What is "GASB" and  O.P.E.B.? "Other" post-employment benefits - does the "O" in other stand for something or someone else?

A "THINK PIECE" FROM THE NEW YORK TIMES...is that like "peace in our time?"  Or is it a link to Global Debt Clock?





Chicago’s Next School Crisis: Pension Fund Is Running Dry
By MARY WILLIAMS WALSH, NYTIMES
September 19, 2012

One of the most vexing problems for Chicago and its teachers went virtually unmentioned during the strike: The pension fund is about to hit a wall.

The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in. That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.

“There’s a huge crisis,” said Laurence Msall, president of the Civic Federation, a nonpartisan research organization in Chicago that works on fiscal issues. “The problem does not get easier by waiting. The problem gets bigger, and starts to become an insurmountable obstacle.”

Having skipped its pension contributions for many years, Chicago is supposed to start tripling them in another year under state law. But the school district has drained its reserves. And it cannot easily turn to the local taxpayers, because of a cap on property taxes. Borrowing the money would be difficult and expensive as well, because of a credit downgrade this summer. One of the few remaining choices would be to make deep cuts in other services.

Like Chicago, many cities and school districts now face pension pressure after reducing their contributions in recent years to save money. Among the funds for different types of workers, teachers’ plans tend to be shortchanged more often, according to research done by the Center for Retirement Research at Boston College for The New York Times.

The reasons are unclear, but in many states — California, New Jersey, Rhode Island and Illinois, among others — pension contributions must be set by state legislators every year. And since teachers’ pension costs are blended with other education spending, lawmakers sometimes decide to withhold money from pensions to allow more direct state spending on the schools. The teachers’ pension fund for the State of Illinois is in even worse shape than the Chicago teachers’ fund.

What many Chicago residents may not realize is that their school district also has been paying $130 million a year to cover most of the pension contributions required of the teachers, a practice known as a “pickup,” which became a flash point last year in the collective bargaining battle in Wisconsin. Wisconsin’s public workers have agreed to make their own contributions, as a concession.

Officials in Chicago know they have a pension problem, even though it was not front and center in the strike. Mayor Rahm Emanuel focused on trying to improve the quality of public education, with a longer school day and more meaningful teacher evaluations. The Chicago Teachers’ Union, meanwhile, was intent on reinstating a 4 percent pay increase, and protecting those who are laid off when failing schools are closed.

Mr. Emanuel has made it clear that he wants to address teachers’ pensions, too. Earlier this year, he tried to curb at least some of Chicago’s ballooning costs by seeking to raise retirement ages, increase employee contributions and trim the 3 percent yearly pension increases that the city’s retirees now receive. He called those increases “the single greatest threat to the retirement security of city employees,” because they drain money from pension funds very quickly.

The State Legislature, whose approval is needed for such changes, has said pensions must wait until next year. But Mr. Emanuel says the system is broken and he is not willing to make any increased contributions until it has been fixed. The mayor said earlier this year that making the larger contributions would lead to “direct cuts in our classrooms.”

“Those cuts mean the average class size will jump to approximately 55 students,” he warned.

The teachers’ union has criticized Chicago for failing to set aside enough money for the pensions, but it has reassured workers and retirees that their benefits are protected by the State Constitution and cannot be reduced. A state law bars strikes in Chicago over pension issues.

Retirees say they are dismayed at the way their fund has been neglected, though they generally say they believe their benefits are safe.

“In the State Constitution of Illinois, it says that once you receive a pension, it can never be changed to be lower,” said Claire J. Murray, 69, who retired in 2002 with a pension of about $42,000 a year, based on 34 years as a teacher and middle-school counselor.

If the money in the fund ever ran out, “the State of Illinois would have to pay our pensions,” she said. “We’re not just a pension fund, we’re part of the State Constitution.”

Ms. Murray pointed out that teachers in Chicago, as in many cities, earned no Social Security credit for their years in the classroom. Their pension plan is intended to replace the federal benefit.

She also said it would be unfair to penalize retired teachers for the school district’s failure to set aside enough money for their benefits.

“It’s the Board of Education who kept on taking all these funding holidays,” she said.

Indeed, the State Legislature granted the Chicago school district a break from its pension contributions, starting in 1995. Since then, the city has never contributed the required amount; for many years it put in nothing. All the while, the teachers’ benefits kept building up.

Pension fund documents say the teachers continuously made their share of the contributions, 9 percent of each paycheck. But in fact, the teachers have been putting in just 2 percent of their pay, while the school district has been making up the rest of what is called the “employee contribution” every year. The practice began under an agreement reached in the early 1980s that was supposed to reduce future pay raises, keep money in the fund and take advantage of a federal tax break.

Such pickups were not widely known until Gov. Scott Walker of Wisconsin began his push to make public employees pay more for their benefits and to bar them from bargaining for anything other than base pay. Wisconsin law calls for public workers and their employers to split the cost of pension contributions, but in practice, state and local governments were picking up almost all of the employees’ share. Local and state workers have contended that they sacrificed current pay increases and the pickup should not be considered a giveaway.

Chicago does not have the state’s only pickup. While Illinois says that teachers outside Chicago send in 9.4 percent of every paycheck for the separate state fund, the state really pays most of that too.

Gov. Pat Quinn of Illinois and Mr. Emanuel have both called for public workers to increase the amounts they pay toward their pensions. Forcing the Chicago teachers to make their full contributions, of course, would erode much of the salary increases they fought for during the strike.




