PERS 2006 Redux: Oregon’s Grand Delusion
In 2006 “Oregon’s Grand Delusion” was published. This article gave the historical traits and the consistent schematic of these financial frauds that are sold to people with magical thinking: Tulip Mania, the South Sea Bubble, assorted Ponzi Promises, and today it is PERS of Oregon. The mental grip on these frauds is psychological, not rational.
[Our age has been called many things, but it is really an age of irrationality. Logic and reasoning take a backseat to emotions and feelings. For instance, only a few years ago, a professor was proclaiming that he was making 300% year on his investment. I had to tell him that he was involved in a felony. Magical Thinking brings irrationality. Any logical person would compound $5,000 at 300% for 5 years and it would become over a million dollars: magical thinking. Such is the case with Oregon PERS. The absurdity continues.]
Historically, when these swindling schemes begin their demise they always try to extend it by selling more debt to keep the magical thinking alive. In this case it was Pension Obligation Bonds, which they then placed in the PERS Investment Account.
[Double your debt, double your fun]
Unfortunately, I did not foresee the ignorance of the next move. Let me explain. When the 20-year bond was sold at “x” amount at “x” interest rate they took on two separate debts, the capital payment and the interest payment. Selling 60 million of bonds meant they now owed 60 million plus approx. 50 million of interest at 4.75%. [I would use 50 million.] Use an amortization schedule on the net.
The logical, rational 1st financial transaction would be to reduce risk.* [We would not Take out a $200,000 loan at 4.75% against our house and put it in stock market with a 50% probability of making 8%; but that is what the employers did]
Remember actuaries give probabilities not certainty. We get certainty by 1st covering our interest cost by buying a zero bond at the same rate or higher. Zeros are discounted 90 – 95% from their face value. Between 2000 and 2008 Govt. zeros were selling at 5 – 6% and private zeros at 6 – 8%. They may have made money on this offset or broke even. But, this was a guaranteed payment of the interest: it was a certainty; not a probability. As it turned out the invested money in the PERS Investment Fund is about break even.
With 10 – 13 years left to pay the original balance and the interest. Can’t be done: magical thinking failed again. So, they decided to start a new debt and by adding 6% to the payroll cost to cover the Pension Obligation Bond Debt. I am sure they will be charging 8% for 30 years to meet the PERS obligation and then amortize this debt over 30 years to lower the payment. [They may backload the debt]
In Summation: Oregon sold approx. 6.5 Billion of Pension Obligation Bonds at approx. 5%. [5% on 6.5 Billion for 20 years] That was an interest cost of: …?
Since they didn’t cover the interest cost with zero’s they will now pay 6.5 Billion plus the original interest. This is a total of:
Then they will take on more debt at 8% over 30 years on that amount. This will be A new debt of:
So, how will they pay the new debt?
If they would have offset the 1st interest cost with zero’s they would only pay on 6.5 Billion at 8% for 30 years for a debt of approx. 19 Billion; a savings of over “x” Billion. So, who should pay for this screw up/money? The citizen or the Bumbling Bureaucrat?
*Warren Buffett: “Don’t lose money.”
Fred M. Starkey is a former Lead Long-Term Analyst for Shearson Lehman and American Express out of NYC. After turning down a lead analyst position with Merrill Lynch and Pru Bache/NYC, he was recruited by Stoltler and Company and moved to Oregon. He is now a private consultant to many firms involved in commodities and those involved in trading and investing: Banks, S&L’s, Mortgage Companies, Grain Elevators, Cotton Mills, Growers, Merchants, Duck Farms, Soybean Crushers, Bullion Buyers, and much more. His financial acumen and 12 years of research into PERS have revealed the real truth behind what he calls Oregon State’s “PERS Ponzi.” A long-term resident of Springfield, Oregon, Fred has been married 43 years and is the father of six.
Fred Starkey may be contacted at: