Monday, March 21, 2011

Public Retirement Funds Circling the Drain

The last great raid is here. The history has already been settled. I am just waiting for the fallout.

In essence, the stock market has traded sideways for 13 years. We are at the same levels we were at in 1999. The stock market is illusory. There are two things that this period of time can tell us.

Equities in 1999 were worth more. They were priced in dollars that were stronger and less inflated than the ones in play now. The other thing we learn is the value of time. Or in this case, lost time.

All public retirement funds are based on actuarial assumptions. These are assumptions that municipalities and states use to gauge and predict future liabilities assuming certain things take place. The problem with that is- they have all "assumed" very rosy scenarios. Rosy scenarios that are not going to happen. I am going to plug in a tool here that I have been using for years. It is called "public fund survey" and includes data from all large and some municipal public retirement funds. It provides information on the fiscal health of our country. It is very interesting indeed. You will have to sign up- which is pretty easy. Mandatory if you are a public sector employeee.

How accurate are these assumptions? Well public funds assume on average an 8% return each year. They also assume a 3.5% inflation rate. They are looking for a 4.5% return. Did they get that 4.5% x 13 year or 58.5% percent return that they were looking for in the 1999-2011 time frame? Of course not. The Dow/S&P 500 would be a net 58% higher. History shows us that the market levels today are at the same levels that they were in in 1999.

The government has managed to manipulate key inflation data by only using "core" inflation data. Public funds have caught onto this rigged pricing and use core data- not real data- to help obtain those fantasy assumptions and they also use core data to give retirees their cost of living adjustments. (My retirement fund gave me a 1% cola in March using the governments shitty accounting methods- while more accurately- real inflation was running 4-5%.)

There is simply no way for states and municipalities to pay what their actuaries have promised. That little skirmish in Wisconsin was nothing. Things are going to get far worse as an angry public takes public employees out to the woodshed. When this steroid induced/QE2 market is finally allowed to tank- this whole thing will accelerate at lightning speed. Watch California. They are the canary in the coal mine. I use this site to keep up on the latest developments in a state that left the rails long ago.

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