State pension fund falling far short of ability to pay retirees
Connecticut has only half the money needed to meet its obligations
By JC Reindl Day Staff Writer
Article published Dec 4, 2011

Hartford - The pension-funding sins of Connecticut's past are now catching up to us, threatening the state's fiscal stability and the comfortable retirements of future retirees.  That was the message to state legislators last week from Benjamin Barnes, secretary of the state Office of Policy and Management and Gov. Dannel P. Malloy's top budget official, although he spared his audience the fire and brimstone.  But what the show lacked in hellfire, it made up with red-ink.

Connecticut has one of the lowest pension funding levels of all 50 states. According to the most recent audit, the State Employees Retirement System, which covers more than 42,000 retirees, had $11.7 billion in unfunded liabilities last year.  The audit found just 44 percent of the money that's needed to meet the state's future obligations, far below the general guideline of 80 percent. 

If nothing is done, Barnes said, "It gets spectacularly ugly."

The state's required annual contributions could grow from the current $1 billion to a peak of $4 billion in two decades. And that doesn't include the other contractual payments for retiree health care and teachers' pensions.

For taxpayers, the stakes are high. Every dollar that the state preserves for pensions is a dollar lost for services such as education, social programs and road work, and growing pension costs could force the state to hike taxes and fees.  Straining under its own payment schedule, Rhode Island's legislature and governor last month approved a sweeping and highly controversial overhaul of that state's pension system that cuts some benefits for retirees as well as workers.  But Connecticut's pension promises to retirees - unlike Rhode Island's - are believed to be firmly bound by legal contracts.

"We committed to giving them pensions under the law; we can't take that away from them," Barnes said.

As the governor's budget chief laid out the depths of Connecticut's obligations, he made an opening argument in what could become the administration's phase II strategy for reining in the pension systems' escalating costs to the state.

He called for doing the opposite of what Connecticut has done for decades: Pay more into its pension funds now to ward off future pain.  Barnes said it is too early to unveil the full details of the idea, but it would likely involve placing budget surpluses into the pension account and, through the fund's relatively strong return rates, would help to smooth out the rising contribution schedule.

The Original Sin

One could say that the first phase of Malloy's pension revamp happened this year when the state reopened the costly 20-year retirement and health care agreement that was signed in 1997 by former Gov. John G. Rowland.

That renegotiation captured a projected $21.8 billion in cost-savings over two decades, including $8.3 billion in pension savings. The next step would involve revisiting that 1997 deal between Rowland and the unions, along with one from 1995.  The two agreements allowed the state to make smaller pension contributions, which offered up-front "savings" for state government. Larger contributions were put off to the future, including a $4 billion balloon payment in 2032 that Barnes warns about.  Rowland was not the first or last governor to find "savings" by adjusting the state's contributions to its pension funds.

The Original Sin of the State Employees' Retirement System was the period of three to four decades, after its creation in 1939, when state officials didn't set aside money in a trust for investment and large-scale accumulation.  The idea at the time was that the retirements were safe because state government would never go out of business and could always raise taxes.  Connecticut stuck to a "pay as you go" method that required only the payment of current retirement benefits. By 1971, when the state enacted the ominous-sounding Public Act 666 mandating an actuarial contribution schedule, the system was nearing $1 billion in unfunded liabilities.

Fast cash

For politicians in a budget crunch, cutting back on pension contributions can, when money is needed, be an easy route to fast cash. The full repercussions aren't felt for years.

"Most people don't even notice these things until the chickens come home to roost," said William Cibes, Jr., a former state budget director.

The state began making big cuts to its scheduled contributions in 1989 when revenues plummeted in the economic downturn. The Hartford Courant reported that from 1989 to 1995, the state should have made $3.1 billion in contributions to the state employees' fund, but only put aside $2.1 billion.  To reduce payroll, the state offered early retirement incentive programs to workers in 1989, 1991, 1997, 2003 and 2009. While the early retirements saved money in the budget, they burdened the pension system as more people were drawing benefits and fewer were paying in.

The 2009 labor deal under former Gov. Jodi M. Rell contained both a retirement incentive program and pension contribution deferrals. The deferrals totaled nearly $315 million over three years.  Budget documents show that reducing early contributions under Rowland produced approximately $150 million in savings for his debut budget. The maneuver freed up revenue that, combined with union concessions, helped finance the governor's first-term tax cuts, including the introduction of a popular $100 property tax credit.  But it stunted the fund's long-term prospects, as there was less money for the state treasurer to invest. Connecticut's pension fund averaged a 6.8 percent annual market return rate from 1993 to 2009, according to a report by the State Post-Employment Benefits Commission, a panel appointed by Rell.

"You save a dollar, but it costs you $20 in the future," said Michael Cicchetti, a former budget official who chaired the commission.

The state's actuaries told union officials that the Rowland administration's desired contribution method was a generally accepted way to finance pensions, said Bob Rinker, executive director of CSEA/SEIU Local 2001, who was part of the State Employees Bargaining Agent Coalition during those negotiations.  Still, the unions would have preferred to stick with the steadier method which then existed, Rinker said. But the benefits that Rowland dangled were tough to resist.

"When he offered us a 20-year pension and health care agreement, it was hard to keep the members away from the ballot box," Rinker said.

On the side

The 1995 and 1997 labor agreements also contained what one former state official calls a "side deal" between the governor and the unions that permitted the state to make smaller annual contributions than normally would be required.  Under this arrangement, the fund's actuaries make an initial calculation of the state's annual contribution and then reduce that amount based on "interpretations" of the two deals.  These reductions totaled $105.5 million last year, and have likely exceeded $1 billion since the late 1990s, according to the post-employment commission's report.
"It was something that the commission in its work really brought to light," said Cicchetti. "Not a lot of people were aware of the effect that these agreements had on the annual payment."

