‘My Proposal to Save Indiana $100 Million Annually’

March 1, 2013

by PHIL TROYER

“I’m afraid there are too many pigs for the teats.” This was Abraham Lincoln’s retort when confronted with the constant demands of citizens seeking federal patronage jobs. That same quote could be attached to lawmakers today who clamor for long-since-spoken-for tax revenues to fund their latest Utopian schemes, or, to continue the swine theme, outright pork-barrel projects such as certain retirement systems.

Lawmakers at all levels of government are continually searching for inventive ways to “find” funds that may be made available for new spending priorities. In this vein, I offer my own proposal to the Indiana General Assembly to free up $100,000,000 annually in current spending.

My proposal is simple; I am surprised to be the first to offer it. Indiana’s Public Retirement System (INPRS), according to its most recent Comprehensive Financial Report, paid Wall Street and international denizens of finance $106,484,000 in investment-management fees for fiscal year 2012. As a civic-minded Hoosier, I hereby offer to manage those same funds for just $5,000,000 per year – a savings of more than $100,000,000.

Now, I know there will be skeptics who will ask with a sneer, “How can you compare your knowledge of the markets with the best and brightest on Wall Street?” They will be right; my understanding of international currency exchanges, complex hedging strategies, and the inverse correlation between bond prices and yields pales in comparison to the Ivy Leaguers who annually pull down multimillion-dollar bonuses.

However, I ask you to compare the results. Again, during FY2012, INPRS paid those financial wizards $106,484,000 for their market “expertise,” and our public-pension funds suffered a total loss of $191,547,000 in net assets, or about 0.7 percent. If I had invested those same assets in an Exchange-Traded Fund that tracked the performance of the S&P 500 (which I could have purchased for $7 on Scottrade), our pension funds would have generated a market gain of about $75,000,000, or 0.3 percent.

True, this would have been slightly lower than the 0.7 percent market gain generated by the wizards of Wall Street. However, it must be remembered that INPRS’ actuaries assumed a 6.75 percent annual growth rate. As a result, the unfunded liability of the combined state employee and teachers pension funds actually increased by almost $1.3 billion last year – raising the current shortfall to more than $16 billion. Therefore, the difference between a 0.7 percent and 0.3 percent return is a mere rounding error in the grand scheme of things. So why pay to sit at Wall Street’s high-rollers table when I can achieve nearly the same payout playing the penny slots?

Others may point to these figures as justification for ditching public pensions altogether and moving state employees and teachers into the same type of 401(k)-styled defined contribution system that is offered to those employed in the private sector.  I have made the same argument to state legislators for several years, to no avail.

Our political leaders, though, seem committed to the notion that if we just keep pulling that Wall Street lever enough times, the stock market will eventually bail them out and cover the lavish retirement benefits they have promised to state employees.  But rather than sending millions of dollars out of our state each year, let’s pay a Hoosier citizen (me) a small pittance of that amount.

Just think of all the great things our political leaders could do with the savings.

Phil Troyer, J.D., is a Fort Wayne attorney and a founding member of the Indiana Policy Review Foundation.

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