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« Carnival of the Capitalists | Main | Referendum C - What Went Wrong, Where Do We Go? »

Why Refs C&D Are Like Passover

Passover is a expensive holiday that demands extensive preparation. So a lot of people (usually with a lot of money) decide to go away to a Pesach program, at a hotel, and Leave the Kashering to Them. Some friends of ours run such a program, and were kind enough to have us as guests a few years ago.

The logistics of preparing a tour like this are complex. Not only is there the catering, but also the kashering of the kitchen, the programming, setting up a synagogue in the hotel, programming, children's programming, arranging local tours, and so on. Families want special rates. They need special room arrangements for wheelchairs. Some people arrive in the middle, some people leave in the middle, and some families partially arrive in the middle, and want rooms near each other. D-Day took less preparation.

Now, these programs are pretty expensive, especially for a family. A family of four can easily spend $30,000 on such a trip, and some families do it every year. Which means that when things go wrong - and they always do - people complain. As my friend Avi put it, "when you're paying $30,000 for a vacation, every meal is a $30,000 meal, because that's the number they remember."

And that's where C&D come in. When we were interviewing Bob Beauprez, he recalled a conversation with the police department in Delta, and how desperate they were for their piece of that $3.7 billion. "How much of that do you really think you're going to get?" he asked them, in a conversation since repeated a few hundred times. "I think they thought they were getting the whole $3.7 billon."

In fact, since nobody really knows how much they're going to get, $3.7 billion is the number they remember. So every slice, every nonprofit, ever fair-to-middle Montessouri school in the middle of Montrose turns into Mr. Berger, Esq, from Manhattan, and his family of five. Just as every seder turns into a $30,000 meal, and every broken TV remote turns into a $30,000 call to the hotel staff, every non-existent allocation turns into $3.7 billion.

Remember, there is abosolutely nothing statutory about where this money gets spent, how it gets spent, or who gets to see it. Legislatures can't bind their successors that way. The C&D proponents simply dangled this $3.7 billion number in front of these guys, and they all figured they're get a generous helping. They foolishly looked at the long list of advocates, and thought this must be a good thing. In fact, tonight, if C passes, every name on that list makes each piece that much smaller.

When those guys who put their names on the line for $3.7 billion get a check for $5,000, they're going to be more than a little disappointed. And no, don't expect them to have second thoughts about the process. Expect them to ask for even more money.

Which just goes to show that generous non-profits can be just as short-sighted and selfish as anyone with retained earnings.


PERA - REF C Connection & White Paper - Think You Will Find of Interest - from Yaakov (Jim) Schwartz

To: The Colorado Legislature, Governors Owens, Romer & Lamm
From: Jim Schwartz
Re: PERA-noia 2 – The PERA Deficit Disorder


Countrywide, state employee retirement trusts ("pension plans") have more than ONE TRILLION dollars of liabilities over assets. Colorado's Trust (PERA) covers 68,000 retirees; 175,000 active members paying into the system; and 125,000 inactive members who are not employed but are waiting for pension benefits. But PERA today has enough assets to fund only 70-73% of its obligations to all these people (variation depending upon how actuaries are instructed by PERA to massage the numbers). A mere 4% of the benefits paid in by present active PERA members could be paid out per PERA’s actuarial analysis. PER Standard & Poor’s (2004 numbers) while the per capita debt in Colorado is but $9, adding back the PERA unfunded liability takes per capita number to almost $2800! (And this does not include the unfunded health trust liability of PERA which is 86% underfunded). PERA’s own questionable scenario’s (Ennis Knupp) show a 5%-21% probability of full amortization starting 2010 or 2015 over subsequent 30 to 40 year period whereas new Federal legislation will require 7 years for full funding of defined benefits of corporations (except airlines) and 30 years for state pension plans! (PERA’s own suggested reforms amortize in 59 years – will paydown of the liability starting 30 years from today! PERA’s executive director indicates that PERA merely has a flat tire though others think a new car is necessary. One could speculate that PERA’s executive director drives a Yugo under the influence.)

