Solving public pension woes: Unleash the trial lawyers!

Illinois faces an enormous public pension problem. Pensions for firefighters, police officers, teachers, and government employees of all ranks and titles, state and local, are "underfunded" by billions of dollars. Our recent "temporary" state income tax hike will almost certainly become permanent (repeat after me: there is no such thing as a 'temporary' tax hike) but that won't solve the problem by itself. In Chicago, property taxes are almost certain to go up, possibly way up, to bring the local pension deficits into balance.

You already know that, right?

Now... let's think about this for a moment. How does something like this happen?

Every two weeks, when a public employee is paid, a certain amount is taken from his or her check for the pension fund. That money can add up, all by itself, to a significant sum.

In our many public corruption cases here in Illinois, for example, it has (finally) become fashionable to deny a public pension to a politician who has been convicted of impropriety in office. But the disgraced politician is eligible to have his or her pension contributions refunded. Years after former Illinois Gov. George Ryan was convicted on corruption charges, the Illinois Supreme Court ruled he was ineligible to keep even a portion of his public pension (the argument had been that Ryan was entitled to a pension for government service in positions where he wasn't charged with corruption). Ray Long and Michelle Manchir reported the story for the Chicago Tribune in February 2010:

[Ryan received pension payments of] $635,000 from Illinois taxpayers in the three-plus years between his retirement and his major political corruption conviction, a top pension official said. Ryan also got a refund of $235,500 when his pension was taken away -- the amount of personal contributions he made during his more than 30 years in public office.

Anyway, one part of the pension contribution comes from the public employee who hopes to some day receive the pension. When you hear teachers and firefighters and cops say, hey, we did what we were supposed to do, believe them. They contributed. They had no choice.

But there are two other components to the pension equation.

The public body is also supposed to make contributions to the appropriate pension fund and the rest of the money is supposed to come from the income earned by investments of these sums.

Public pension funds took a beating around the country when the banks torpedoed the economy and caused the Great Recession in 2007. Growth forecasts and investment projections proved just as overly optimistic in public pension funds as they did in your 401(k) at home.

In Illinois, however, the problem was greatly exacerbated by the fact that our dedicated public servants did not make the pension contributions required by law. To the extent that some of them may have thought about it at all, they bet that the bull market and the never-ending appreciation of real estate values would cover up their malfeasance and nonfeasance forever; meanwhile, they took the money that they were supposed to have invested for the future of public employees and put it into programs, grants, jobs for idiot relatives -- all the usual stuff that governments do. But this was money that should have been unavailable for any purpose but pension investment.

Worse, our public pension funds, unlike your 401(k) at home, were managed by the politicians, or more precisely by their friends and relations, and they invested liberally in other friends and relations with little regard to the safety or security of the bets they were making.

In a lengthy article for the November 18, 2010 Chicago Tribune, headlined "Pension bets not paying off; Public funds fall further behind after making risky investments," Jason Grotto wrote:

Trustees of Chicago's failing public pension funds have funneled hundreds of millions of dollars into highly speculative investments that have not only failed to realize outsize returns but also saddled them with underperforming, long-term assets that can't be sold off, a Tribune investigation has found.

The investments, which involved buying equity stakes in businesses ranging from fast-food franchises in Mississippi to a Los Angeles grocery chain, were supposed to plug huge holes in pension fund coffers by yielding gains of up to 20 percent a year.

But a Tribune analysis of nearly 130 private equity and real estate investments made by four pension funds since 2000 found that nearly half have lost value so far. Of the $1.3 billion invested to date, the pension funds have seen just $60 million in added value on their balance sheets.

Had the funds used an equal amount to buy and hold a 30-year U.S. Treasury bond offered in 2000, they would have received $893 million in interest payments to date -- and their principal investments would be secure.

Trustees of the city's pension funds made these risky calls because they were hoping to make more than the modest returns offered by government bonds. For years, they have been under tremendous pressure to make up for city agencies' inadequate contributions to the funds, which promise retirement security to the city's public employees.

Among the beneficiaries of these investments was a real estate firm, co-founded by a nephew of then-Mayor Richard M. Daley, Robert Vanecko, a brother of R.J. Vanecko, who recently pled guilty to involuntary manslaughter on charges arising from a late-night altercation on Rush Street. According to Grotto's article, City pension funds put $60 million in Vanecko's firm -- and lost $11 million. (The other co-founder of DV Urban Realty was lawyer and real estate developer Allison Davis, the man who gave a very young Barack Obama his first job after law school. In Chicago, everything is connected somehow.)

The politicians themselves are probably immune from suit for failing to do their legislative and executive duties, allocating public pension money for public pension funds.

That's a shame, although if I were an ambitious prosecutor, I'd be thinking about how I could make a criminal case of this astounding dereliction of duty.

But the losses accumulated by the pension funds may be another matter. You can't sue the fund that ruined your 401(k) because it made bad business decisions. In the Great Recession, thanks to the megabanks -- the "too big to fail" banks that We the People bailed out, for reasons I'll never understand -- there were a lot of bad decisions made. But the fund that tanked your 401(k) probably wasn't speculating in investments touted by the offspring of fund managers. A lot of public pensions apparently were. There can be liability for making unsound investments with inadequate disclosures of risks and conflicts.

If I were running the SEIU or another public union whose members are about to be shafted by this pension mess, I wouldn't limit my lawyering-up to only those who will challenge the constitutionality of the bills we've passed here purporting to trim increases for current pensioners and cut benefits going forward for employees still on the public payroll. I'd also be looking for lawyers who can sue the funds that invested the money, the recipients of those investments, and anybody else I could find who might help defray the costs of this debacle besides taxpayers like thee and me.

The unions might be a tad suspicious of the deep-pocketed, silk-stocking lawyers they'd need for this purpose, because these are usually deployed as management tools, trying (and generally succeeding, at least in the private sector) to minimize the union footprint on the American economy. But, if I were a public employee union executive today, I'd be shopping.

Actively. Unleash the trial lawyers!