WatchSonoma Watch

Public pensions compared to Ponzi schemes


Public sector pensions are “Ponzi schemes” propped up by taxpayers whose money has been poured endlessly into a risky “gamble,” key speakers said Thursday at an economic conference in Petaluma.

“It’s the system and the system has been rigged to ensure that all these (pension) obligations are met even if it’s not from money the system is producing,” said Brian Sobel, a political consultant and former Petaluma city councilman.

He was one of two speakers to compare public pensions to the illegal financing ventures known as Ponzi schemes. The other was Sonoma State University economics Professor Robert Eyler.

The third presenter to take aim at public pensions at the annual breakfast conference sponsored by SSU and the North Bay Business Journal was former North Bay Assemblyman Joe Nation.

Nation, a Stanford professor of public policy, said state and local governments have underestimated the amount of money they owe to their retirement systems for pension obligations. That figure is now $3 trillion to $5 trillion nationwide, he said.

Some of those systems, including the state retirement fund, CalPERS, and Marin County’s pension system, likely won’t be able to pay their obligations to retirees in the future, Nation said.

“Everyone,” he added, “is headed to insolvency, unfortunately.”

Nation did not have a forecast for Sonoma County’s retirement system, but he criticized the county for borrowing about $590 million, in the form of three pension bonds over the last 18 years, to reduce the unfunded liability in its pension system. He called it a “gamble” with public money.

The speakers’ comments sparked immediate reaction from public employee union representatives and pension officials in the audience.

In interviews, they called the criticism offbase, saying it did not accurately portray the value of the public pension system, the health of Sonoma County’s fund in particular or the service and pension contributions of public employees.

Robert Moffett, president of Service Employees International Union Local 1021, which represents the most county government employees — about 1,800 — called the comments “irresponsible,” saying they “trivialize the sacrifices of public servants.”

Pension contributions by county workers are among the highest in county pension systems statewide, union representatives said.

Greg Jahn, a board member of the Sonoma County Employees’ Retirement Association, the county’s pension system, called the criticism “hype.”

“I think that people respond to the headlines. But if you look beneath the surface, you’ll find that the way the (Sonoma County) fund has been structured, the way it is designed, generally it is structurally sound,” Jahn said. “I think this debate is healthy, but we need to get all the facts out on the table.”

The annual economic conference drew hundreds of business leaders and some local government officials to the Sheraton Hotel in Petaluma. It featured several speakers addressing economic, political and public policy issues.

The comments on public pensions proved some of the morning’s hottest material.

Nation, a leading pension-overhaul advocate, repeated his call for government retirement systems to lower their investment earnings projections.

He has called for a more conservative 4 percent rate, equivalent to the return earned by bonds. Pension officials have widely denounced that proposal and have defended the earnings projections they use — most in the 7 to 8 percent range — to manage their investments and meet benefit obligations.

But Nation said those assumptions have been unrealistically high over the last decade and have contributed to many of the pension funding shortfalls of late.

Add the recent stock market crash and the rich benefits promised to workers in the late 1990s and early 2000s and you now have hundreds of pension funds across the country that are woefully underfunded, Nation said.

“At the end of the day, the people who pay are taxpayers,” he said.

The problems will grow in the next five years as a large wave of government workers is expected to retire, he said. Already, governments have slashed jobs and services to meet rising retirement costs.

“People talk about a pension tsunami. This is a tsunami that’s hitting us,” he said.

The top administrators of Sonoma, Napa and Marin counties spoke at the conference after Nation. All conceded the importance of pension overhaul.

“This isn’t something we’re taking lightly, I want to assure you of that,” said Sonoma County Administrator Veronica Ferguson.

The county’s annual payments to its pension fund have more than tripled in the past decade and, including pension debt, are at $90 million and rising — or nearly a third of the county’s $300 million payroll.

Ferguson, who took over as county administrator a year ago, told the crowd she was not to blame for decisions that led to the county’s rising retirement costs.

“I wasn’t the person who created these pension benefits,” she said.

But she and the other county leaders said changes were under way or being discussed.

Most of those efforts focus on reduced benefits for new employees. The new tier of benefits could take shape through changes in retirement age, years of service and a multi-year average of final salary instead of the current single-year earnings, Ferguson said.

