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Springfield Goes to Wall Street


Springfield Goes to Wall Street

Fred Starkey

April 19,2012

In 2002 the Oregon Public Employees Retirement System (“PERS”) went unofficially bankrupt.  The reason was because the government promises of permanent 8% returns were impossible to keep.  Here’s why: the financial markets produce a return on investment based on a “risk/reward” ratio.  The higher the return, the higher the investor risk and accompanying volatility – meaning a concomitantly higher risk of loss as well as gain.  A well-diversified investment account can produce predictable results; some years the return may be greater than the statistical norm, but other years it may be lower – and substantially lower.  The only way to guarantee a specific return in the long run is to use a “risk-free” return rate that effectively means the pure time value of money. Logically, nobody can promise any return in the long run that exceeds the risk-free rate of return and hope to fulfill that promise.  The current investment return available in the United States with no risk is less than 1%.

However, by making such a promise to PERS recipients in their variable accounts, the public entities effectively created a gift – every year that the PERS investment account (also known as the “variable” account) failed to produce the designated return, the difference had to be made up from somewhere else.  Eventually those deficits became overwhelming.  But PERS can’t really go bankrupt, because its obligations are constitutional.  So, unlike bankrupt businesses, PERS simply sent bills to the participating public entities to make up the variable account deficit along with the 8% increases that they contractually promised to PERS members.

When PERS public entities realized that the PERS obligations would be difficult or impossible to meet, they decided to take action.  Unfortunately, what they did was to make matters worse – much worse.  According to the Oregon State Treasury, in order to finance that debt on its variable PERS account (rather than decimating their current budget), PERS sold 20-year Pension Obligation Bonds at 4.65% interest.

By selling the bonds, they immediately received the funds  necessary to meet their PERS obligation; however, now they owe that money to their bondholders.  This postponed the immediate debt, but also added interest to be paid by the taxpayer so that now taxpayers have to pay not only the 8%, but the additional 4.65% as well – for a grand total of – you figured that right – 12.65% per year.

But if that wasn’t bad enough, then the PERS managers did an even worse thing.  They had what looked to them like a big pile of money sitting in their PERS fixed account from the Pension Obligation Bond sales.  Why not take that money on which they were paying 4.65% and invest it in their variable account?   They reasoned that they could use the investment income to reduce or eliminate the amount they would have to pay out to the bondholders because it was invested in securities that had the potential of creating a higher return.   So, they “invested” the original bond sales proceeds on which they were paying 4.65% interest by moving it into their PERS variable account with an expectation of an 8% return or higher.   Unfortunately, the investment was not in fixed securities, and the PERS managers also ignored two basic rules: first, fiduciaries are never allowed to speculate with the property entrusted to them; and that is because of the second rule: stock markets are unpredictable. Instead of assessing and measuring the risk with taxpayer dollars and hedging or buffering in any way, the PERS managers simply went by the seat of their pants.  To nobody’s surprise, the stock market downturn has ravaged the values in that investment account.

The Springfield School District’s original share of the PERS losses was $60 million (along with the contractual long term growth promise of a minimum of 8%).  However, a recent independent audit now shows a loss of $30 million from the original $60 million, or ½ its value, so that the Springfield School District now owes $90 million plus the ever-accumulating interest. To nobody’s surprise, neither Springfield Superintendent Nancy Golden nor the Springfield School Board has any reasonable plan for repaying those losses.

But pay for them they must.  When those obligations come due, the Springfield School District will have to use very real tax dollars; every one of those tax dollars will represent a dollar not spent on current education. The Springfield School District will have to pay the 4.65% interest every year in addition to the principal for the bonds for the next 20 years.  That means that the interest alone exceeds $7.5 million per year. However, they only have half of the original funds available, so Springfield will have to also make up the principal as well.  That means they are on the hook for well over $10 million dollars per year – which will have to be raised in tax revenue before it can spend the very first dollar on its schools – for at least the next 20 years.

