Ed Siedle on MN pension scandal

American Experiment interviewed Edward Siedle, public pension warrior, for our podcast yesterday. The full 32-minute video of the interview:

A former lawyer for the U.S. Securities and Exchange Commission (SEC), Siedle has carved a second (or third) career going after underperforming state public pension funds.

One of his targets is Minnesota’s State Board of Investment (SBI). The four-member board is chaired by Gov. Tim Walz and includes the other three statewide-elected officials: attorney general, secretary of state, and state auditor.

The Board manages $146 billion (with a “b”) in assets on behalf of hundreds of thousands of government employees, both active and retired.

Specifically, Siedle was hired by a group of retired teachers to look into the state Teachers Retirement Association (TRA), whose assets are managed by SBI (his report is here). As with many public pensions, TRA is underwater: they only have assets sufficient to cover about 80 percent of expected future liabilities. There are only three tools to close that gap: lower benefits to retirees, higher contributions from active teachers, or larger contributions from state taxpayers.

None of those options is popular. Everyone is better off if SBI gets higher returns on plan assets, but it appears that SBI is underperforming relevant benchmarks.

SBI’s investment policy appears to include 50 percent public equity (stocks) 25 percent fixed income (bonds) and 25 percent private equity.

One thing of note, the Board is chaired by Gov. Walz, who famously claims to have never personally purchased a stock or a bond. From USA Today in August 2024:

Tim Walz’s working-class cred: no stocks, no bonds, and he doesn’t own a home

In other words, the perfect candidate to manage a $146 billion financial portfolio.

It’s that last piece (private equity) that Siedle has focused on. In particular, he observed that SBI was grossly underreporting the amount of fees SBI was paying to the managers of their private equity piece. His suspicions were confirmed when SBI began reporting much larger amounts in such fees (400%!).

Just yesterday, NBC News reported that Siedle was taking on the biggest fish of all, CALPERS, the state of California pension fund behemoth.

California public pension fund, the nation’s largest, faces probe launched by concerned retirees:
A forensic pension investigator was hired to provide clarity about the fund’s investments, the high fees it pays to big Wall Street firms and its lagging performance.

That investigator, of course, is Siedle. NBC News takes note of his work in Minnesota,

Siedle, the investigator hired by the retired public employees group, has probed three public pension funds in recent years. His 2024 analysis of the Minnesota Teachers Retirement Association pension, commissioned and crowdfunded by a group of retired educators, found the pension had underreported the fees it was paying to investment managers by failing to disclose large payments to private equity managers.

Following the investigation, the fund began listing these payments — $80 million in 2024, or 76% of the fund’s total external manager fees.

Even at the still underreported level of $80 million, that’s a lot of money going to Wall Street. With elected politicians making up the entirety of the Board, the opportunities for conflicts of interest abound.

To be clear, no one involved has been accused of any wrongdoing but let’s look at one example. SBI publishes annual reports. In 2024, as usual, they list (pages 79-112) which private equity firms they place money with and how much.

BlackRock, of course, appears on the list. Also, SBI has committed to place some $850 million with The Carlyle Group, one of the world’s largest private equity firms (ticker symbol, CG).

Statewide office holders, such as the four SBI board members, can raise relatively little campaign cash under their own names. They rely for support on larger campaign funds — the Democratic Governors Association, DGA, Democratic Attorneys General Association, DAGA, etc. — who can raise money in unlimited amounts.

Perusing the DGA campaign finance report for Minnesota for 2024, we find a $50,000 donation from a senior executive at The Carlyle Group.

Perhaps this New York-based executive is just a big fan of Walz personally, or the work of Democratic governors generally, but a big-dollar campaign contribution to the entity backing the Chair of an investment fund placing billions of dollars with Wall Street creates obvious issues.

An interesting note on The Carlyle Group, its headquarters are in Washington, D.C., not New York City.

In very, very old news, ABC reported back in 2009:

Private-equity giant Carlyle Group has agreed to pay $20 million and make several reforms to resolve its role in a corruption investigation of the New York state pension fund that has sparked related inquiries nationwide.

Perhaps all of these past issues have now been resolved. Again, no one has been accused of any wrongdoing, but the potential for problems is obvious.