Underfunding of PERA's obligations is due in the best case to incompetence of administrators and in the worst case to their deceptive practices (hiding the ball and or kicking the problem down the road). Past and present Colorado state elected officials have chosen to increase benefits while, at times, decreasing contributions. Compounding the PERA deficit disorder have been self-dealing legislators (some inadvertent but not excusable) and other public officials whose own PERA membership creates serious conflicts of interest relative to perceived independence and the public’s substitute reliance. The above was, of course, exacerbated by the 2000-2002 stock market declines. However, to place all the blame on the market’s decline is a faulty excuse to deflect the PERA deficit disorder which will be further jeopardized by ever increasing longevity of PERA members. Solutions to such seemingly intractable problems will require substantial mutuality of sacrifice -- both economic and political -- by elected officials, PERA members. Mere reform but rather chloroforming may be necessary, but first, honest independent actuarial analysis utilizing probability scenarios (i.e. Monte Carlo) will be necessary to determine the extent of the PERA Deficit Disorder and the need or not of a declaration of actuarial emergency. Those suggesting solutions prior to engaging this process are engaging in “fire, ready, aim” political games.


• $44+ billion of liabilities (obligations) and but $33 billion of assets (1) making PERA 70%-73% funded depending on actuarial. This is a debt to equity ratio in excess of 133%.
• Full amortization (starting in 2010 or 2015, 30 and 40 years hence, per PERA’s Ennis Knupp analysis is but 5%-21% (and PERA refused to provide the methodology!)
• Colorado per capita debt is $9. Add in PERA unfunded liability – the per capita debt rises to approximately $2800 (and that does not take into account probability analysis – i.e. Monte Carlo)
• The PERA Health Trust is but 14% funded
• As of 12/31/06, accounting rules will require taking the unfunded health trust liability from a footnote unto the balance sheet further increasing the per capita debt from $2800 per Coloradoan.
• Today, PERA could only fund 4% of the benefits already earned by active PERA members (p.82, 2004 PERA Report)
• A rate of 17.31% is the actuarially required employer contribution rate (up from the present 13.15% that by law goes to 13.65% over the next several years) to pay the Normal Cost and amortize the UAAL over 40 years. PERA of Colorado Actuarial Valuation, December 31, 2003. (On 175,000 active PERA employees making on average $50,000 would mean an a state funding increase of from the projected 13.65% schedule to the 17.31%. This would require a minimum of 320 million a year for 40 years (not including inflation) cannibalizing the estimated $3.7 billion in Ref C proceeds “earmarked for health, education, and transportation” plus another $9 billion in taxpayer dollars . Latest actuarial studies indicate a yearly funding need in excess of $400 million per year (or $2.2 billion of the $3.7 billion of Ref C proceeds over the next 5 years.

PERA Administrator Meredith “Wilson” Williams 76 Trom-bone-head response, “the margin of error is very very small.” Meredith playeth the notes not the music – dum, de, dum, dumb. The Meredith, the Music Man, has also stated that there is no need for a new car (PERA) when PERA merely has a flat tire. (Mr. Williams obviously must drive a Yugo under the influence.)


• During the 2000-2003 period, the S&P 500 (stock market index) declined 38% (or $100 became approximately $62) and even with the recovery of the past 3 years, the value would be approximately $91 – without even taking into account inflation.
• Excessive fees in managing funds – typically up to 2.5% per the Arnott studies corroborated by Bogle. Thus, $1000 a year for 65 years at 8% becomes $148780, while 5.5% rate of return (accounting for fees) yields only $32465
• Demographics – we are living longer and our lifespans will continue to elongate necessitating longer retirement benefits as well has increased health benefits from the PERA Health Trust – than have been anticipated
• Creative actuarial assumptions
1. You want numbers, I got numbers. You don’t like these numbers, I got other numbers (paraphrasing Groucho Marx)
2. Smoothing versus Marking To Market (when convenient – insurance scandal comparisons) – result $1.3 billion less underfunding by the pen (a.k.a. The Smooth Move)
3. Conflicts – soft dollars
4. Faulty assumptions – yield curve (feds) vs. average; the “count” of monte carlo technique and Platte River
5. Using the ‘flaw of averages’ which does not take into account the major effects of both THE SEQUENCE and THE VOLATILITY OF RATES OF RETURN
• Dracula (PERA Member Elected Governmental Officials) Guarding Bonfils Blood Bank – Systemic Conflicts of Interest and Self Dealing
• Violations of asset allocation percentages

INCREASING BENEFITS (WHAT’S PAID OUT) WHILE DECREASING CONTRIBUTIONS (when Corporations do this to manipulate earnings we are aghast, when government does it….???)