A twist to the story is that some union officials, including Sal Luciano, executive director of Council 4 AFSCME - the largest state employees union - say the Rowland administration "misapplied" the language of the two deals and erred by cutting back on the state's contributions.

"They shouldn't have been taking those additional reductions," said Matt O'Connor, spokesman for the unions' bargaining coalition, speaking for Luciano. "Ultimately we would like to see this problem rectified."
Rowland did not reply to requests for comment for this story.


Budget chief calls for legislature to tackle cash-starved pension system
Keith M. Phaneuf, CT MIRROR
November 29, 2011

Now that state legislators have closed the largest budget deficit in Connecticut history, Gov. Dannel P. Malloy's administration has a new challenge: Fix a state employee pension system on a collision course with fiscal collapse in about two decades.

Office of Policy and Management Secretary Benjamin Barnes, Malloy's budget chief, presented the challenge Tuesday to the legislature's Appropriations and Finance, Revenue and Bonding committees during OPM's annual budget briefing. And though he didn't propose a specific timetable to meet the challenge, it could ultimately add hundreds of millions of dollars in costs to the annual state budget.

"There is enormous work left to be done with respect to the fiscal condition of the state of Connecticut," Barnes told lawmakers as part of his office's Fiscal Accountability Report, an annual briefing on short- and long-term budget issues.

"State government is leaner and more efficient" as a result of the $1.6 billion concessions deal ratified in August with state employee unions, as well as other spending cuts, agency mergers and efficiencies ordered in the $20.14 billion budget adopted in June, Barnes said.

But he also noted that the governor, who took office in January, inherited a financial picture plagued with more than $71 billion in long-term debt -- one of the highest burdens, per capita, of any state in the nation.

That includes: bonded debt stemming largely from school construction, roads, bridges and other capital projects; pension funds and health care benefits for retired state workers and teachers.

Among the pension funds, the program for state employees is in the worst shape.

According to the last actuarial valuation, the fund had reached a 22-year low, as of June 30, 2010.

State government had $9.35 billion in assets in the pension fund as of mid-2010, but it owes $21.1 billion. Together, these represent a funded ratio of 44.4 percent. Actuaries typically cite a ratio of 80 percent as fiscally healthy. The last time the ratio hovered close to 45 percent was in 1988.

Barnes noted that state government has failed to reach healthy funding levels in its employee pension program for most of its history.

How the problem began

Connecticut's pension fund began as a pay-as-you-go system. For nearly four decades, state government put nothing away, and therefore gained no investment earnings, to help cover pension costs.

Annual contributions into the pension fund, which began in the early 1980s, fulfill two purposes: Meeting the "normal cost," or saving to cover the benefits earned by workers during the year; and making up -- over a 30-year schedule -- for the dollars Connecticut should have saved in decades past to meet its obligations.

Another huge wrench was thrown into the fiscal works in 1995, when then-Gov. John G. Rowland and employee unions agreed to put the pension program on what amounts to a balloon mortgage schedule.

The two sides agreed to abandon a pension fund contribution schedule that required largely equal payments, with annual inflationary adjustments, over the next 30 years to eliminate the unfunded liability.

In its place they imposed a system of ever-escalating payments. Although payments were lowered in the short-term, they have been increasing dramatically since the late-1990s.

The state's annual contribution to the pension fund, which stood at $844 million last year and tops $1 billion this year, is on pace to hit $1.5 billion in 2022, top $2 billion by 2027, and approach $4 billion by 2032, according to OPM.

"It gets spectacularly ugly," Barnes said, adding that it's time for the administration and legislature to search for a way to shift from the "back-weighted system" and move "toward more level funding."

Barnes didn't offer specific proposals Tuesday, though he made it clear that this can only be resolved over the long term.

A 2010 panel formed by then-Gov. M. Jodi Rell to propose solutions to the huge funding gaps facing retirement benefit programs ordered an analysis that concluded that the state would have had to add an extra $550 million to its annual pension contribution last fiscal year to get the pension system back on a level-funding schedule.

But Malloy's budget chief did make it clear that he thinks there is only one solution that will solve most of the problem: dedicating money to meet the state's responsibilities.

"The only way to solve long-term structural liabilities is to pay them off," he said, adding that the sooner Connecticut addresses this problem, the more progress it will make. That's because larger contributions to the pension fund will increase investment earnings, which in turn will be reinvested and produce more income for the pension system in future years.

Sen. Eileen Daily, D-Westbrook, co-chairwoman of the finance committee, said the administration made progress reducing Connecticut's pension fund issues during the August concessions deal. The savings negotiated in that deal are being assessed by actuaries who are expected to issue a report in late December.

But Daily said most state officials who have looked honestly at the pension obligations would come to the same conclusion that Barnes did.

"I think Mr. Barnes made clear what we know: that we have to do this," Daily said, adding that Connecticut's benefits contract with the State Employees Bargaining Agent Coalition extends through 2022.

But Sen. Robert Kane of Watertown, ranking Republican senator on the Appropriations Committee, said Connecticut might have been able to cut its pension costs even further in 2017 -- when its benefits contract with unions originally was set to expire -- had Malloy not agreed to extend it five years to get other concessions.

"I'm glad to see the administration is focusing on our long-term liabilities because sooner or later we're going to collapse under the weight of them," Kane said. "But I think we really missed an opportunity for major structural reform."

