With evidence that Social Security is in the ICU, you just have to wonder why Maine is considering turning to it for help with the state's pension problems. Maybe it has something to do with having the state's employee pension fund lose $2.25 billion in value in the past couple of years. Even if Maine officials decide to allow Social Security to become part of their employees' exit package, the fiscal relief won't be immediate. But, at least it will take some of the heat off the pension fund's current responsibility for its employees' retirement nest egg. Keep in mind that the state's losses are the result of investments made by financial professionals, and it actually was making contributions to its pension fund in recent years. Maine is one of only a few states that does not participate in the Social Security system.
Pension problems have been building for decades, and thanks to the recession crushing the value of many funds and baby boomers headed for the exits, communities have been trying to address their shortfalls. However, while desperate times may demand desperate measures, some have taken unscrupulous or unintelligent paths, which have come back to haunt them.
For example, New Jersey officials perpetrated a double whammy on the state's pension fund, adding new benefits for its employees a decade ago and then falsely claiming that money was being set aside to pay for them from 2001 until 2007. After the charade was uncovered, the Securities and Exchange Commission (SEC) accused the state of securities fraud in August, saying that it sold $26 billion worth of bonds over the six years it was misrepresenting the health of its pension fund. The SEC and New Jersey ended the dispute with a cease and desist order and no prosecutions. (Uh-uh, what?)
Denver picked another poison when trying to close a pension gap to pay its retired teachers: gambling. In 2008, it agreed to issue $750 million in 30-year pension certificates with variable interest rates and a derivative attached. (Again, uh-uh, what?) Denver officials must have gone into the arrangement with little or no understanding of the downside of such a deal, including the onerous charges to refinance or terminate the debt. They have since learned their lessons after the nation's financial collapse and must be living in a level of hell that Dante couldn't even create.
The SEC has formed a new unit to review public pension disclosures and said it wanted to send a message to local and state governments, probably concerning the use of accounting tricks or outright deceit to confuse bond investors. My advice to those who find themselves out on a limb and looking for a way down: Be careful grasping at straws, because you're likely to wind up in the drink.
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