1. Illegal exemption from Tabor 24-77-102 (15)(a)(ix) – only special purpose authorities or a vote of the people can override Tabor. Otherwise, a constitutional amendment cannot be modified by statute.
2. Colorado legislator and the executive branch are conflicted – all PERA members – yet have an oversight function.
3. Colorado legislature, all members of PERA, exempted PERA, illegally from Tabor
4. The Colorado Legislature decreased its contribution from 12% to below 10% by 2001 while INCREASING benefits. Subsequently, The Colorado legislature changed direction – increasing funding to 13.15% by 2012.
5. Sequentially, from 1987-1997 a PERAnista making $50,000 with 30 years went from a benefit of $30,000 a year to $32,500 and now $37,500 which goes up with the 3.5% guaranteed cost of living increase
6. Overlook instead of oversight by Colorado elected officials increasing benefits (discounts to buy additional years, earlier ages for retirement etc.) while decreasing in several years – contributions
7. Governor Romer’s Administration: CRA sec 24-77-102(15)(a)(15b)(IX) and 16 provide together that PERA is not subject to Tabor (passed in 1992). L93: Entire article added p 1496 sec 1 effective June 6. L 2002 (15)(a)and (15)(b)(IV) amended p 1896 sec 67 effective 7/01
8. Governor “Three Card” Bill Owens, who now accepts part of the responsibility for the PERA ebola (Denver Post, 1/5/2006), compounded the problem allowing retirement of PERA employees as early as age 50 with 30 years of service without losing benefits. His rationalization was to be able to get rid of the “dead wood.”
• To get rid of dead wood, Governor Owens offered another gift in his first term. Whereas previously, the cost of buying another year of services to count towards an PERA’s members years of service was 18.1% of salary paid over 10 years at 8.5% interest (some would say a sweetheart deal), Governor Owens dropped the cost from 18.1% to 15.5% of salary). Gov. Owens argued the cost of waiting – inflation of costs for T Rex – but forgot present value when it came his new budget “front loading” transportation’s 30% to 100% of excess Ref C funding. The argument of following bad advice – may work once – but this is a course of conduct.
• It would have been cheaper to fire and even go through litigation if necessary on the dead wood as service credit purchases increased to over $100 million by 2001. (Subsequently, PERA raised the cost back to 18.1% of members under 50 and 22.1% for those over 50 – but this would not be effective until 11/2003. So between 2002-2003 - $1.13 billion was spent by PERA members yielding 128.133 years of service. In Sept 2004, the price was doubled for 50+ year olds again effective 11/2005. Another 32,684 years were purchased in the interim. (It would be interesting to find out the internal rate of return of these purchases relative to the rate of return assumed by PERA of 8.5% now)
• It would be interesting to find out how many elected legislative officials and gubernatorial appointees bought years of service during the discount periods, how many years were bought on average by these officials as opposed to the average years bought by all other PERA members per year during the discount period. Of note would also be the % of elected officials buying years of service versus the overall percentage of PERA members purchasing additional years. 83 of 100 legislators failed to respond to a Clairmont Institute Survey asking: 1) are they members or not of PERA, and 2) how many additional years of service did they purchase.
9. PERAnista former State Senator Norma Anderson, who was a sponsor of many PERA bills including the 1997 PERA benefit expansion, stated in Rocky Mountain News, “For 60 years they (PERA) were right. Why would we not trust them? Did we run the numbers, at the time. No. We used PERA numbers.” PERAnista Anderson’s checks and balances: Overlook or oversight.
• Denver Print Media Ignoring This PERAnorma-l Timebomb – Words of Mass Distortion
1. Both the Rocky Mountain News and Denver Post, jointly operated by the Denver News Agency, supported Referendum C.
2. Both papers were aware of the potential PERA cannibalization of REF C funds – as REF C, unlike Amendment 23 and the recently passed Tobacco Tax Amendment, there were no barriers to diversion of funds other than words “earmarking and intention.”
3. John Temple Rocky Mountain News 8/22/05 19:36:08 “Thanks for your letter. I think your story idea about Ref C is excellent (“a suggestion – even in light of the News declared support for Referendum C – in light of the PERA investigation: A follow up on the story relative to whether Rerendum C, unrestricted in its spending is a Trojan horse for the underfunded Police and Fireman’s, and now 400 million a year required additional funding for the underfunded PERA” 8/20/2005 11:19 AM from Jim Schwartz to John Temple) We have plans for an extensive series of stories. Look, I think it’s (Ref C) is too much money. But I think something had to be done and polities is the art of compromise. But that won’t affect how we cover the issue. We are working behind the scenes to get ready for after labor Day, when attention turns to politics. Please feel free to send any other suggestions.”


