By Frank Keegan _ All states and municipalities suffer to one degree or another from the fraud New Jersey on Wednesday agreed to stop committing. Investors, taxpayers and betrayed public employees in every state must force governments to admit their true fiscal condition.
Anyone who bought state or local government bonds in the last decade should file a complaint with the Securities and Exchange Commission.
Every fraud New Jersey would not admit doing – but agreed not to do anymore – all states and municipalities do.
The Garden State is just one cell in a fiscal cancer metastasizing throughout our national body politic.
New Jersey agreed to not commit fraud anymore even as it did not admit or deny committing fraud in issuing $26 billion in bonds.
The Securities and Exchange Commission accepted this cosmetic blusher on the suppurating cyst of New Jersey’s vastly under-funded public pension plans but performed no surgery, chemotherapy or other cure.
Too bad, because the disease afflicting The Garden State, Illinois, California and New York infects every state and municipality to one degree or another.
The only question is: How bad, and what’s the prognosis?
According to a statement Wednesday by Robert Khuzami, Director of the SEC's Division of Enforcement, "All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks."
All states and municipalities are not providing that information.
Instead they are hiding trillions of dollars in long-term obligations that rapidly are becoming short-term obligations.
The often cited Pew “Trillion Dollar Gap” study on unfunded state retirement promises found less than a third of what states actually owe. Pew just used official state assumptions and data as of June 30, 2008.
Guess what happened since then? Markets crashed.
Compounding the malignancy is the fact that among the delusions within the deceptions are assumptions of 7.5-8.5 percent risk-free returns forever.
The true gap is at least $3 trillion, according to Northwestern University professor Joshua Rauh.
The latest Government Accountability Office 10-61 study of just the false retirement health-care promises in all state and 39 major municipal retirement plans says “… totaling unfunded … liabilities across governments is challenging for a number of reasons, including the way that governments disclose such data.”
Actually, they hide it two layers deep.
The Nov. 30 GAO-10-61 full study includes hot links to all state and the 39 municipal Comprehensive Annual Financial Reports.
Every investor should study those mind-numbing CAFRs’ Supplemental Required Information, which includes some of the bad stuff the Government Accounting Standards Board recently required governments to hide in plain sight, but not put on the books.
Any business or individual who did that would go to prison, but governments — as the absence of any SEC penalties against NJ proves — don’t have to obey laws.
A more accurate assessment of a state’s true financial desperation is by Sheila Weinberg of the Institute for Truth in Accounting. She gives links and a good guide to comprehending CAFRs and is pushing legislation in every state to force revelation of fiscal reality.
The truly terrifying aspect of this is the fact that betrayal of taxpayers and public employees on retirement promises is only one manifestation of a widespread, endemic fiscal disease.
Politicians have deferred other expenses totaling trillions of dollars through accounting tricks and bad financial deals.
Here are 10 minimum questions all taxpayers, public employees and investors should ask their state and local leaders:
- Is your FY 2009 CAFR done? If not, why and when will it be?
- Are you making your Annual Required Contributions to pension and Other Post Employment Benefits funds? What is your Unfunded Actuarial Accrued Liability at a realistic discount rate assumption?
- Are you invested in any Variable Rate Demand Obligations, Auction Rate Securities, interest rate swaps or other exotic financial deals?
- Do you have enough cash on hand from revenues to pay bills and tax refunds?
- Are you borrowing to pay current expenses?
- Are you meeting your current debt obligations?
- Are you able to meet your Medicaid obligation?
- Are you or do you anticipate borrowing from the federal government for unemployment insurance payments?
- Have you or do you plan to delay capital projects?
- Will you carry an operating balance into next fiscal year, and if so how much is it compared to prior years?
Bills are coming due. Federal bailouts cannot go on forever. Defaults loom.
That puts bondholders way down on the list of who gets paid when a state or local government bellies up.
Investors deserve to know the truth. They should file complaints now to force a cure before it is too late.
Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, watchdog.org and statehousenewsonline.com . He is available to help citizens, public employees, activist groups and journalists examine the state and municipal fiscal crisis. frank.keegan@franklincenterhq.org
