Wow, I stirred up a hornets nest with my "New" Millionaire Next Door article, and it has been nearly 100% positive. I've even heard from a couple of teachers who couldn't be more concerned about how the state expects to make good on their promises. Just to clarify, most teachers and other State employees are fabulous people and I absolutely have nothing against them earning the best living that they can. I am especially grateful to the teachers who take my children under their wings every day! The point of the article was to show how unsustainable the current system is.
The real culprits here are not the employees, it is really the unions and the legislators. I don't even blame the unions that much since they are just doing what they always do...leach on to something and suck it dry. No, the real blame falls on the shoulders of our financially challenged legislators.
In my prior career I managed a portion of PSERS and SERS investment portfolios. I've been to Harrisburg numerous times, sat in the Treasurers office, and presented to the investment committee. While there are some relatively bright investment professionals actually working in the Treasurers office, the problem arises when it comes to their bosses. The politically correct way of saying it would be that their bosses (predominately elected officials) are financially challenged. They bought into the erroneous belief that just because stocks returned 8% a year "on average" over the prior 60 years that they would return 8% every year into the future. They also believe that their portfolios should return at least 8% a year since they are hiring the best money managers that their consultants recommended (in actuality the PSERS portfolio returned 3.28% annually for the ten years ending June 2009) . Of course they don't want their portfolios 100% invested in stocks (that would be too risky), so they diversify with bonds (yields under 4%), private equity (extremely illiquid), and hedge funds (illiquid & volatile returns). So they use a targeted actuarial return of 8% (it used to be 8.5%). Now there is actually no way in hell that a diversified portfolio is going to earn 8% annually over the long-run! Treasuries yield a whopping 3%, cash is at 0%, and the ten year return on stocks is negative! I can't tell you how many times I sat there and tried to explain the difference between total return and current yield. I think these people even believe the Fed and Treasury, when they say that we have "a strong dollar policy". Put simply, they are clueless when it comes to understanding the financial markets.
But, don't they hire consultants and financial professionals to take care of the investment portfolios? Of course they do. But, the consultants and financial professionals tell them what they want to hear. They want to hear that they can achieve their actuarial targets so they don't have to fund their plan, and consultants don't want to tell them that they can't get an 8% return because they will find another consultant that will tell them they can. It's an insidious game. The sad thing is that we are all stuck paying the bill for their ineptitude.
What can be done? Of course we don't know exactly how this is going to play out, but an educated guess goes something like this:
First, they try to extend the severe tax hikes by spreading them out longer. We still pay significantly more in taxes, just a bit less in the early years. Overall the tax bill is higher.
Second, they try and make some cuts in the benefits for new employees. Some strikes should be expected.
Third, they try and cut into the benefits of existing employees. Strikes are a certainty.
Fourth, they try and cut benefits to existing retirees. Huge uproar, and strikes are a certainty.
Lastly, a prepackaged bankruptcy (PC Restructuring) will ensue where the States bond holders will take a hit, and the States employees and retirees will take a hit.
It will be long and ugly, but the simple fact is that the system is bankrupt. The sooner we wake up to this Fact the lower the ultimate bill to the tax-payers will be.
Here is the link for PSERS 2009 Investment Review...WARNING this is not appropriate for anyone with a weak stomach! The portfolio declined from $63.9 billion in June 2008 to $43.3 billion in June 2009, a stunning loss of $20.6 billion. This is your loss!
The Transition From The Dollar To A New Reserve Currency:
Jim Rickards is one of the foremost authorities on currencies, and in this excellent interview he talks about how the G-20 are starting to plant the seeds for a transition to a new reserve currency.
With gold hitting new highs I thought it was pretty timely.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/6/14_Jim_Rickards_files/Jim Rickards 6:14:2010.mp3Steve Wynn, the entrepreneur who led the rebirth of Las Vegas and in the process became the 468th richest man in the world, had some pretty choice words for "those hypocritical SOBs in Congress." Enjoyable T.V.
A little Friday humor on BP's handling of a coffee spill.
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