Archive for March, 2010

State Pension Abuse

March 13, 2010

The article in today’s (March 10, 2010) Star News, “N.C. among states raising pension-investing risks” will sadly receive far less attention than it should. [Note: the original article is, “Public Pension Funds Are Adding Risk to Raise Returns” and was published in the NY Times on March 9, 2010.] In the same vein a subsequent article, “A richer retirement for ex-ABS boss” (March 13, 2010) adds fuel to the pension abuse fire. In fact, the NC pension system is a state level version of the federal Fannie Mae / Freddie Mac debacle. That is, Fannie Mae and Freddie Mac were deemed independent of the federal government by such luminaries as Rep. Barney Frank and Sen. Chris Dodd. That is, they were independent right up to the day that the federal taxpayer became fully liable for all their debts and fraudulent activities (see accounting frauds – Fannie Mae and Treasury, debts, Fannie Mae and Freddie Mac).

The NC pension system is undoubtedly deemed independent of the state’s taxpayers. And so it will remain right up to the day that the system is broke and the state taxpayers will become obligated to cover all the pension obligations incurred by a profligate state government that is owned and operated for the benefit of the state employees not the state taxpayers.

A recent article regarding a local state employee exemplifies this future debacle. The retiring Supreme Court Clerk when asked about her future plans noted that she will have to do something since she is only 48 and can’t draw her pension until she’s 50! What private sector employee gets a full pension at 50? And I mean full private sector not some quasi-governmental organization like Cape Fear PUA or the ABC folks. When state (and quasi-state) employees are able to take full pensions at age 50 and receive their benefits for 30, 40 years or more who will pay them? Given the failure of the pension board to meet its projected 7.25% return assumption for over a decade who will pay the promised benefits? It certainly won’t be the state employees.

The one answer, the only answer, the answer every time is the state taxpayer will pay. Indeed, no sentient being expects the state NOT to bail out the pension plan when it fails. And clearly it will fail when the investment assumptions are based on the benefits to be paid not the returns that can conservatively be earned. This is a prime example of government not by the people, of the people, for the people but government by the government, of the government, for the government. Government looks to the taxpayer every time. Government is not longer the servant of the people, it is our master. It is a classic case of heads, the taxpayer loses and tails, government wins. Here’s how it works.

The state employees pay the least possible amount that is politically acceptable into the pension plan. The pension board makes absurd assumptions about investment returns. The board then promises extravagant benefits based on those faulty assumptions. When the investment returns do not in fact occur the pension board then seeks authority for “flexibility and the tools to increase portfolio return and better manage risk.” to quote Janet Cowell, ex-state treasurer. In other words the pension board wants to speculate with the pension money in order to earn the higher returns needed in order to pay the extravagant benefits promised. And why not? If the pension boards speculative investments fail – and fail they eventually will (see Harvard, Endowment Fund, Losses) – then the pension board will simply ask the taxpayer to take over the obligations.

As an example of these extravagant pension benefits, consider our local ABC administrator Billy Williams. To calculate his pension the state treasurer uses the average of his four highest paid years, plus other factors such as  date of birth, estimated social security benefits, unused sick leave, the number of beneficiaries and the length of his employment. There are few, very few, if any private sector employees who can ever hope to obtain such extravagant benefits. Yet it is these very same private sector taxpayers who will ultimately be responsible for Billy Williams’ pension benefits. In short, state employees, through the state pension board and state treasurer get to speculate with their pension money so as to receive these extravagant benefits knowing full well that the state taxpayer will bail them out if the pension system fails. It is a win-win for the state employees and a lose-lose for the state taxpayers.

Where should the pension board invest the money? First, they should buy all the state and local bonds. Only when all state and local bonds have been purchased should the pension system be permitted to invest in federal bonds. That’s it. By investing in the state and local bonds the pension system and by extension, the state employees will have their fates tied to that of the state taxpayer instead of to some Wall Street hedge fund.