August 6, 2012

By Blaine Rollins, CFA, Managing Director, 361 Capital, LLC

The accounting at the heart of government pension plans is fraudulent, so much so that it should be illegal. Here's how it works. For a plan to be deemed solvent, employees and the government must finance it with regular monthly contributions. The size of those contributions is determined by assumptions about the investment returns of the plan. The better the investment returns, the less the state has to put in. So states everywhere make magical assumptions about investment returns. David Crane, an economic adviser to former California Governor Arnold Schwarzenegger, points out the state pension funds have assumed that the stock market will grow 40.0% faster in the 21st century than it did in the 20th century. In other words, while the market has grown 175 during the past 100 years, state governments are assuming that it will grow 1,750 times its size over the next hundred years.

Source: This was excerpted from Time via 361 Capital's 361 Capital Weekly Research Briefing, June 18, 2012, www.361capital.com.

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