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By Fred Starkey
May 12, 2012

To use a statement from Pete Mandrapa, from Eugene: I find it ironic that Paul Cleary turns me down to disprove my statements on KMED, KPNW and KUIK on Live Radio but figures he can hide behind his words in a newspaper. I have been researching this Fraud and Swindling Scheme, as Kindleberger would say, for 15 years and I have never found anyone in this state that understands PERS, including Cleary.

Of course I have an advantage being a Market Analyst for 30 + years consulting for Banks, S & L’s, Mortgage Companies, Bond Funds, Cotton Growers, Mills, Merchants, Grain Buyers, Users, Feed Lots, Duck Farms, Crude Oil Marketers, Soybean Crushers, various FCM’s and others. I was ranked #1 out of 20 + Analysts with PH.D.’s at Shearson after one year, and offered the Head Jobs at both Merrill Lynch and Pru- Bache in NYC.

An analyst is paid to give forecasts that make money for clients. If you perform you are paid very well, and if you don’t, you are fired. A National Wire House or FCM is not going to allow someone to speak and write on markets to 500 plus offices around the globe unless you can perform with accuracy: that is a fact. You are paid on performance not degrees. The Oregon State economist wouldn’t last 6 months. As we say in this business, that guy couldn’t forecast his own bowel movement.

PERS is really very simple. The key is the discount rate which calculates the capitalization for the pension. All PERS (Public Employees Retirement System) accounts in Oregon use the 8% discount rate. There are no exceptions. This is fixed and is not a variable. If you do this in the private sector you will go to prison. What states do is a lot worse than Wall Street, which is why PERS must be shut down.

What is a discount rate? It is an assumed rate, on future returns, on assumed future capital. It’s all based on assumptions. By law the private sector must use the AAA Corporate Bond Rate, which is usually between 3 – 5%. The reason being is that it is supposed to be a riskless rate of return to insure it will be paid and the company will not go bankrupt.

State Pensions use a risky rate of return because the taxpayer and his property becomes de facto the corporation or the insurance company for the pensions. In other words market risk is shifted to the private individual from the government employee, regardless of the risky discount rate. Naturally when the private sector finds out these facts he becomes outraged and the PERS sector goes into hiding & spews propaganda.

Let’s backtrack for a second. The TOP 20% of all citizens in the USA excluding home equity have a grand total of $60,000.00. Only 2.8% of all citizens including home equity are 1st generation millionaires. Only 11% of citizens 55 and older have over $210,000.00. Regardless of what you see: new cars, new fancy houses, and the latest fashions the average citizen has less than $15,000 of savings. What you see is an illusion of wealth: that is not reality. Now, let’s compare that to PERS.

Assume a savings at age 55 of $100,000.
PERS Tier I: Money is doubled: $200,000 times 8% = $16,000
(Their contribution is zero)
Private: $100,000 (No Doubling of Money) times 4% = $4,000.
(They contribute all of the money)
PERS is 400% more than the private sector at this point.
But, this does not include PERS Benefits: 2% COLA every year until death,
No Management Fee, [unlike private pension], health benefits, and they pay
No state income taxes of 10% when they retire, and a perpetuity clause. That’s more like a 14% + Annuity as compared to the private sector that pays 4%. Just multiply these base numbers to calculate other pension amounts.

Or, you can look at it another way: how much capital is needed to throw off
$50,000 year at age 55: the average 30 year PERS Pension? If you use 8% discount rate it is $625,000. If you use 4% discount rate it is $1,250,000: use a calculator on the Net.

PERS is actually saying that if they worked in the international competitive market sector with international risk they could have saved $1,250,000 at age 55. Are you kidding? Look at the facts!!! These people are delusional: what do you think?

I really want to thank Mr. Cleary for his article because he clearly demonstrates the typical ignorance regarding Capital Management and Elementary Finance. He reminds me of the personal finance teacher at Springfield High School who had filed personal bankruptcy 3 times: it was that attribute that got her the job: schools want more money.

Mr. Cleary goes on about market returns: gain of 35% in 2009 and loss of 44% in 2008. Of course Mr. Cleary thinks he is fooling you because if you use the geometric mean they are still behind 24.4%: the actual facts: they are still behind. What he obviously doesn’t understand is that these returns are a reflection of volatility: this is more like an aggressive commodity fund. Good Managers have a low beta, low S.D. and a return above the index average. High volatility means there are too many risky assets in the portfolio: PERS is a ticking time bomb.

PERS is really trapped. That is why you have to shut it down. The 200 year average for the stock market is 6.5 – 6.9 or 6.7 as the middle of the bell curve: not 8.00. The 200 year average for bonds is less than 3%. If your allocation is 20% bonds (riskless assets) and 80% stocks (risky assets) you will barely make 8%. This leaves little room for error: too tight: back to the geometric mean. See, from 1965 – 1980 the stock market lost 4%.

What if we experience that again? Draw your own scenario.

Pension Obligation Bonds were sold to extend the PERS debt and place it on the next two to three generations. Jon (Wall Street Crook) Corzine called POB’s “the dumbest idea I ever heard of….It’s speculating the way I would have speculated in my bond position at Goldman Sachs.” See, most people don’t understand that Oregon is doing many of the same things that got Wall Street in trouble. Cleary states that 120 PERS Employers sold POB’s on “their independent financial evaluation”: Financial evaluation? Nonsense, where is the probability study? You don’t just dump 60 million into an investment for which you must pay in 20 years without a thorough probability study of this paying off: to do otherwise is just plain stupid/foolish.

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Who is going to pay for this debt if the investment loses money?: You the taxpayer and the next 2 to 3 generations. Isn’t it great that both Mr. Cleary and the Springfield School District believe we should place taxes on innocent children?

Mr. Cleary goes on about the Oregon Personnel except he doesn’t tell you that PERS payroll cost will rise from 18% to 21% - 24% in 2013. In other words they can’t make the money needed to pay the pensions; so you and your posterity will pick up the tab.

It was Nietzche who said: “That which is about to fall deserves to be pushed”. We will explore more disturbing facts about PERS in my next article: State Comparisons of economic metrics and another giant Time Bomb from PERS to you. PERS: it’s the gift that keeps on taking.

(Potential Idea: Mr.Cleary. Would you borrow $100,000 at 4.5% against your house and put that money in the stock market with a 40% probability of making 8%? No rational, reasonable person would do this)

� 2012 - Fred Starkey - All Rights Reserved

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Fred M. Starkey was previously the Lead-Long Term Analyst for Shearson Lehman out of NYC. In One Year he was the most followed analyst out of 30 by a 5:1 ratio. He turned down a lead analyst position with Merrill Lynch and Pru Bache in NYC, recruited by Stotler and Company, and transferred to Oregon. He is now a private consultant to FCM’s, Grain Merchants, Wheat Farmers, Cotton Mills, Cotton Merchants, Gold Bullion Dealers, and others regarding pricing, hedging, and forecasting. Fred has been married for 37 years, the parent of 6 children, and lives in Springfield, Oregon by the McKenzie River.

E-mail: [email protected]








Pension Obligation Bonds were sold to extend the PERS debt and place it on the next two to three generations.