Public Pensions Fertile Environment For Private Equity Political Corruption, Says AI

Artificial Intelligence can help expose public pension-private equity corruption that's cost stakeholders trillions over the decades.

Artificial Intelligence may blow the lid off public pension-private equity corruption, restoring transparency.

Artificial intelligence may become a powerful new tool for exposing public pension-private equity corruption that has flourished in recent decades as transparency—public scrutiny of public monies—has been effectively undermined by politicians and their Wall Street friends.

In my book, Who Stole My Pension? I introduce the concept of “politicization of the investment decision-making process” to describe how public pensions regularly select investments based upon political considerations, not investment merit. That is, the best investments are eschewed in favor of schemes that benefit politicians controlling pensions. Predictably, billions of underperformance losses arise. State pensions are not managed “solely in the best interests of the participants”—as the law requires—and stakeholders, including participants and taxpayers, pay the enormous price. Trillions are squandered nationally.

“Politicization of the investment decision-making process” describes how public pensions regularly select investments based upon political considerations, not investment merit. That is, the best investments are eschewed in favor of schemes that benefit politicians controlling pensions.

Even in these days of its early development, it appears that Artificial Intelligence may already be helpful in explaining the complexities of public pension-private equity corruption and, in so doing, AI will hopefully expose and end these costly abuses.

Ask Chat GPT:

What prevents Private Equity managers from making dark money donations to SuperPACs of politicians who appoint or influence trustees of public pensions? Does the fact that most state pensions by-pass historic state procurement laws for secret no-bid contracts create an atmosphere for dark money to flourish?

And here’s the answer you’ll get:

You’ve hit on a fundamental vulnerability in U.S. public pension governance: there is very little preventing private equity (PE) firms from influencing pension fund decision-makers through dark money, especially in states and cities where pension fund appointments are politically controlled and investment contracts are shielded from procurement rules.

Here’s a detailed breakdown of why this risk exists, how the system enables it, and the regulatory blind spots that allow dark money to flourish:

1. What Prevents PE Managers from Using Dark Money to Influence Pensions?

Answer: Very little.

• Potential Barrier: SEC Pay-to-Play Rule (Rule 206(4)-5)

Reality: Applies only to direct campaign contributions—not dark-money SuperPACs. Does not cover indirect or third-party spending.

• Potential Barrier: State Ethics Laws

Reality: Often narrowly drafted; may not cover PACs, independent expenditures, or donations to 501(c)(4) groups.

• Potential Barrier: Procurement Rules

Reality: Many pension investments are exempt from Request for Proposals (RFP) laws and traditional procurement laws—especially alternative assets.

• Potential Barrier: Disclosure Requirements

Reality: PE firms are not required to disclose political donations, lobbying, or influence efforts related to pensions.

• Potential Barrier: Trustee Fiduciary Rules

Reality: Politicians who appoint trustees are not fiduciaries. They face no ERISA-equivalent standard of loyalty.

Bottomline: Dark money flows easily through gaps between these controls.

2. Bypassing State Procurement Laws: The RFP Loophole

Most public pension plans are exempt from competitive bidding laws for investments. The rationale is that investment management requires flexibility and discretion. But this exemption allows:

• No RFP process.

• No performance benchmarking.

• No documentation of selection rationale.

• No disclosure of placement agents or campaign contributors.

This opens the door to “pay to play” politics:

A governor, treasurer, or mayor can appoint trustees → trustees hire PE managers → PE firms give to SuperPACs supporting that politician → no paper trail.

Even when “placement agents” are banned, this does not apply to politically connected insiders, family offices, or affiliated bundlers.

3. How Dark Money Works in Practice

• PE firm creates or donates to a 501(c)(4) or SuperPAC.

• SuperPAC runs ads or provides funding for campaigns of state officials (e.g., governors, comptrollers, mayors) who appoint pension trustees.

• Those trustees later approve no-bid contracts with that firm.

• Because of the Citizens United ruling and weak FEC enforcement, this is entirely legal and largely undisclosed.

4. Systemic Effects

• Entrenchment of underperforming or high-fee managers.

• Suppression of fiduciary whistleblowers or independent trustees.

• Lack of diversification across asset managers

• Use of opaque structures (e.g., Cayman LPs, side letters) to conceal terms.

• Political dependence on PE contributions to fund elections.

This isn’t just theoretical—it's been exposed in numerous scandals over the years.

Conclusion: A Fertile Environment for Corruption

The combination of dark-money SuperPACs, political control of trustee appointments, and exemptions from procurement law creates a structurally corruptible system.

Even without explicit quid pro quo, this system ensures that capital flows to politically connected PE firms, not necessarily the best-performing or lowest-fee managers.

The takeaway: Be aware that the investments and performance of your public pension are subject to corrupt decision-making. Whenever pension benefits cuts or contribution increases are proposed, recognize that mismanagement of investment is almost always the cause.