State law governing county retirement systems prevents increases to employees’ pension contributions for everything but changes to salary and benefits, mortality rates and investment earnings projections.

Other changes, including reduced benefits for current employees or further restrictions in the type of compensation considered pensionable, would need to be authorized by changes in state law, administrators said.

An overhaul should recognize that guaranteed retirement benefits remain a big draw for public sector workers, Ferguson told the crowd. Any wholesale changes to that promise are a serious matter, she said.

“We’ve got to attract the right people,” she said. The goal “is finding a level of benefits that’s competitive but at the same time makes sure costs are sustainable.”


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26 Responses to “Public pensions compared to Ponzi schemes”

  1. John Sakowicz says:

    Here in Mendocino County, the mismanagement borders on the criminal — $50 million of our $100 million in unfunded pension liabilities is directly attributable to a dubious accounting concept known as “excess earnings.”

    In truth, we’ve never had excess earnings. What we’ve had are 16 straight years of negative amortization. Sixteen years!

    Another thing.

    Excess earnings in public pension fund accounting is the same as “capitalization of expenses” or “improper revenue recognition” in the private sector. It’s what landed Bernie Ebbers of MCI WorldCom in federal prison; also Ken Lay and Jeffery Skilling of Enron.

    Look it up.

    Here’s the real kick in the head for us taxpayers in Mendocino County — $9.6 million in county contributions was diverted from the pension account. Don’t believe me? Well, that $9.6 million was written off as a complete loss during the July, 2010 meeting of the Retirement Board.

    How did the diversion happen? Well, past Boards of Supervisors were, by turns, lazy, too trusting, and incompetent.

    Who diverted the $9.6 million?

    That’s easy — longtime county treasurer and pension administrator, Tim Knudsen.

    And Knudsen’s misconduct had plenty of help from longtime county auditor, Dennis Huey, and longtime county counsel, Peter Kline.

    So why aren’t these guys in jail?

    Good question.

    Our current district attorney, David Eyster, states, “I can’t investigate Knudsen. It’s a conflict of interest. I’m a member of the retirement system.”

    So why doesn’t Eyster refer the case to the district attorney of a neighboring county, or to the California Attorney General?

    Another good question without a good answer. Perhaps SEIU and other powerful special interests have their hooks into Eyster, too. It’s unfornate. Eyster, who was elected last year, ran a campaign that promised real reform and zero tolerance for public corruption.

    One final note.

    Although our current Bard of Supervisors in Mendocino County care little about pension reform, we the taxpayers care very much.

    Last year, we soundly defeated Measure C, a ballot measure to increase the county sales tax. Measure C was widely perceived as being a pension fund bailout.

    We defeated Measure C by a 70 to 30 margin. It was a vote of “no confidence” in the Board of Supervisors. They voted 5 to 0 to put the measure on the ballot.

    We the people of Mendocino County can learn a lot from the people of Tunisia, Egypt, and Libya. When government fails us, when our leaders seek only to enrich themselves, when the ruling class becomes a private club, then the people must take to the streets.

    There is no substitute for grassroots organization and direct action if people are to be free.

    And currently, we are not truly free. All government borrowing at every level — national, state, county, and city — is predicated on a Ponzi scheme. And eery level of government is so grossly in debt as to make that debt unpayable. Our children and grandchildren are ensalved by our generation’s profligate spending and borrowing, and borrowing and spending.

    Mendocino County is just a microcosm of everything that’s wrong.

    God help us.

  2. Tom Drumm says:

    Which telescope did you mean, Tom…Joe Nation’s funhouse telescope?

  3. County Worker says:

    They need to think it through. The last time they tried a quick fix with employee medical it cost them an un-anticipated $22 Million. Oops. If they make it too unattractive, then why would people stay? Take the time and money have and move to a cheaper climate now while you can still get established. They could see their most experienced leave in droves. Of course, that may be what they want, to create a crisis, only to solve it by raising taxes. They learn from the top.

