Thursday, May 10, 2012

The Small Price of Big Favors

By Tim Dulaney, PhD and Craig McCann, PhD

Yesterday the Securities and Exchange Commission issued a press release announcing that it had filed a complaint (link opens PDF) alleging Detroit officials -- including former mayor Kwame M. Kilpatrick and former city treasurer Jeffrey W. Beasley -- influenced the city’s pension fund investments to favor an advisor, MayfieldGentry Realty Advisors LLC, in exchange for personal gifts. This story illustrates an all too common occurrence in municipal finance. According to the SEC, Kilpatrick and Beasley requested and accepted $125,000 in personal gifts from MayfieldGentry to facilitate the city’s pension funds’ $106 million investments in the MGRA Genesis REIT.

Municipal officials have control over billions of pension fund dollars ($9 billion in the case of Kilpatrick and Beasley).  When municipal officials are corrupted by unscrupulous advisors, pension beneficiaries pay dearly -- often hundreds of millions of dollars a year as we've seen.  Without complete transparency, competent salaried employees, fee-only investment advisors and independent second opinions on all major investments, public pensions will continue to follow the advice of the highest bidder. This story reminds us how small the price is for such big favors.

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