Public Pension Ponzi Schemes

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, has 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 is in serious jeopardy…and it 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, ha? 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. On March 1st, I wrote Larry Fink Warns Calpers, Sense on Cents Warns America.

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 vs social loss for the taxpayers stuck with the bill.

The 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 issue government IOUs back 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?

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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