SEBAC had no immediate response Tuesday afternoon to Barnes' statements.




WHAT WAS THE DATE EXACTLY?
Mary L. Schapiro, head of S.E.C., and Sheila Bair, former head of FDIC;  banking changes - FOLLOW THIS ISSUE!!!.


Officials Eye Madoff Role of a Lawyer
NYTIMES
By GRETCHEN MORGENSON and LOUISE STORY
September 16, 2011

Federal ethics officials are expected to recommend that the Justice Department begin a criminal investigation into actions taken by David M. Becker, the former general counsel of the Securities and Exchange Commission, who determined the agency’s proposal for compensating victims of the Bernard Madoff Ponzi scheme when he had a financial interest in the outcome.

A possible criminal referral from the Office of Government Ethics is expected to be part of a report issued next week by H. David Kotz, the inspector general of the S.E.C., according to two people briefed on the report’s contents.

Mr. Kotz began investigating Mr. Becker’s role in reversing an earlier agency compensation plan for Madoff victims after the Becker family’s $2 million Madoff stake was disclosed publicly last February.

Federal conflict of interest law 18 U.S.C. § 208 requires government employees to be disqualified from participating in a matter “if it would have a direct and predictable effect on the employee’s own financial interests.”

Mr. Becker joined the S.E.C. in February 2009 at the urging of its chairwoman, Mary L. Schapiro. In that role, he persuaded the S.E.C. to change its victim compensation methodology to a more generous approach, even though he had received a Madoff stake through an inheritance from his late mother, who had invested with the money manager.

Mr. Becker left the commision this year.

William R. Baker III, a lawyer for Mr. Becker, declined to comment for this article. A spokesman for the S.E.C. declined to comment because the commission had not seen the report.

In early 2009, the S.E.C. agreed on a method that would give investors a claim to only the money they had put into their Madoff accounts.

But in the summer of 2009, Mr. Becker reversed this decision, arguing that the commission should allow victims to keep some of the gains their investments had generated, since the investment would have grown over time even in a low-interest account. The Becker family would benefit from this approach.

The S.E.C. approved the compensation plan backed by Mr. Becker. Mr. Kotz is expected to report that none of the commissioners knew of the Becker family’s Madoff holdings when they approved the new compensation plan. As a result, Mr. Kotz may urge the full commission to put the victim compensation matter to another vote.

Previously, Mr. Becker said that he had advised Ms. Schapiro and the S.E.C’s chief ethics officer of his financial interest in a Madoff account, “either shortly before or after” joining the agency in February 2009. The ethics officer, William Lenox, approved Mr. Becker’s role in the Madoff compensation deliberations after only a brief review. Mr. Lenox reported to Mr. Becker.



Auditors say state's computer systems aren't ready for GAAP
Keith M. Phaneuf, CT MIRROR
July 28, 2011

The state's bipartisan auditors warned this week that technical issues with state government's core financial computer network "represent a significant problem" for the conversion to a more transparent and accountable budgeting system, but Comptroller Kevin Lembo said the issues are "fixable."

Auditors John C. Geragosian and Robert M. Ward also warned that the failure to fully implement the CORE-CT system across all of state government also could hinder the transition to generally accepted accounting porincipals, or GAAP--a linchpin of Gov. Dannel P. Malloy's plan to improve fiscal accountability.

"There are significant costs and difficulties involved," the auditors wrote in their latest audit of state financial operations, though they didn't detail specific expenses.

Lembo, however, said Thursday that he's convinced modifications to the CORE-CT system not only can be completed to allow full conversion to GAAP by the July 1, 2013 statutory deadline, but most of the costs should be covered by a previously planned upgrade that starts later this year.

CORE-CT was launched in 2003 under Lembo's predecessor, Nancy Wyman, who was Malloy's running mate last fall and now serves as lieutenant governor. The system, which has cost about $131.4 million so far, was designed to unify dozens of agency accounting and human resource systems--many written in different programming languages--and link them with central state financial networks.

Established by the Government Accounting Standards Board, GAAP requires expenses to be promptly assigned to the fiscal year in which they were incurred. Similarly, revenues are counted in most situations in the year in which they were received.

That's not always the case under the modified cash basis system state government operates under, and CORE-CT--as it operates right now--isn't ready to meet GAAP standards, the auditors wrote.

For example, purchase orders that are placed in one fiscal year but not completed until the next simply are rolled over, under CORE-CT, into the year when the goods or services actually arrive.

"Similar issues are found to affect revenue accounting," the auditors wrote. Revenues earned shortly before the fiscal year ends on June 30, but not deposited until July or August, also tend to be assigned to the later year--a move that doesn't meet GAAP standards.

Though that is a problem, Lembo noted that the irony is that CORE-CT was launched in 2003 to accommodate an eventual transition into GAAP rules. Wyman, who served as comptroller from 1994 through 2010 and now is lieutenant governor, has been one of the most vocal advocates for a GAAP conversion in state government.

"All of the tweaking that had to go on then with CORE-CT was to make it conform to our current situation," Lembo said. "Frankly, all we have to do now is move in the direction that this product was built for."

Lembo said the auditors' characterization of CORE-CT as a "significant problem" on the path to GAAP conversion as a "reasonable observation," but "this is fixable and--relatively speaking--not costly."

CORE-CT has been upgraded numerous times since its inception and the next upgrade, planned to begin later this fiscal year, should be able to address the auditors' concerns within the tentative project budget of about $20 million.

A second problem, according to Geragosian and Ward, is that a significant portion of state government never fully joined the CORE-CT system. Connecticut's public colleges and universities, as well as the Legislative and Judicial branches, process transactions through their own accounting systems and then periodically enter the information into CORE-CT.

