New study: public pension fund corruption costing tax payers $1 billion a year 

Northwestern’s Yael Hochberg and Joshua Rauh published a paper last week titled: “Local Overweighting and Underperformance: Evidence from Limited Partner Private Equity Investments.” The paper’s findings are a bit sexier than the title.

Hochberg and Rauh compared the investment decisions and outcomes of all types of institutional investors and found that not only did public pension funds invest more heavily in own-state companies than other institutional investors, but those own-state investments did significantly worse than their out-of-state funds.

The paper also found that public pension over investment in own-state funds was higher in those states with higher levels of corruption. By contrast, other institutional investors in high corruption states invested less in their home state. Hochberg and Rauh conclude: “Our calculations suggest that if each public pension LP performed as well on its in-state investments as out-of-state public pension LPs performed on investments in the same state, the public pension LPs would reap $1.23 billion annually in additional returns.”

And that $1.23 billion a year will ultimately have to be made up by taxpayers. This is just yet another reason state governments should follow the private sectors example and drop defined benefit pension plans all together.

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Conn Carroll

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