State Pension Abuse

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.

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5 Responses to “State Pension Abuse”

  1. Fund Investing Says:

    Furthermore, it is possible to invest directly into ones own company’s commercial property. Fund Investing

  2. G.Nelson Says:

    When it comes time for the pensions message, hopefully you will have the maximum amount allocated for you. If not, you should, if no errors were made in their calculation. The smallest change can have the greatest impact.
    Pension Release UK

  3. Lawrence Kramer Says:

    Having been a pension lawyer for longer than I care to admit, I’m 99% with you on this issue. Adjusting investment return assumptions to balance a pension fund is like retouching the x-rays to cure a disease.

    My only problem is with having the state buy its own bonds. If you believe that the state will bail out the fund, then investing in state bonds is equivalent to no funding at all. Under the current arrangement, there’s at least the possibility that the state will choose to default on the pensions before it defaults on its bonds. If the fund owns bonds, the two are the same thing.

    • redst8r Says:

      LK: aw shucks, good point about the bonds. My objective was/is to align state employee’s economic interests with the private sector economic interest. I may not have identified the proper mechanism. Regrettably that alignment does not exist today but I believe such economic balance is vital to our economic survival.

      Would it work if there was a legislative prohibition on state employee pension bailouts? Not that such prohibition would ever occur absent some seismic political change.

      Thanks for your comment.

  4. Lawrence Kramer Says:

    A friend of mine once suggested that we could fix the US Postal Service by requiring that all of its employees’ paychecks be mailed to them.

    A legislature cannot bind its own hands. Only a constitutional amendment can stop a future legislature from doing anything. Good luck with that.

    A legislature can forbid state officials to promise benefits that the granting agency or subdivision cannot fund under reasonable assumptions. That would not be likely up here in NY, which regularly competes with Illinois and California for the worst state legislature in the country. But maybe in Dixie…

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