4. The Denver Post Traumatic Ignoring Syndrome – all the news that’s fit to ignore – WMD’s – weapons of mass distortion – front page editorial
5. Convenient failure to allow the connection to be made between REF C and PERA underfunding despite investigative stories on PERA.

Consequence of Doing Nothing (effects)

• Cannibalization of REF C funds from the “earmarkings and intentions” of 30% equal for education, health, and transportation or 1/3 each for k-12 education, higher education, and health if Ref D failed according to Senator Fitzgerald (a deal not mentioned or covered in the Blue Book).
• Increase in State funding – potentially requiring extension of REF C and or new additional taxes on top of REF C’s “time out”
• Increase in taxes – “several states are having to double or triple payments to underfunded plans” (Denver Post 1/5/06). Illinois teachers had just 62% of the money needed to cover its pension promises in 2004, while the State Employees had just 54.2% funded. Missouri’s transportation and highway patrol employees were just 53.4% - so in a beauty contest of uglies Colorado is a ‘winner?’
• Lawsuits – “It’s worse (PERA’s financial straits) than I thought going in…The State of Colorado has a moral obligation if not a legal obligation to bail out this thing, and this problem is not goin to fix itself. (PERA) is absolutely in denial over the future burden they’re building in for future taxpayers.” Former Governor, PERA member, & PERA (O)missioner Member Richard Lamm in the PERA Silence of The Lamm Report, RMN 9/14/05

PERA’s Proposed Solution

• No reconstitution of its presently constructed board for checks, balances, and accountability – pure arrogance – lipstick on a pig in light of incompetence and questions of corruption
• Breaking the law funding proposal: Full funding by 2065 (59 years from now – when state law requires full funding in 40 years). Even proposed federal legislation (passed by the House and Senate) for private defined benefit pension plans of corporations requires full funding in 7 years (the exception is airlines 20 years) and Meredith Wilson’s proposal takes 59 years.
• Two tier benefit system with all the sacrifice on new hires – dropping the 3.5% COLA to 3% for newbies, calculating benefits on the basis of 2.1% rather than 2.5% per year of service up to 40% of pay for retirement benefit – in thus a $50,000 newbie would get $32,000 instead of $37500 potentially. In return, the newbie would only have to pay 7% contribution instead of 8%. Of course, 76 Trom- Bone Head would esculate the over 4 years instead of 5 the state’s contribution going from 13.15% to 13.65%.
• DOA – as should be Williams tenure.

Real Solutions: Equality of Sacrifice Doctrine

1. Present PERA funds to their account transferred to separate defined contribution plan
2. Must repeal PERA exemption to Tabor
3. Without the above there is no hope – only more Abramoff type accusations and distrust
• PERA Administation
1. Investigation for malfeasance
2. Reconstitution of Board – 60% elected officials, outside professionals, and taxpayers
3. Fire Williams
4. Oversight Committee of the Legislature
5. Investigation of any ties direct and indirect to managers, consultants via soft money etc.
• Independent Actuarial Assessments (plural) of PERA underfunding – including extensive probability analysis (Monte Carlo) factoring in longevity, rates of return, liquidity needs over 1000’s of scenarios to determine if there is an actuarial necessity and emergency.
• STOP the “fire, ready, aim” assertions of politicians and ‘academicians’ making these statements until the numbers are in.

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