  4. Tom Lynch says:

    From the introduction of \The Road to Generational Equity\ (1995)

    \When the Ecclesiastical soldiers went to arrest Galileo for the heresy of stating the earth went around the sun when everybody knew it was the other way, he set up his telescope and said to the head guard, \Look into the telescope. Look into the telescope. You can see the shadow of the earth on the moon. How could it be any other way than the earth going around the sun?\ But the guards didn’t look in the telescope; and, of course, it took hundreds of years to correct that error.\

    Retiring union leaders, city and county administrators, and politicians use all kinds of scapegoats and reasons as to why these pensions and benefits are so underfunded, or worse pretending they are fine.

    The simple truth is that the current generation retiring, has negotiated benefits for themselves, managers and workers alike, without funding them.

    These obligations will be paid by opportunities, services and jobs lost to the next generation of cops, teachers, mental health workers and taxpayers. Along with a massive decline in the quality of education for our children, the safety of our community and the erosion of our roads and infrastructure.

    We all have to work together toward reforming and creating a more sustainable system.


    When Bethlehem Steel, United Airlines, Enron and other workers lost pensions, who else cared?

    The working class is being impoverished one group at a time. The entire working class could be impoverished.

    Public pensions seem good [some are very good] because private pensions [401K] generally are not so good. Private pensions were as good or better than public pensions however anti-worker forces destroyed many private pensions.

    Time to stop fighting each other and organize for the common good ?

  6. Josh Stevens says:

    @pen(sion) is mightier…

    Corporations don’t pay taxes,people do.


    We need to win in Wisconsin,then the rest of the country.

  7. Reality Check says:

    Why didn’t the PD identify the “key speaker” who called public pensions a Ponzi scheme? Hyperbole gets one attention, but not respect.

    Plus, it discredits the notion that we have a serious problem, which we do. Joe Nation, it should be noted, isn’t Glenn Beck. He’s was a Democrat elected to the state assembly from Marin County.

    San Jose mayor Chuck Reed, also a Democrat, is publicly on record as saying that city’s budget problems start with “exploding pension costs.”

    Add that the comments of Gary Wysocky’s and those of the public defender of San Francisco, Jeff Adachi (a true man of the left) and one is forced to see is a non-partisan issue.

    Its needs no hype to be taken seriously by the public.

  8. The Pen(sion) Is Mightier Than The Sword says:

    Sonoma County may have to lay off 500 employees this year. I believe over 200 were laid off that year. The county “elites” walk away with $100,000′s a year for the rest of their lives in retirement.
    Don’t insult our intelligence by implying that this issue has anything do with what Chevron or Exxon pay in corporate taxes. The County derives most of its tax revenue from property taxes. Not from individual or CORPORATE INCOME taxes.

  9. Reality Check says:

    Yep, corporations know how to play our complicated tax code.

    First rule, move operations to low tax regions of the world. Duh. Since the U.S. has about the highest nominal corporate tax rate (Canada’s is half ours), Europe and China look even more attractive.

    Second, play the enviro tax incentives for all they’re worth. No one does this better than GE, which has become an openly political corporation and supporter of the current administration. Such alignments have business and tax benefits.

    Since several Republicans have advocated doing away with most tax loopholes that make this tax gamesmanship possible, in return for lower rates, I don’t see what’s keeping Democrats from signing on.

  10. If the North Bay Business Journal was really interested in having a debate — or even an informational public forum — then they would have invited someone who works for the County government or better yet, someone who actually tries to live on a SoCo pension.

    Instead, this forum was apparently put together with a particular political agenda — that of destroying the pension system for retirees in Sonoma County.

    It conveniently ignored two main reasons for the pension “crisis”:

    First, the economic crisis of 2008 resulted in huge swaths of pension funds being lost — lost as a result of reckless behavior on Wall Street. CalPERS just sued Lehman Brothers to the tune of $700 million due to mortgage-backed securities fraud (CalPERS lost $100 billion in value between Sept 2008 and March 2009).

    Second, the under- and non-funding of the employer contribution of pension funds during the “good years” of the early 2000s. In those years, it was solely the employees who were contributing to the pension funds. The employers neglected their obligations and now want to make the employees pay even more for their mistake.

    Instead we get “experts” like Brian Sobel, Joe Nation and Robert Eyler?