What is the lesson to be learned from the loss of millions of taxpayer dollars?  This: people who have no track record of managing money successfully in the private sector should not being managing public money.  Where else can an employee violate fundamental fiduciary rules, accumulate such losses, and keep their job?  Everybody with their hands on those PERS financing decisions should be terminated immediately.  When private Wall Street executives did this there was a national outrage and they were branded as “thieves.” However, when public employees do it in Oregon then nobody —  not even a local TV station — reports it and the employees are regarded as “valuable public servants.”

Fred Starkey

Predicting America

  1. Pension funding is problem too large to ignore, Thomas J. Healey, assistant secretary of the Treasury under President Ronald Reagan, Senior Fellow at Harvard Kennedy School
  2. 93 and 18.6 Lunar declination Cyces and their relationship to the stock market cycles1

Swindler

  1. What is a Swindler?

Fourth Turning Regeneracy

  1. WHERE’S OUR FOURTH TURNING REGENERACY?
  2. WHERE’S OUR FOURTH TURNING  REGENERACY ? PART 2
  3. WHERE’S OUR FOURTH TURNING  REGENERACY PART 3

Understanding Pers

  1. Understanding the true cost of state and local pensions, American enterprise Institute, Andrew Biggs
  2. Can pensions be changed “going forward?” In Budget Crisis, States Take Aim at Pension Costs  By MARY WILLIAMS WALSH
  3. Public-sector pensions remain generous because taxpayers are in the dark-Dodging the Ball
  4. NASRA Issue Brief: Public Pension Plan Investment Return Assumptions
  5. Public Pension Pressures in the United States Olivia S. Mitchell, Oct
  6. Why do states assume an 8% return on public pension investments?
  7. Teamsters Find Pensions at Risk Mary Williams Walsh, November 15, 2004
  8. A Test for State’s Untouchable Pensions from New York Times Mary Williams Walsh, March 18, 2012
  9. Freedom and Understanding Pers by Fred Starkey
  10. Can States Escape Pension Obligation Through Bankruptcy?
  11. Pension funding is problem too large to ignore, Thomas J. Healey, assistant secretary of the Treasury under President Ronald Reagan, Senior Fellow at Harvard Kennedy School
  12. Analysis of California Pensions Finds Half-Trillion-Dollar Gap
  13. The Underfunding of State and Local Pension Plans; NASA
  14. What a Piece of Junk: respondingto the eonomic Policy Institute on Public employee Pay, The Enterprise Blog, Andrew Biggs
  15. Oregon’s Ever Increasing State Debt Load, Dennis Richardson
  16. A Gold-Plated Burden, Hard-pressed American states face a crushing pensions bill, The Economist, Chuck Reed
  17. PERS Rates Are Going Up, WAY UP, On July 1, 2013, Dan Re
  18. The Pension Crisis,  Ronald J Ryan, CFA
  19. State Bankruptcy: Start Worrying, Steve-Wordpress Blog
  20. On “Costless” Benefits for Public Workers, Jason Richwine

Unions

  1. The Reality of Labor Unionism in America by Brian Farmer
  2. The States With the Largest Unionized Work Force

Discount Rate

  1. Retirement Fund Discount Rate
  2. Another point of view on the pension obligation discount rate

Moodys Reports

  1. 2011 State Median Report, Moody
  2. Combining Debt and Pension Liabilities of U.S. States Enhances Comparability

Answers to the Delima

  1. Is School Like Jail? Jeffery Tucker

Recommended Books

  1. The Main Spring of Human Progress, Henry Grady Weaver , Rose Wilder Lane, and  G. Henry Weaver 
  2. The Law, Frederick Bastiette 
  3. Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics, (See Wikipedia information on author)Henry Hazlitt
  4. Freedom and Economics,
  5. The Economics of Freedom: What Your Professors Won’t Tell You, (see Wikipedia information on the author) Selected Works of  Frederic Bastiat
  6. The Road to Serfdom, Miton Friedman
  7. Common Sense, Thomas Paine (see Wikipedia information on this book)
  8. The Working Life of a Dollar ; Lee Wendelbo & Sam Shannahan
  9. The Fourth Turning: An American Prophecy – What the Cycles of History Tell Us About America’s Next Rendezvous with Destiny; by William Strauss
  10. The Millionaire Next Door, Thomas J Stanley, Ph.D. and William D Danko, Ph.D.
  11. The Fatal Conceit, The errors of Socialism,  Edited WW Bartley

