New York's "Madoff-like" promised 7.5% safe return on pension investments chickens are headed home to roost. Warren Buffet says 6.0% would be a better rate. It is reported as "The State Pension Time Bomb" where, "Poor accounting rules and flagrant irresponsibility have sped up the states’ day of reckoning." This blog previously in November 2010 reported: link
Madoff had promised safe returns of 10% before the economic recession began. The SEC warns in its Ponzi Schemes – Frequently Asked Questions that Ponzi schemes share common characteristics:
High investment returns with little or no risk
Overly consistent returns.
Comptroller Di Napoli has reduced his hope to earn 8% percent a year to 7.5%. Except for Madoff, who guarantees a 7.5 percent safe rate of return? Or 7 percent? Or 6 percent? No junk bonds allowed. NY's real rate of return was less than 4% for ten years.
Even worse, NY's return for past 5 years was 01.1%. Link.
A report in the August issue of Governing, called New York State, the nationwide pension leader with Pension liability: $141 billion. The NY Times, agrees and had "How to Cheat a Retirement Fund", an "approach that assumes, as economists generally do, that even corporate accounting standards in this area are too lenient, public pension underfunding is about $3.5 trillion, or one-quarter of gross domestic product."
"Private pension plans must discount their liabilities based on a market rate—typically, a corporate or U.S. government bond rate—which is often much lower than the plans’ projected returns."
*Return US Treasury: 10-MONTH NOTE 10-15-2010 2.475%
There appears to be a large difference between 2.475% and 7.5% and DiNapoli's assumed drop from 8% to 7.5%.
Bottom line: New York's balance sheet is tipped by an unfunded pension liability of up to $143 billion dollars. Already, the New York Debt per person including local debt is $24,195. (For a family of four that is about $97,000.)
Now add another $143 Billion divided by 19.4 million (NY Population) to add another $ 7,341 to that $24,195.
NY State and local debt per person $24,195
NY unfunded pension debt per person $7,341
Who would lend money to such a debtor?