In “Animal House,” a classic gross-out movie from the 1970s, fraternity candidates endure a sadistic ritual as frat members slap their behinds with wooden paddles. After every blow, the pledges must thank the paddler, and request more spanking.
It seems like Illinoisans paying income, sales, and property taxes are in a similar position.
Here’s one reason why.
Pension plans for government workers are sorely underfunded, and after last year’s Supreme Court decision effectively guaranteed those benefits, taxpayers have a lot of spankings ahead.
While the situation is dire, it is good to recall that these plans have massive investment portfolios. The investments are small only in relation to the massively higher obligations that Illinois politicians have promised to government workers, on the backs of taxpayers.
How are these investments managed? How costly is that “expertise?” Who is paying the freight for this management?
As a general rule, Illinois public pension plan investments are dominated by relatively risky financial instruments, including equities and real estate.
Most of these plans have decided to retain “private” (ha) sector professionals as investment managers, and pay them hundreds of millions of dollars in management fees -- every year.
Those fees reduce the assets otherwise available to pay future benefits. In theory, these “private” sector professionals are being paid for their expertise, and their ability to achieve good returns. But critics are skeptical that active managers actually add much value, compared to passive management vehicles like index funds.
There is another fundamental issue here.
With taxpayers taking any downside on these risky, expensive-to-manage portfolios, it may feel like taxpayers are paying investment managers to whip them – again, again, and again.
-- “Sometimes I feel like I’m tied to the whipping post.” -- The Allman Brothers