Books on History  

  1. Tragedy & Hope: A History of the World in Our Time, Carroll Quigley
  2. A Monetay History of the United States, 1867-1960, Milton Friedman and Anna Jacobson Schwartz
  3. The Law of Civilazation and Decay; An essay on History; Charles A Beard
  4. Manias, Panics, and Crashes, 4th Edition; Charles P. Kindleberger
  5. Suicide of a Superpower, Will America survive to 2025? Patrick J. Buchanan

Books on Education

Cultural Literacy, Ed Hirsch, Jr.

The Harbinger, Jonathan Cahn

Books on PERS and risk

  1. Against the Gods, A remarkable story of risk, Peter L. Bernstein (See Wikipedia information on Peter)
  2. The Theory of Money and Credit, Ludwig von Mises (See Wikipedia information on this book. It is also sold at Amazon.com)
 
Books on Freedom  and Economics
  1. Economics is One Lesson,  (see Wikipedia information on this author)  Henry Hazlitt
  2. The Naked Communist,W. Cleon Skousen

Freedom and Understanding PERS


FREEDOM and UNDERSTANDING PERS by Fred Starkey

Ecclesiastes 1:9: “The thing that hath been, it is that which shall be; and that which is done is that which shall be done; and there is no new thing under the son”.

Thomas Jefferson: “the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale”.

John Kennedy: “the belief that the rights of man come not from the generosity of the state, but from the hand of God”.

The problem with understanding PERS is that you need a lot of background information in history, economics, finance, markets, law, religion, human nature, ethics, and from this, a historical perspective. This idea was thoroughly discussed in Cultural Literacy by E.D. Hirsch, Jr. in 1987, which is even more applicable in today’s culture than it was at that time. “American School Materials from 1790 – 1900 were in almost complete unanimity in values and emphasis in textbooks. They consistently contrasted virtuous and natural Americans with corrupt and decadent Europeans; they unanimously stressed love of country, love of God, obedience to parents, thrift, honesty, and hard work; they continually insisted on the perfection of the United States, the guardian of liberty and the destined redeemer of a sinful Europe”.  But today, many in our society are illiterate.  In fact, according to NAAL 43% of the people can’t read and only 13% of adults are considered proficient.  It brings to mind F.A. Hayek: “It takes a large group of ignorant (illiterate), gullible, and docile people to move from Freedom to Socialism.

[Or, with a track record like that, Public School Teachers should not be rewarded with a lavish retirement benefits package, even one that is solvent, let alone one that is clearly not. (This is Diane’s writing)]

PERS is in Economic History a Financial Fraud and a Swindling Scheme. The new alchemist is the actuary: the wizard of numbers, which he manipulates to present a misleading future. Moreover, his current algorithms are not working as the cost of PERS payroll is going up 6% in 2013.  This can be easily proven especially under the definition by Jefferson.  PERS does not need reform it needs to be shut down and liquidated.  We are now in a condition that we either liquidate PERS or the citizens, their property, and their families will be liquidated.  That is what history tells us. PERS is not new.

“There is no new thing under the sun.”

Fiat Paper Money, the History and Evolution of our Currency, by Ralph Foster, is proof  that all paper currencies go zero: that’s PERS, your savings, and your cash.  This is what history tells us. So, we know the end, because we have seen it happen in other countries, who took this similar path. But, time is short if we are to stop this financial train wreck.

We study history so hopefully we won’t repeat the mistakes of others.  Jim Rogers, the legendary investor, said to study history, not business if you want to be successful.

