Deadly Serious About Pensions

Tuesday, November 01, 2005 | Mishandling public pension money gets people murdered. San Diego doesn’t understand. Even now.

In 1990, the Minneapolis Employees Retirement Fund, MERF, hired me to straighten out a bad investment. MERF managed the pensions for five different municipal unions.

I became CEO of a troubled investment and John Chenoweth, head of MERF, served as chairman.

Chenoweth had been a state representative until Minnesota Gov. Arne Carlson and Minneapolis Mayor Don Fraser appointed him to run their billion-dollar retirement fund. Carlson was Republican and Fraser was Democrat.

Being a lifelong politician, Chenoweth was a credit-card spender who believed in boosting payments to retirees every time an investment went well, with a belief in the future that had no resemblance to history, thinking stocks can only go in one direction.

Our first board meeting ended in a shouting match between Chenoweth and me.

This became an uncomfortable reporting relationship.

So I went public with a small sample of his misdeeds, which included his lust for small boys, cocaine and business naivete. This forced the politicians to give me their proxies, or I would resign noisily, mentioning their guilt. I then fired their prized employee, my boss. We fixed the business in the following years, after eliminating their political influences.

But within weeks of Chenoweth’s departure, he absorbed four .38-caliber bullets in the torso.

The Minneapolis police announced an “air-tight case” against the murderer. But the killer’s description of the hit, as reported in the StarTribune, matched neither the corpse nor eyewitness accounts. The Policeman’s Retirement Fund, however, had lost significant amounts of money through Chenoweth’s mismanagement, and the police chief showed little interest in any deeper investigation, never responding to my letters.

Charges were dropped against this first “murderer” when another person confessed. With that guilty plea, no trial was necessary. The convicted person suffered from AIDS and couldn’t afford treatments, but he soon received the needed medications in prison. Case closed. Everybody relaxed.

Months later, an advisor who sold two bad investments to MERF collapsed on a Paris street with two bullets to the head. This advisor’s prior business experience was murky, but involved fund raising for an AIDS relief fund that disappeared and several other failures.

Is San Diego’s pension fiasco this bad?

No, it’s headed for worse. There are three basic differences:

1. San Diego’s deficit is 20 times bigger. That’s if the lowest estimates hold.

2. Instead of several individuals responsible, we have several administrations and several city councils plus several sets of advisors that all contributed to our mess.

3. Unlike Minneapolis, San Diego can’t rely on the state to bail it out.

Pension funds are the perfect place to steal. The robbery isn’t discovered until years later if trustees prostitute the accounting with more generous assumptions each year. And if they take out more cash, to pay outside consultants generous fees, their theft is certified as OK, so later they’re innocent.

That’s why Jimmy Hoffa always made sure his union got control of the pension funds when they organized workers. The fuse is long. And, like two of the Minneapolis pension managers, Jimmy finally paid the big price.

This gets worse. It’s not just our city. At a community lunch I sat next to a retired county worker who had become a trustee of the county pension fund.

“What’s your unfunded liability?” I asked.

“What’s that?” he asked back.

“The amount of money you ultimately owe, but don’t have, using normal life expectancies and reasonable investment projections.”

“Oh, we’re in great shape,” he said.

“What’s the number?”

“That’s a good question. I should look it up.”

I then asked him what the average monthly payouts were, which he said he could check out and get back to me. Maybe he will call. It’s only been 10 months now.

We face a non-trivial problem here. People got whacked for less in Minnesota.

Gary Sutton is a retired CEO. He wrote “CORPORATE CANARIES…Avoid Business Disasters with a Coal Miner’s Secrets.”