    Brian Sobel is a political consultant and “analyst to conservative causes so his expertise is suspect.

    Joe Nation is trying to reinsert himself into the public spotlight because he dreams that he will one day be called Congressman Joe Nation.

    And Robert Eyler doesn’t appear to have any particular expertise regarding pension systems (other than on derivatives!)

    We should be figuring out real solutions to the pension problem instead of pitting workers against each other .

    This forum was a missed opportunity for real dialogue.

  11. John says:

    @ GAJ
    This was the first article listed on my search of ‘Exxon Profit’.
    @ Lisa – Nice work
    @ thumbs downers – you live in denial


  12. Tom Drumm says:

    Anyone responding negatively to Lisa Maldonado’s link documenting that two major league corporations pay NOTHING in taxes, while public employees are pressed for concessions, are obviously corporate shills–how can they be anything else?

  13. John says:

    Anybody consider that the driving force behind these discussions may be Wall Street and their desire to get their collective hands on Public Pension Funds. They stand to make a GIANT amount of money if the BILLIONS of dollars in public pension funds were under their control.
    It also irritates politicians that they can’t get access to borrow/re-direct money from pension funds.

  14. GAJ says:

    This “corporations pay not taxes” nonsense is ridiculous.

    If you’re going to make such outrageous accusations at least provide some proof.

    From May of ’09:

    “Last year, big oil was blamed for enormous profits while dodging their fair share of taxes. Unfortunatedly, with the decline in the price of oil, there is no windfall this year.

    But pundits and politicos missed the real story of oil’s overtaxation. To set the record straight, Chevron (CVX) made out a check for $1.3 billion in income taxes this quarter. Add in the $4.0 billion paid out in assorted other taxes (VAT, excise, “other taxes”) and you get a eye-popping $5.3 billion given out to various government entities. That’s an incredible 74% of its income before all tax expenses.

    So, for the quarter, $1.8 billion for shareholders and $5.3 billion for government. Doesn’t seem fair, does it? That’s not any different from previous periods. For the full 2008 year, CVX paid out $19 billion in income taxes and $21 billion in “other taxes” leaving a net profit of $24 billion, a clobbering 63% in taxes. ”


  15. bear says:

    OK, public sector pensions are “Ponzi schemes,” which means criminal behavior.

    Let’s try to keep in mind that the temporary issues with public pensions are the direct result of criminal behavior by major financial institutions that killed the stock market.

    Who’s in jail for these crimes?

    Either the US economy is going to crash, or things will get better. If they get better, then the returns on investment by public pension funds will cover this temporary “crisis.” Or the stock market will really crash, in which case everyone is financially destroyed.

    But it seems like most posters here want to blame stuff that affects everyone on public employees?

    Every day I see TV ads that will “get you out of paying taxes” and “reduce your credit card debt.”

    Guess most of you folks are paying close attention to these ads, if not your financial obligations.

    I’ve always paid all my bills, but it seems I could have had a better life by taking the deadbeat route.

  16. Kevin says:

    @Virginia…I stand corrected, Prop 33 was defeated but would have given legislators the pensions they wanted. It did pass on the floor… (AYES 57. NOES 12.) (PASS)

  17. John says:

    @ Mike

    sounds fair as long as you limit what private sector workers can make and private corporations can earn … but again that’s Socialism. And I doubt you are advocating limits on what you can earn.

  18. Virginia says:

    Ken is WRONG,,,state legislators do NOT receive any pension whatsoever. This was part of Prop 140 1990. In fact, legislators cannot even contribute to a pension system…it is non-existent.

  19. bats555 says:

    I think Stanford at times loves to sensationlize things that will make headlines in the media.
    Here’s a quote from the President of Stanford University: According to Stanford University President John Hennessy, “Medicare and Social Security will be equal to the entire tax revenue of the country” by mid-century. Unless something changes, we are facing a future, he said, with “no money left for defense, no money for education, no money for research.”
    Does this not sound similar to what Joe Nation is stating about the retirement systems?

  20. Kevin says:

    Maybe a little more on Joe Nation…He’s obviously trying to come down on what he considers the “right side of the fence.” As a “Termed out” member of the State Assembly, Mr. Nation will be in line to accept at the age of 60, a lifetime pension of $95,572. And thats for just 6 years of service. I might also add that the California State Assembly is the highest paid state assembly in the nation.