When my daughter (6th of 6 children) came home from school (Honor roll student) and asked me: “Dad what’s liberty”. I thought what are they teaching at our government schools?  Then I asked my daughter and I would ask you: “why did all these people go to war and die for their country? why do we still sing the music?:” “land of the free, the night from the light from above”, or listen to the soul stirring rendition by Ray Charles of America the Beautiful: “who more than self their country loved, God shed his grace on thee, confirm thy soul in self-control, thy liberty in law” and, “Sweet land of liberty, land where my fathers died, long may our land be bright with freedom’s holy light.”

See, we have had the wool pulled over our eyes.  Somebody blew out the candle.  But, maybe we can light it again if we go back in history to understand.  America, the USA, freedom, and liberty cannot be understood without the Bible.  In James 1:25: “…the perfect law of liberty…”  I have been going to Church for over 40 years and have never heard a sermon on the “perfect law of liberty”: have you?

In Romans 13:1 we find the word powers. In Greek, this is translated “exousia” defined as “power of choice, liberty of doing as one pleases”. “This inalienable right to choose is man’s responsibility to govern himself under the providence of God”.  In other words, similar to Kennedy’s belief stated above, we get our rights from God and not from the State.  Moreover, Gods laws are superior to man’s law. Therefore we should always obey God and his laws as our first priority.

This was the clear understanding prior to and after the revolution.  It was Thomas Paine who galvanized the American Revolution through a small pamphlet called Common Sense published on January 10, 1776.  In Chapter two his arguments were supported by references to Gideon, Judges, and Samuel of the Bible.  His proposition was to replace the principle of heredity and privilege with the ideals of talent and merit and stated “tyranny like hell, is not easily conquered”.  PERS is tyranny.  It is analogous to this heredity and privilege concept. These people have set themselves above others as the omniscient “crème de la crème” with superior privileges for a bureaucratic elite. This proves that human nature upon which the constitution was written is repeating.

As the Bible states: “There is nothing new under the sun”. Consider: “The Millionaire Next Door” by Thomas J. Stanley states on page 2:The top 20% of all Americans after home equity have a net worth of $60,000.00. Only 2.8% of all Americans are 1st generation millionaires.  Yet, the average 30

Year PERS pension at $50,000 a year including a zero contribution to the pension, a 2% COLA, exemption from state income taxes, no management fee, and health insurance, which is a cost of $15,000 plus a year in the private sector.  This is being funded at 50% or less using the 8% discount rate as compared to the private sector. The capital required to fund this pension in the private sector is around 1.5 Million.  Yet, these people are saying they could have saved this amount of money in 30 years (age 55) by working in the private sector.  Do you believe these people are delusional?  I do.

In comparison these are the aristocratic, privileged people that were America’s enemy when this country went to war and declared their independence. They refused to worship King George and said they receive their rights from God.  We all know what happened. Will it happen again? “There is nothing new under the sun”.

In the next article we will discuss the mechanics of PERS: why PERS is a Financial Fraud, a Swindling Scheme, an Intellectual Fraud, and why it cannot be paid.

I want to thank the Lane Conservative Forum and the Register Guard for allowing us to publish an understanding on PERS within the current financial debacle or meltdown.  We believe this issue is of great importance to the citizens of this state, the businesses that support this state, the people, families, and the children who will pay the future taxes to support PERS.

INFORMATIONAL LINKS

A Test for State’s Untouchable Pensions from New York Times Mary Williams Walsh, March 18, 2012

In Budget Crisis, States Take Aim at Pension Costs  By MARY WILLIAMS WALSH

TEAMSTERS FIND PENSIONS AT RISKBy MARY WILLIAMS WALSHPublished: November 15, 2004

WHERE’S OUR FOURTH TURNING REGENERACY?

More to  reference -Market Cycles-The 9.2 Year 18.5 year Cycles in Stock Market by Louis M Thompson July/Aug 1989

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