Lembo conceded some changes might need to be made to ensure the state's system, under GAAP, receives information in a timely fashion. This could require both upgrades and staff training. "It's a challenge, but it's an anticipated challenge," he said, adding that converting to GAAP has long been "a hard sell" in state government.

The legislature enacted a law in 1993 ordering a conversion, then routinely waived that requirement year after year as lawmakers and governors used an array of accounting gimmicks that pushed expenses into future years to balance finances in the short-term.

According to both the comptroller's office and the legislature's nonpartisan Office of Fiscal Analysis, state government would need an extra $1.5 billion on hand to fully follow GAAP principles. And that GAAP differential grows each year because of inflation.

The new budget Malloy and the legislature adopted during the regular legislative session would dedicate $75 million this year and $50 million in 2012-13 from projected surpluses to cover the inflationary growth and effectively freeze the GAAP differential at its current level.

Malloy and lawmakers also agreed that, starting in 2013-14, agencies would begin keeping their books under GAAP rules and Connecticut would pay down that $1.5 billion differential at the rate of $100 million a year for 15 years.


State government's adoption of new accounting methods revealing dirty fiscal laundry;  State's reality check overdue, accountants say
By JC Reindl Day Staff Writer
Article published Jul 24, 2011

Hartford - After nearly two decades of politicians' delays, the principles of modern-day accounting are easing their way into the balance sheets of state government.  Though full implementation is still two years away, this new system for tallying Connecticut's red and black ink is already exposing uncomfortable facts about finances at the Capitol.  Three big shockers:

• Connecticut arguably doesn't have a balanced budget.
• There is actually a deficit of $1.5 billion.
• That deficit could be even bigger: $20 billion, or even a hair-raising $60 billion, in the view of some accountants.

"If we were in the private sector, we'd all be in jail," says state Rep. Diana Urban, D-North Stonington, a strong proponent of the new accounting system. "It's the truth."

State government is converting to Generally Accepted Accounting Principles, known as GAAP, which are bookkeeping standards used by businesses and corporations, as well as many state governments and all of Connecticut's cities and towns.

Connecticut's budget has historically been managed on a "modified cash basis," which calls for counting revenues on the day the money is received and expenditures on the date that they're made.  To its many critics, this accounting style leads to an unsavory amount of budget gimmickry. A common maneuver is pushing expenses that occurred in one fiscal year into the next year to show an artificial surplus in that program's account.  The system's permissiveness makes it attractive to politicians in a budget crunch.

"The cash basis has the virtue of simplicity," Benjamin Barnes, secretary of the Office of Policy and Management, explained in a recent report. "However, this simplicity can also lead to manipulation or to financial statements that are not fully reflective of the activity occurring in the period being accounted for."

GAAP, in comparison, requires that expenses and revenue be counted when they occur - no wiggle-room allowed. It's widely considered the more transparent way to budget.  At least 17 state governments use GAAP for budgeting purposes, according to a survey by The National Association of State Budget Officers. Connecticut's comptroller has published a set of GAAP figures with the state's annual report since the late 1980s, but GAAP has never been used for budgeting.

A campaign promise

Converting state government to GAAP was a core campaign issue last year for Gov. Dannel P. Malloy, a Democrat. He declared at an October debate in the Garde Arts Center in New London that "I will sign no budget that spring until the legislature has passed a law incorporating GAAP finance rules."

Some Capitol watchers have since accused him of stretching his campaign pledge because the new two-year budget that began July 1 doesn't explicitly call for implementing the principles until mid-2013.

"Several times he said he would not sign a budget that wasn't a GAAP budget," Tom Foley, Malloy's Republican opponent last fall, said last week. "And here he's signed a budget that's not a GAAP budget."
Yet the governor's staff and his budget office insist that GAAP is already here and on the path to full implementation.

"The governor promised to move Connecticut state government to GAAP financing, and that's exactly what he's done," said his spokeswoman, Colleen Flanagan.

Malloy's first executive order in January initiated the conversion process. The target date for complete implementation is July 1, 2013 - the start of the next biennium. Policy officials say it takes time to update state computers and train staff for the new accounting style.  Unlike many big initiatives in Hartford, GAAP has bipartisan support.

"It's a great move," state Rep. Chris Coutu, R-Norwich, said. "Right now, we all know, there are literally hundreds of millions of dollars that aren't accounted for."

Indeed, the transition is shining a harsh light on some budgetary indulgences of the past. According to the latest audit, state government shows a $1.5 billion deficit when its finances are converted to GAAP.
Connecticut's constitution forbids the General Assembly from passing a budget that is out of balance. But it doesn't require any particular accounting system.

"The absence of GAAP has allowed the state to hide its true fiscal condition and allowed the state to get away with a number of budget gimmicks that allow us to say, 'we have a balanced budget,' when in fact we don't," said state Rep. Tom Reynolds, D-Ledyard.

The Malloy administration and legislative leaders refer to the $1.5 billion deficit as the "cost" of converting to GAAP, as it must eventually be paid. The new two-year budget, while not GAAP-balanced, does set aside $75 million in its first year and $50 million in the second to keep this deficit from ballooning further.  When GAAP takes full effect in 2013, the state will start paying $100 million a year for 15 years to retire the deficit.
"It's going to take a period of time to get it done, and it's going to be uncomfortable," said Urban, who thinks the benefits of a transparent budget are worth the sacrifice.

