Where Has All the Money Gone?

I have written in previous articles that governments and corporations would attack retirement funds and the ugly truth would surface that they have raided these funds for years without telling their employees and when reporting the financial status of the companies that are publically traded, these actions were reported but distorted and hidden.  Certainly they were not fully expensed as liabilities to be kind.

Today, I want to follow-up and update my readers to one demonstrate that my information and “intuition” was correct and that these actions will really surface hard during the next three months.  My concern is that it is these types of actions and situations that will bring tensions to the surface and they have the potential to be released as collective anger and mob mentality.  No doubt there certainly is full justification for such reactions, but we must not fall into that kind of mentality.  Here is some of that information that, while not reported in MSM, is starting to surface.

Automaker Pensions Underfunded by $17 Billion

By NICK BUNKLEY Published: April 6, 2010

DETROIT — The pension plans at General Motors and Chrysler are underfunded by a total of $17 billion and could fail if the automakers do not return to profitability, according to a government report released Tuesday.

Both companies need to make large payments into the plans within the next five years — $12.3 billion by G.M. and $2.6 billion by Chrysler — to reach minimum funding levels, according to the report, prepared by the Government Accountability Office. Whether the companies will be able to make the payments is uncertain, the report concluded, though Treasury officials expect the automakers will become profitable enough to do so.

If either company’s plan must be terminated, the government would become liable for paying benefits to hundreds of thousands of retirees. The effect on the government’s pension insurer, the Pension Benefit Guaranty Corporation, would be “unprecedented,” the report said. The agency manages plans with assets totaling $68.7 billion, less than the $84.5 billion in G.M.’s plan alone.

The carmakers’ pension plans were jolted by the downturn, increased liabilities and other factors. G.M.’s plan was over funded by $18.8 billion in 2008, and was then underfunded by $13.6 billion last year, the report said. (Note: that is $32.4 billion shift in 1 year! So if you do the math correctly GM spent the government bailout money PLUS $32.4 billion. Wow!) Chrysler’s plan was over funded by $2.9 billion in 2008 but underfunded by $3.4 billion last year. The plans cover about 650,000 people at G.M. and 250,000 at Chrysler.

The Treasury Department owns 61 percent of G.M. and 10 percent of Chrysler as a result of the emergency loans the carmakers received last year. The government spent $81 billion bailing out the companies and others in the auto industry.

The report issued Tuesday said Treasury officials were confident that G.M. and Chrysler would earn enough to allow the government to gradually sell its stakes. But the report warned that the government could push the companies out of business, consequently terminating their pension plans, if their recovery efforts failed.

“In the event that the companies do not return to profitability in a reasonable time frame, Treasury officials said that they will consider all commercial options for disposing of Treasury’s equity, including forcing the companies into liquidation,” the report said.

In addition, the report said the government’s interests as a shareholder of G.M. and Chrysler could clash with those of pension participants and beneficiaries. “For example, Treasury could decide to sell its equity stake at a time when it would maximize its return on investment, but when the companies’ pension plans were still at risk,” the report said.

President Obama has said he wants to sell the government’s stakes in the two companies as soon as is practicable. G.M. executives have said that a public stock offering could happen this year but that the company would need to be profitable and meet other criteria first. G.M. is scheduled to release its financial results for 2009 on Wednesday. Chrysler plans to provide an update on April 21.

Analysis of California Pensions Finds Half-Trillion-Dollar Gap

By MARY WILLIAMS WALSH Published: April 6, 2010

An independent analysis of California’s three big pension funds has found a hidden shortfall of more than half a trillion dollars, several times the amount reported by the funds and more than six times the value of the state’s outstanding bonds. California Gov. Arnold Schwarzenegger says that unless legislators act on pension reform, programs will have to be cut.

The analysis was commissioned by Gov. Arnold Schwarzenegger, who has been pressing the State Legislature to focus on the rising cost of public pensions. Graduate students at Stanford applied fair-value accounting principles to California’s pension funds, using a method recently devised by two economists working in Illinois, Joshua D. Rauh of Northwestern University and Robert Novy-Marx of the University of Chicago.

