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Jon Fleischman

Bernie Madoff’s Quarterly Report

This week, California’s two largest government employee pension funds released their 2011 earnings reports revealing poor performances that may lead to huge taxpayer bailouts.  If Bernie Madoff had issued honest quarterly reports like these, his investors would have seen his fraud and closed down his Ponzi scheme before it cost them billions.

A recent Stanford University study shows California taxpayers may have to pay up to $300 billion to cover shortfalls in the statewide pension funds during the next 30 years — CalPERS, CalSTRS and UC.  The $300 billion projection assumes government pension funds will earn an average 6.2 percent return, a more realistic estimate than the 7.75-8% average return the funds use to obscure their huge debts.  Of course the actual earnings could be far less during the next three decades, raising the final cost much, much higher.

It is incredible that we are betting our civic and economic futures on the stock market, but that is the condition of offering government employees risky defined benefit plans.  With so many of our financial eggs in one basket we must carefully watch that basket.  When CalPERS reported earning just 1.1% for 2011 and CalSTRS reported a slightly better 2.3%, pension experts grew very nervous about growing unfunded liabilities.  The impact of lower earnings grows exponentially with time, rewarding early actions and severely punishing political dithering.

Indeed, the $145 billion CalSTRS fund is already on an insolvent trajectory, with its actuaries estimating the fund will run out of money by 2042.  The actuaries say it will take an extra $4 billion a year from the state budget to fully fund CalSTRS in 30 years.  Of course those estimates are based upon an 8% annual return, when the pension fund has actually earned just 5.4% over the last ten years and .7% average over the last 5 years.  Low returns greatly accelerate the day when CalSTRS goes bust and greatly increases the cost of keeping retirement promises to teachers.

The taxpayers’ long term prospects are bleak.  During the board meeting where CalPERS’ dismal results were released, their outside financial expert Robert Arnott told the board it should not expect to meet its estimated rate of return as the largest parts of its portfolio, equities and fixed income securities, are unlikely to annually return more than 4% for more than a decade.  This projection should be a huge warning for taxpayers and policy makers.  If market returns fall short, taxpayer bailout costs go up dramatically.

Even Governor Brown recognizes a Ponzi scheme when he sees one.  Last month he told a legislative committee that the way the state’s pension funds operate — using contributions from new members instead of investment earnings to pay retirees – is a Ponzi scheme.  Good for him, though he needs to confront the union bosses and their legislative puppets and demand a solution.  So far, the Governor has provided only lip service to the problem, trying to score points by mentioning it, but avoiding the political consequences of doing something that upsets his campaign funders.  The Sacramento Bee called him out in a lead editorial earlier this week.

The statewide initiatives being proposed by California Pension Reform would fix the state’s government employee pension problems by cutting the benefits given to new government employees, making current employees pay their fair share and requiring independent, subject matter experts be the majority on the state’s pension boards.  The proponents do not yet have the funding needed to place a measure before the voters this November.  If voters have to wait until 2014 to fix this mess, the costs will be higher, the pension debts deeper and an additional 100,000 new government workers will be added to the unsustainable Ponzi scheme some politely call government employee pensions.

One Response to “Bernie Madoff’s Quarterly Report”

  1. Robert Bosich Says:

    woooooo….numbers….mere numbers…..

    Pass the grapes and brie….an……an…..can ya top off Jerry’s Moet Chandon pleeeeeze!!!