles Times

Los Angeles Times business writer Marc Lifsher co-moderated the discussion with Grotto and Walsh. Lifsher, who has covered California’s state pension system CalPERS extensively, said public pension woes extend to all 50 states and urged reporters to look into the issue in their own coverage areas.

Although public pensions can seem to be suffering from a never-ending string of issues, Keith Brainard, research director for the National Association of State Retirement Administrators, said the problems are really exceptions to the rule.

Even so, he urged reporters to sniff further if there’s something unclear with their pension systems.

The three offered tips for journalists looking to cover pay-to-play issues:

  • Find out which private investment firms public pensions are investing in.
  • Follow the placement agents.
  • Review investment firm websites for old press releases, etc.
  • Look for investment firms that pitched pension funds for business but didn’t get it.
  • Look for revolving door relationships between private equity funds, placement agents, and pension funds.
  • Stay organized with detailed spreadsheets that break down the major players (investment firms, pension funds, etc.)

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