But some private-sector accountants say that Malloy's efforts are insufficient. Members of The Connecticut Society of Certified Public Accountants have pointed out that Connecticut is adopting the less stringent of two types of GAAP.

"This is just a baby step in a huge hike we have to take," said Marcia Marien, the society's past president and managing partner of Marien + Company CPAs in Norwich. "Everyone's saying, 'Oh, this is so responsible. Businesses use GAAP.' But they don't realize there's two types of GAAP."

The types are "modified accrual" and "full accrual." The full accrual method - commonly used by businesses and rarely, if ever, by state governments - takes into consideration long-term liabilities such as retiree pension costs and the depreciation of assets, such as buildings. Connecticut is instead doing modified accrual, which focuses on the short-term inflow and outflow of cash.  The difference between the two can be huge. If Connecticut converted to full GAAP, the $1.5 billion deficit would become a $20 billion deficit, a sum equal in size to the state's entire annual budget.

And that's not all.  New guidelines for long-term liabilities would raise the state's deficit under full GAAP to a gargantuan $62 billion, according to Marien.

"It gets scarier and scarier," she said.

Long time coming

GAAP is not a new concept at the Capitol. In 1993, the General Assembly passed a bill that authorized the use of the accounting principles for budgeting and set the 1995-96 fiscal year as its enactment target.
The conversion was considered a related initiative to the 1991 introduction of the state income tax. The prospect of having gimmick-free accounting was said to have helped win votes for the income tax.

"If we go to GAAP, we will no longer be fooling ourselves about the state's financial condition and, more important, we will no longer be fooling the state of Connecticut," then-state Rep. Gene Gavin, a Republican and the future state revenue commissioner, said at the time.

But legislators went on to enact a series of delays over the next 18 years to block the accounting system's implementation. The reason, GAAP proponents say, is that lawmakers and governors just couldn't part with their beloved bag of budget-shifting tricks.  Lt. Gov. Nancy Wyman was a strong proponent of GAAP during her years as state comptroller from 1995 through 2010. She and several legislators, including Urban, tried without luck to speed up its implementation.

"I have been fighting for the state to do more honest and transparent budgeting for a very long time, and enacting GAAP is a major step in that direction," Wyman said.

In an interview, Wyman defended the state's choice of modified rather than full GAAP. She said the strictest set of accounting practices can be appropriate for businesses, although not state governments' budgets.

"Part of it is you can't afford to do the full GAAP," she said, giving the example of the state having to calculate future retirement benefits for new hires who are fresh out of college.  She also faulted legislators for spending surplus money in the 1990s that could have instead gone to paying down the GAAP deficit.  Now she's happy that GAAP is almost, finally here.

"After all these years it does feel like a victory," she said. "Not for me, but for the taxpayers of our state.".



Stabbed in the back
NYPOST
By E.J MCMAHON
Last Updated: 12:05 AM, June 25, 2011
Posted: 9:55 PM, June 24, 2011

The passage of a 2 percent cap on local property-tax growth in New York should have been the crowning achievement of Gov. Cuomo's first legislative session -- complementing an austere budget to set a more fiscally responsible tone for the Empire State.

But even before the tax cap finally came to a vote in Albany yesterday, the Legislature was making a mockery of the governor's objectives. Lawmakers approved a bill that would allow school districts to borrow money to cover a portion of their growing teacher-retirement costs -- the same costs that will be partially excluded from the tax cap, under a concession Cuomo made last month to secure the support of Assembly Speaker Sheldon Silver.

School boards opting to bond out their teacher-pension contributions could thus have it both ways. They could stretch a coming "spike" of pension costs into 15 years of installment debt -- which, unlike other forms of school borrowing, wouldn't require voter approval. Meanwhile, thanks to Silver's partial exclusion, they could squeeze taxpayers for bigger property-tax increases (in some cases, much bigger) than Cuomo's original bill would've allowed.

The net result: less pressure for contract concessions from members of New York teacher unions, who are constitutionally shielded from being directly required to share in the rising cost of their generous retirement benefits.

Small wonder, then, that the bill had strong support from the New York State United Teachers. In fact, the measure was drafted and introduced at NYSUT's behest more than two months ago, but stealthily lurked in legislative committees until the final days of the legislative session, when the union's friends in the Senate Republican conference swiftly moved it to a vote late Thursday.

Cuomo has ample reason to veto the bill -- and not just because it runs counter to the intent of his cap. Permitting schools to bond out pension costs would also amount to a classic New York fiscal abuse -- converting an operating expense into debt, compounding future financial risks for the same already overburdened taxpayers the governor has sworn to help.

If the coming increase in tax-funded teacher-pension contributions was truly just a two- or three-year blip on an otherwise smooth and predictable path, as the bill's supporters implied, a borrowing option for districts might actually be defensible. But in the wake of the pension fund's massive losses during the 2007-09 bear market, tax-funded contributions to the New York State Teachers Retirement System haven't even risen halfway up a very steep slope that is likely to peak at more than twice its current level no earlier than 2016.

Districts issuing pension bonds would push a growing expense into the middle of the 2020s, gambling (with taxpayers' money) that taxpayer-contribution rates will fall sharply in a few more years. For that to happen, however, returns on pension-fund asset will need to exceed the fund's already optimistic 8 percent yearly target through out the next decade.

Meanwhile, by the time their borrowed money is exhausted in 2014, districts that have borrowed to cover pension increases will have fallen even further behind in meeting their actual current pension expenses.

That is, the bonding option could easily become "a millstone rather than a life raft," as state Assemblyman Jim Hayes (R-Amherst) put it in yesterday's floor debate on the bill.

