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Public Pension Ponzi Schemes

Posted by Larry Doyle on April 6, 2010 10:50 AM |

Making promises that can’t be kept.

Garnering support via payback, if not kickbacks.

Effectively misrepresenting expected returns.

Am I talking about Bernie Madoff and every other con artist who has ever perpetrated a Ponzi scheme? No, although I could be. I am addressing the reality of the public pension system in our country. Those participating in public pensions can rail on me all they want. The simple fact is the power and leverage of the public unions combined with the willingness of public officials to sell their souls, while mortgaging our children’s futures, have created a massive gap in the funding of public pension liabilities in our nation today.

Call me heartless if you’d like. The truth may hurt, but unless we are willing to face it, our collective national future will be in serious jeopardy…hell, it already is.

I have highlighted this growing financial disaster previously, but I witness more evidence of it again today via a recently released report from Stanford University. The Wall Street Journal highlights this report in writing, Shortfall Awaits California’s Big Pension Funds:

A study released Monday by Stanford University estimates that California’s three largest state-operated, public-employee pension funds—the California Public Employees’ Retirement System, California State Teachers’ Retirement System and University of California Retirement System—currently face a total shortfall of more than $500 billion.

Nice round figure, huh? Look at that number relative to the estimate made less than two years ago:

The figure dwarfs the funds’ own combined shortfall estimate of $55 billion as of July 2008, according to the report, which doesn’t account for the more than $100 billion loss sustained by the funds during the recession. That adds a further wrinkle to California’s already precarious fiscal situation.

The study, prepared by Stanford graduate students for Gov. Arnold Schwarzenegger, used a more conservative formula to estimate the pension systems’ unfunded obligations, an approach advocated by a growing chorus of experts.

Like who? Well, start with Blackrock’s Larry Fink. (Refer back to my March 1st commentary, “Larry Fink Warns Calpers, Sense on Cents Warns America.”) The WSJ continues:

The report also recommended increasing contributions to the funds, investing in less risky assets and trimming pension benefits for future employees.

Gov. Schwarzenegger warned Monday that pension-fund shortfalls could lead California, which faces a $20 billion budget gap in the coming fiscal year, to divert more funds from other state programs to cover pension costs.

What do you think the chances are that Schwarzenegger, or any other politician, would compel those holding these pensions to take a haircut in terms of their payouts? Not likely. How then might these growing pension gaps be addressed? Look for the funds to disregard this report and actually increase the risk profile within their investment portfolios in an attempt to generate greater returns. Can you repeat after me? Private profit for those holding the pensions versus social loss for the taxpayers stuck with the bill.

The union beneficiaries of these pensions represent the base of support for the Democratic Party. I have no interest in politics in this commentary. I have every interest in exposing these Ponzi-type pensions and providing integrity in the process.

What might be the ultimate solution for these state pension funds and also the federal pensions, including Social Security?

Keep a close eye on your retirement accounts. Would the United States, especially under the Obama administration, effectively take control of our individual retirement accounts, use the current assets to fund these pension gaps and some of our federal deficit, and then issue government IOUs to us in return? Do not think it can’t or won’t happen. For more on this leg of the Ponzi scheme, I strongly recommend you read my commentary from February 19th, “Will Uncle Sam Takeover Your IRA?”

LD

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  • Break Even

    Scenario (for conversation’s sake, of course):

    Age: mid-40s
    Gross yearly salary: $55k
    401k savings: $150k
    Non-vested pension (state teacher): $22k (cash value)

    No personal debt, home 100% owned

    Couple of questions:

    If/when they abscond with 401k’s, is it most likely there will be an “account freeze” date ?

    If someone quits employment they can roll-over the 401k ?

    At what point, financially, would it be worth leaving a current employer to leave with your life savings ? Risk finding another job?

    Or is all this hooey, in that, it will be made a retroactive “account freeze” and no way to leave your employer AND take get your 401k money ?

    This is the main issue I have had with investing in “the market” since the “bailouts” began. You have to “guess” what the Feds are going to do next . . . we have stopped contributing to 401k’s beyond getting the match, exactly because of this issue.

    What are we to do, taxes will go up eventually . . . put it under mattresses ? ? ?

    • LD

      Break Even,

      All great questions. I would not pretend to have the answers but the first, and often the most important, point in assessing a potential problem is simply being aware of its existence.

