Harry Markopolos telephoned me over a year ago.
At that time, he suggested, in general terms, some of the professional pursuits he was considering.
You may recall, Mr. Markopolos was instrumental in exposing the Madoff methodology as far back as the late 1990s. His repeated, detailed accounts provided to the Security and Exchange Commission (SEC), at that time and in the ensuing years, were severely mishandled.
Currently, he is assisting an SEC investigation of State Street, the third largest custodial bank, concerning its pricing of foreign exchange services to the California and Arkansas Teacher Retirement System pension funds.
According to Bloomberg News, “California said in October 2009 that State Street defrauded the state's two biggest public pension funds of $56 million since 2001 by charging more than agreed on the transactions and concealing the overcharges by entering false exchange rates into its own databases and in documents. The state is seeking more than $200 million in damages and penalties. The California suit was initiated by Associates Against FX Insider Trading, a Delaware general partnership of unnamed whistle-blowers.”
Bank of New York Mellon, State Street’s largest rival, is facing similar claims from pension funds in Florida, Virginia, and Pennsylvania.
The Congressional Budget Office (CBO) recently issued a report that further validates the dire actuarial condition of U.S. pension funds.
A June 2010 analysis performed by Alicia Munnell, et al from the Center for Retirement Research at Boston College, suggests the unfunded liabilities for state and local pension funds total $2 trillion to $3 trillion.
State and local pension funds are defined benefit plans. These plans provide a guaranteed growth in assets of 8 percent per annum, ad infinitum. This methodology has been approved by the Government Accounting Standards Board (GASB). The explicit guarantee for performance comes from the government (for example, taxpayers). That is, if the guaranteed returns are not realized in the market, the taxpayers will provide the differential.
Examining the defined benefit pension system 20 years ago, I concluded the methodology was ill-conceived, and the anticipated results were virtually impossible to realize. Evidently, my assessment was accurate.
According to Dr. Munnell, “During 2010, the 100 largest state and local pension plans, which account for almost 90 percent of the assets of all state and local plans, collected about $117 billion in contributions ($81 billion from governments, or about 4 percent of total state and local spending, and $35 billion from employees) and paid out $183 billion in benefits.
Of particular note, the annual government (employer) contribution is roughly 67 of the total.
Following this report, the GASB initiated a reassessment of their existing methodology. Their preliminary review included a more realistic risk profile, such that real returns more closely approximate expected returns.
Success in securing $200 million for the California Teacher Retirement System pension fund, Mr. Markopolos will alleviate a portion of the pension shortfall.
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