So now the spotlight turns to Cuomo. For the moment, his tax-cap triumph has been tarnished by the Legislature's end-of-session union pandering. The governor needs to let lawmakers know that he'll reject the pension bonding bill as soon as it arrives on his desk, whenever that might be.

And he'd better keep his veto pen sharp, because there's plenty more where this came from. Attempts to undermine what is destined to become known as the Cuomo Tax Cap will now become a virtually permanent feature of the legislative process. The sooner the governor makes it clear he won't play this game, the better.

E.J. McMahon is a senior fellow at the Manhattan Institute's Empire Center for New York State Policy.




Newer (2012) Pew Study

PEW STUDY LINK








Report: Connecticut lags in tackling retirement benefit costs
Keith M. Phaneuf, CT MIRROR
February 7, 2011

Connecticut not only faces one of the largest funding shortfalls in its retirement benefit programs of any state in the nation, but has been one of the slowest to respond over the last two-and-a-half years, according to a new study from a nonprofit economic development group.

The Connecticut Regional Institute for the 21st Century, a coalition of businesses and public institutions, also recommended a broad array of steps including increased government contributions toward retirement savings accounts, new restrictions on retiree benefits, an end to traditional retirement incentive plans that weaken pension funds.

Retiree health care and pension liabilities are "a fiscal tsunami heading right for Connecticut. Increasingly, towns and states are actually considering bankruptcy because of the huge liability associated with pensions and OPEB (other post-employment benefits,) the institute wrote.

Connecticut's unfunded pension and medical liability approaches $42 billion. The overwhelming bulk of that liability involves a pension fund and retirement health care for state employees and a pension fund for public school teachers.

Annual contributions for those total more than $2 billion, or about 11 percent of the current state operating budget.

But since 2008, Connecticut has lagged behind most other states in trying to address long-term obligations that nearly double annual spending, according to the report.

State officials here have taken two steps since then to counter this problem:

    * A 2009 concession deal with the State Employees Bargaining Agent Coalition required all new employees, and existing workers with less than five years of experience, to contribute 3 percent of their annual pay toward their retirement health care.
    * That same deal also offered incentives to senior state employees to retire now. But while that move saved the state operating funds in the short-term, many economists argue that over the long haul, it increases pension payments and weaken pension funds. The institute report also recommends avoiding incentive programs in the future, effectively leaving Connecticut with just one affirmative step to mitigate its retirement benefit obligations.

"We're near the back of the pack" of states in terms of fixing the problem," Shelly Saczynski, United Illuminating's director of economic development and a member of the institute's steering committee, said Monday.

But Saczynski added there is a silver lining to Connecticut's late start. It can benefit from analyzing the measures undertaken by other states and choosing those that have been most effective.

The most common step taken by other states to control the growth of employee pensions, according to the report, involves increasing the number of salary years analyzed to calculate that benefit. The most common shift was moving from a three-year average of an employee's highest salaries - as Connecticut uses - to a five-year average.

States also instituted new restrictions to prevent "spiking" of pension benefits, such as limiting how overtime earnings could affect pension calculations. Increases in the minimum retirement age and reductions in cost-of-living adjustments also were common options, though lawsuits have been filed to protect COLA formulas in Colorado and Minnesota.

Vermont borrowed a page from the Connecticut state employee unions' playbook, bolstering its teacher pension fund by increasing teachers' benefits - if they work longer. Connecticut workers offered this proposal last year, but it was not accepted by Gov. M. Jodi Rell's administration.

"The report is a bit embarrassing but not surprising," state Comptroller Kevin Lembo said Monday, adding officials cannot use the mammoth-sized, $3.67 billion budget deficit projected for 2011-12 as a reason to postpone tough decisions even further.

"I can understand that reaction," he said. "But next to a time of budget surpluses, a time of record deficits is precisely the right time to make structural changes."

Deputy House Speaker Kevin Ryan, D-Montville, who co-chaired the legislature's Labor and Public Employees Committee for the past eight years, also conceded that officials hadn't taken reports of huge unfunded liabilities as seriously as they should have.

"I think in the past it was thought that we could get away with it," he said. "I think people realize now we have to talk about it.

The institute study did endorse several restrictions or reduce benefits for Connecticut state employees or teachers, including:

    * Increasing the age to retire with full benefits.
    * Instituting the five-year salary average for pension calculations and an end to COLA adjustments
    * And implementing a defined contribution plan, similar to the 401(k) plans offered in the private sector, for new employees.

Connecticut's biggest liability involves its retiree health care. According to Lembo's office, the state has $26.6 billion in unfunded liabilities tied to this benefit, and almost nothing saved to offset it. The legislature did set aside a token $10 million in 2007.

Currently, most state employees qualify for that health care when they retire provided they have 10 years of state service, even if they then leave for private sector jobs and retire decades later. State employees hired after July 2009 must meet two conditions: having 10 years of service and their age and years of service must total 75.

The report recommends that Connecticut move to a combination of 90, noting that many states now limit access to health benefits to those vested employees who remain in state service until their retirement.

But Saczynski noted that the report's recommendations are not focused solely on restricting benefits. "It is not an issue of slash-and-burn," she said.

Besides recommending contributing the full amount recommended annually to stabilize the state employees' and teachers' pension funds, the institute also called for Connecticut to reverse a controversial move taken in 1995 that put the state employees' pension system onto a back-loaded contribution plan.

That deal, negotiated by then-Gov. John G. Rowland's administration and state employee unions, moved Connecticut off a relatively level-funded plan to stabilize its worker pension system over 30 years.