      Keep these questions on your agenda and evaluate them accordingly on a regular basis. I would not expect that a program such as this would or could be implemented in short order, but be on the watch for developments and discussions.

      To that end, keep reading Sense on Cents!!

  • I’ll Be Back

    Great review of this pending disaster. From the WSJ article ,there is a fabulous comment referencing material sourced from the Dept of Labor. Check these stats out:

    The root cause of this problem is the growth of public sector unions. Here are some alarming statistics from the Bureau of Labor Statistics (Dec 2009):

    Average wage of Public Sector: $39.83/hr ($26.24 in salary + $13.60 in benefits)

    Average wage of Private Sector: $27.49/hr ($19.45 in salary + $8.05 in benefits)

    Public Sector Workers that are Unionized: 37.4% (7.9M out of 21.3M)

    Private Sector Workers that are Unionized: 7.2% (7.4M out of 108.0M)

    There are now more unionized government workers than private sector union workers. The public sector unions have been able to dramatically increase the wages and benefits of government workers over the past few decades, while private sector wages have stagnated.

    This does not bode well for this country when the wages of “public servants” (who also happen to enjoy virtual lifetime job security) have overtaken the wages of private sector workers who must produce and pay taxes in order to pay for the government workers. As shown above, wages of public sector workers are now 45% higher than private sector wages.

    There is a tremendous amount of economic distortion being caused by this conversion of organized labor from the private sector to the public sector. However, this problem is going to be VERY difficult to address. Public sector (government) workers are VERY politically active – probably the most politically active of any group in the country. To make matters worse, incumbent politicians (of both political parties) are VERY in-tuned to this group of workers. They can make or break a politician’s career. Politicians are more than happy to buy their votes and it’s very easy for them to do so. After all, they do it with taxpayer money, not their own.

  • Fed Up

    Any chance we can package these pension liabilities into a reverse-CDO and pawn them back onto Wall Street? How do we get that done?

  • Bill

    For these public employee unions, giving money to pols is basically an investment. If their pol wins, the investment pays off in terms of the pol voting to up their pay and benefits. On the disparity between public and private sector pay, it would likely look even worse if the amount of work actually being performed, as opposed to just showing up, were quantified and compared.

    It’s also great the way the media pontificate about the social security and Medicare “trust” funds. I doubt they have any understanding whatsoever of the subject. Madoff couldn’t have done a better job setting up a scam than those trust funds. It’s the same mindset that writes about “free” healthcare.

  • Mike

    500 billion dollar shortfall? As in there is 500 billion less on hand than what they promised to pay out??

    So now we bailout California teachers that are going to retire because their fund manager lost too much money playing the Forex?

    I could understand why we bailed out Wall st. cuz all our administration is Wall st. alumni or bribe-ee, But why bail out teachers and public workers?

    • LD

      Mike,

      The pension shortfall across America is speculated to be upwards of $3 trillion.

      Why bail them out? The Dems and the unions are in bed together. More incest.

      The shortfall was exacerbated by the meltdown in the markets. Many pension managers would not know risk if it bit them in the a$$. Problem is it is biting the American taxpayers in their a$$.

  • Sid

    Great article as ususl LD! Another scenario I wish you would write about is the ineptness of state appointed gov’t pension fund managers who double-dip. I read re california where the fund manager first dealt with an in-state brokerage firm who then negoiated and placed assets with a wall street firm…much of it with the same house. The state was not aware that their gov’t paid watchdog and the in-state broker received nearly $50 m in personal payments. In Florida, a former governor appointed a friend to watch over state investments and again all funds were placed with the same wall street firm. No mention was made of commissions paid by wall street in this case…but the former governor went to work immediately upon leaving office for the same firm where all of Florida’s pension fund assets had been invested. They soon suffered heavy loses. I wonder how wide-spread the described practice is. Considering that you have a new governor every 4 or 8 years and a new watchdog is appointed, is there any wonder why states have lost their shirts in recent years?

    • LD

      Sid,

      Thanks for the comment. The practice you are alluding to is not uncommon in the field of pension management. Not unlike municipal finance, when you have a state employee who is making high 5 figures to perhaps low 6 figures handing out business where the broker is making hundreds of thousands of dollars if not more, well how long do you think it takes that pension manager to say,”some of that is coming right back here.”

      Who was effectively implicated in making a payoff in just such a scandal in New York? Obama’s car czar Steve Rattner.

      A month ago I wrote, Throw the Book at Steven Rattner.






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