  21. @Common Sense: Sonoma County Employees and SEIU members ARE taxpayers! In fact working people pay MORE taxes than Exxon and Chevron and many other of the big banking corporations who ARE THE CAUSE of the economic collapse in this country.

  22. Luke says:

    “I think that people respond to the headlines. But if you look beneath the surface, you’ll find that the way the (Sonoma County) fund has been structured, the way it is designed, generally it is structurally sound,” Jahn said.


    “We’ve got to attract the right people,” she said. The goal “is finding a level of benefits that’s competitive but at the same time makes sure costs are sustainable.”


  23. Tom Drumm says:

    FIRST, the Sonoma County pension trust, SCERA, is not a “Ponzi scheme.” A Ponzi scheme is a fraudulent arrangement in which money “invested” by new investors is paid directly to those who had “invested” first,” who then sing the praises of the “investment,” luring new “investors.” With SCERA, you may remove the quotations marks: SCERA does IN FACT invest contributions of the employer, the County of Sonoma, and the employees, thus growing those contributions into assets which are used to pay retirements. Mr.Bei, the Administrator of SCERA, has in this paper provided the actual long term returns of the system, which I recall to have been be in the 8%-9% range. Of these returns, only a small part of every dollar paid in retirement. The rest has come from the proceeds of the investments. In a Ponzi scheme there are no investments.

    If these so-called experts who term SCERA a Ponzi scheme are referring to the fact that employer contributions have been increased recently, then I must wonder where these same critics were a decade ago when, for a period of 4-5 years, employer contributions shrank to little or nothing–due to the success of the investments.

    SECOND, while the article correctly notes that Sonoma County employees contribute a percentage of their pay toward the “normal cost” of their retirements which is among the highest in the state, the fact that employees ALSO are paying for recent improvements to the level of benefits is once again lost on Mr. Wilkison. The actuarially determined cost of the improvements to Miscellaneous (non-public safety) part of SCERS was, as I recall, about 5.6% of payroll. 1 1/2% of this was saved by the issuance of pension obligation bonds. The bonds are this minute being paid off BY MISCELLANEOUS EMPLOYEES as follows: 3.03% of wages redirected to SCERA for a period of 18 years, beginning in 2002; 1% Deferred Compensation diverted to SCERA without limitation; and changes in benefit level of the offered health plans.

    THIRD, the contention that the issuance of these bonds is gambling, as “Doctor Professor” Nation alleges, is absurd. If there were an element of arbitrage in this transaction, investing the money received at the outset in an effort to earn more than the rate owed on the bonds, Nation would have a point. He does not. The money provided to the County by the bond issuer was contributed directly to SCERA to address the unfunded liability created by the benefit improvements. Now the employees are paying off the bondholders.

    FOURTH, let’s put to rest the idea that Joe Nation is some sort of expert on economics whose opinion regarding pension funds we should care about.

    The Stanford Program where Nation works is no less biased than the Hoover Institute, the other notorious Stanford “think tank.” The study being pushed was commissioned–bought and paid for–by our recent Republican governor. Although Nation claims to have received his PHD in “public policy,” from the RAND Graduate School, his published work from his RAND years has nothing to do with anything but military affairs:


    FINALLY, professional actuaries, whose expertise we rely on in the insurance industry, think Nation’s theories are “crazy.”

  24. Mike says:

    This is not new information. The state legislators, county supervisors and city councils were bought and paid for years ago by SEIU and other public unions.

    The only way to fix this problem is to limit what public unions can negotiate for and stop paying these exalted pensions to a privileged class of employees.

    The people who pay the bills, the taxpayers have run out of money and credit to fund this mess.

  25. Common Sense says:

    Robert Moffett, president of Service Employees International Union Local 1021, which represents the most county government employees and NONE OF THE TAXPAYERS! We the paying public sector are treated as CASH COWS to just pay more.

    I draw the line on all the Bonds we had to pass to make up their unfunded liability in its pension system. We are all losing in the stock market and now we now lose twice! once in ours and also have to pay to make up their losses.