Sold down the river in Missouri

Posted by Marc Hodak on July 22, 2009 under Collectivist instinct, Executive compensation, Politics, Scandal | 5 Comments to Read

The nice people at MOSERS, the Missouri state pension fund, had a bonus plan.  They beat their targets, earning their bonus.  The Governor and legislature denied them their bonus.

Governor Jay Nixon called $300,000 in bonus payments to the 14-member staff of the Missouri State Employees’ Retirement System (MOSERS) “unconscionable.”

Unconscionable?  What happened?

MOSERS’ incentives are based on a five-year cycle.  The bonus payments paid this year were based on fund performance from January 1, 2004, through December 31, 2008.  In that period, says [Executive Director Gary] Findlay, MOSERS had an overall return of 3.9% compared with its benchmark of 1.8%. (the benchmark is the performance of the asset allocation if it were invested passively).

The difference to MOSERS between a 3.9% rate of return and a 1.8% rate of return over that period, points out Findlay, is $600 million.  So, the MOSERS investment staff added $600 million in value to the fund’s assets for bonus payments of $300,000, which is 5/100 of 1%.

So, tell me again, why did the politicians hose the MOSERS fund managers?

[Chairman of the legislature’s pension committee, Senator Gary] Nodler argues that payment of bonuses makes no sense in any year in which the fund experiences no actual growth.  When the fund loses money, he says, then there is no money from which to pay the bonuses except to go into current assets.   And that, he says, is a misappropriation of funds and a breach of fiduciary responsibility.

Makes no sense, indeed.

I give Nodler points for creativity, however.  I have never heard a “breach of fiduciary responsibility” allegation used to cover up a breach of contract and a breach of good faith.  You have to have a highly cultivated sense of mendacity to make this stuff up while summoning outrage for the cameras.

If the politicians had a shred of integrity, they would have told their pension fund managers five years ago that they would under no circumstances get any bonuses when absolute returns were negative.  That way, the managers could have evaluated their compensation fairly versus their other opportunities, and decided whether they wished to stay or take their talents elsewhere.  Given that the pols agreed to a bonus plan, their ignorance of its terms, or difficulty in explaining to the public why they are making payouts, is not a reason to stiff their employees.  At best, if they decided after the fact that they wanted to pay for absolute performance rather than relative performance, then they should recalculate the bonuses earned in past years under this plan on an absolute basis, and pay them consistently.  As it stands, the Missouri politicians were content to pay bonuses based on relative performance when peer fund returns were positive, but for absolute returns when the funds are negative.

And that is why politically run systems can’t outperform private sector ones.