The Stanford group’s finding does not suggest that California has to come up with half a trillion dollars all at once; pensions are paid slowly over time. But the possibility that the state’s public pension funds are much deeper in the hole than reported could help explain why the required contributions to the funds have been rising every year, contributing to California’s annual budget drama.

The finding also raises vexing legal issues, because public debts in California are supposed to be approved by the voters. The voters have, in fact, duly authorized all of the state’s general obligation bonds, but the much larger pension debt is appearing out of nowhere.

The researchers offered six recommendations for closing the gap between what is owed to the state’s retirees and how much has been set aside, including less volatile investments and a revamped benefit structure. Governor Schwarzenegger issued a statement on Monday, warning that unless state lawmakers tackled pension reform, “increasingly large portions of state funding for programs Californians hold dear, such as schools, parks and health care, will be diverted to pay for this debt.”

Mr. Schwarzenegger pointed out that he proposed pension initiatives a year ago, but lawmakers never followed through. “We cannot wait any longer,” he said. “Without reform, pension debt will only grow.”

The Stanford project focused on California’s big state-run employees’ pension fund, known as Calpers; a second large fund for teachers, known as Calstrs, and the University of California Retirement System. The three funds serve more than 2.6 million public employees and retirees.

Smaller public pension funds in California, run by cities and some counties, were not included in the analysis. Public pension funds in all states and cities normally report their financial status with numbers prepared by actuaries, who keep track of assets and liabilities while calculating required contributions every year. Increasingly, though, economists and other authorities say that the actuarial numbers give an unacceptably distorted picture.

That is because pension actuaries are trying to plan a budget of smooth, predictable contributions over the years, regardless of market volatility. Their job is not to provide a current financial picture. Companies are no longer allowed to use actuarial numbers when reporting their pension values to the Securities and Exchange Commission. For governments, the board that issues accounting rules has been contemplating whether to change its pension standard, but while it deliberates, economists like Mr. Rauh and Mr. Novy-Marx are recalculating public pension numbers on their own.

The primary complaint about the method used by states and cities is how they gauge the value of the pensions they owe in the future in today’s dollars — a widely accepted financial calculation known as discounting.

Currently, governments discount pension values by using the return they expect their pension investments to earn over the long term. For most public pension funds, that means about 8 percent. In California, the teachers’ fund uses 8 percent, Calpers uses 7.75 percent, and the University fund uses 7.5 percent.

The Stanford team found fault with that approach. The researchers wrote that in today’s economic climate, such rates are associated with more speculative securities that carry some degree of risk, like those of emerging markets. Pensions, by contrast, are constitutionally protected and therefore the payments to public employees and retirees should carry almost no risk.

After the researchers applied a risk-free rate of 4.14 percent, equivalent to the yield on a 10-year Treasury note, the present value of the promised benefits ballooned. The researchers came up with a $425 billion shortfall for the three funds. As of July 1, 2008, the funds officially reported they were $55 billion short. They have not issued financial statements since then, but have said informally that they lost a total of $110 billion.

The researchers concluded that their estimate of the gap would also have grown by roughly $110 billion, to more than half a trillion, today. Their full report is expected to be released this week on the Stanford Institute for Economic Policy Research Web site. Calpers challenged the research, saying it was “out of sync with governmental accounting rules and actuarial standards of practice.”

So there you have it folks. The reality is that nationwide this is just the tip of the iceberg.  My own rough on the napkin kind of calculations suggest that there is between a $10-15 Trillion dollar theft err… I mean deficit of retirement funds.  I call it theft because when you trace where the money went, guess where it leads?  Look surprised! JP Morgan Chase and various hedge funds received the funds as investments that were invested by the people who had the responsibility to PROPERLY invest and management the retirement assets.  Secondly both companies and governments have for years used retirement funds as a source of interest free loans.  These practices should absolutely be prohibited by law.


Author: redhawk500

International business consultant, author, blogger, and student of life. After 35 years in business, trying to wake the world to a new reality. One of prosperity, abundance, and most importantly equal opportunity. it's time to redistribute wealth and power.

4 thoughts on “Where Has All the Money Gone?”

  1. Hi everyone, This webpage is remarkable as well exactly how the issue has been extended. I like some of the remarks too even though I would prefer we all keep it on topic in an effort to bring value to the subject.

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