The alternative system, which saved Connecticut $255 million back in 1996, has helped place the state's annual pension contribution on a rapidly escalating schedule.

The annual contribution into the workers' pension fund,, which currently stands at $844 million, is on pace to leap by 50 percent by 2017, double by 2026 and triple by 2038, based on actuarial consultants' estimates issued last year. Consultants estimated it would cost an extra $550 million next year to return to a level-payment system.

Veteran state union leader Salvatore Luciano said unions believe government must start making its full pension contribution, and also support a return to a level-funded system.

But Luciano, who is executive director of the American Federation of State, County and Municipal Employees' Council 4, said he doesn't believe Connecticut is as far behind other states as the report contends. He specifically noted that Connecticut did establish a pension savings account back in the mid-1980s, when many other states still had not.




"LAND OF STEADY HABITS" INDEED
From "Gone With The Wind" - "tomorrow is another day" or the most often used term by the female protagonist, "Fiddle Dee Dee"




Wall Street taking a closer look at Connecticut's ailing pension fund
Keith M. Phaneuf, CT MIRROR
February 1, 2011

One of the leading Wall Street credit rating agencies recently increased its focus the fiscal health of state pension systems when rating overall creditworthiness--at the worst possible time for Connecticut.

Moody's Investors Service stopped short of saying when--or if--this might lead to a drop in credit ratings for particular states. But it defended the focus as a step toward a more thorough and accurate assessment of states' fiscal conditions.

"Pensions have always had an important place in our analysis of states, but we looked separately at tax-supported bonds and pension funds in our published financial ratios," said Moody's analyst Ted Hampton. "Presenting combined debt and pension figures offers a more integrated -- and timely -- view of states' total obligations."

Moody's found Connecticut is one of four states, along with Hawaii, Massachusetts and Illinois, with the highest debt- and pension-funding needs.

Connecticut, which has more than $19 billion in bonded debt and has approved nearly $2 billion in borrowing since June 2009 to help fund day-to-day government operations, already received a bond rating downgrade from Fitch Ratings Services last year.  And in November, the state received an actuarial report showing its pension fund in its worst shape since the state began saving for pension obligations in the mid-1980s.

The state's pension account held less than 45 percent of the funds needed to meet its obligation to workers in the biennial valuation released by Cavanaugh Macdonald Consulting of Kennesaw, Ga.

State government had $9.35 billion in assets in the pension fund as of June 30, compared with $21.1 billion in obligations, which together represent a funded ratio of 44.4 percent. Actuaries typically cite a ratio of 80 percent as fiscally healthy.

The ratio, which stood at 52 percent in the 2008 valuation, plunged in part due to declining investment earnings during the most recent recession, a problem all states faced.  But the system also has been weakened by deferred contributions, retirement incentive programs and other actions by legislatures and governors to balance the annual budget. And the slippage accelerated over the past two years.  Investment earnings, which fell by $1.7 billion in the 2008-09 fiscal year, were partially offset by an $825.8 million gain in 2009-10.

But a May 2009 concession deal negotiated by then-Gov. M. Jodi Rell and ratified by state employee unions and the General Assembly deferred $214 million in pension contributions over the past two fiscal years, and allowed another $100 million deferral this year.  That deal also allowed the state to offer a retirement incentive program in 2009, which increased pension benefits for about 3,800 eligible employees. State government has offered five retirement incentive programs in the past two decades.

Though popular among workers, these incentive programs have been criticized by economists, legislators and some union leaders for providing illusory savings, offering a short-term reduction in salary costs that eventually is offset by larger, long-term losses suffered by a pension savings account robbed of investment earnings.

The state's annual pension contribution, which currently stands at $844 million, is projected to grow just beyond $1 billion next year.

Further complicating matters, state employee unions agreed in 1995  with then-Gov. John G. Rowland to shift the pension contribution system from a level-funded 30 year schedule to a backloaded system that will force dramatic increases over the next few decades.  The required annual contribution is on pace to grow by 50 percent by 2017, double by 2026 and triple by 2038, based on a consultants' report issued last summer for a state panel studying retirement benefits.

Gov. Dannel P. Malloy, who inherited a projected state budget deficit of $3.67 billion for the coming fiscal year when he took office on Jan. 5, announced shortly thereafter that the pension system could not be subjected to any more fiscal gimmicks. Malloy announced his pension fund policy before the Moody's statement.

"He has been incredibly blunt and consistent: We cannot do stuff like that any more," Roy Occhiogrosso, Malloy's senior advisor, said Monday. "The governor has been quite clear about the need to get the state's fiscal house in order due to issues just like this."

Malloy chastised congressional Republicans and New Jersey Gov. Chris Christie during an editorial board interview with The Day of New London earlier this month, charging that talk of states declaring bankruptcy was fostering instability in the bond market.

State House Minority Leader Lawrence F. Cafero, R-Norwalk, said Malloy and all Connecticut officials need to be prepared for some frank discussions about the state's huge debt.

"The first step in solving a problem, personal or otherwise, is to acknowledge the problem," Cafero said Monday. "And for so long we have swept the problem under the rug. What it's all really about is telling the truth -- to ourselves and to the public."



Moody’s to Factor Pension Gaps in States’ Ratings

NYTIMES
By MARY WILLIAMS WALSH
January 27, 2011

Moody’s Investors Service has begun to recalculate the states’ debt burdens in a way that includes unfunded pensions, something states and others have ardently resisted until now.

States do not now show their pension obligations — funded or not — on their audited financial statements. The board that issues accounting rules does not require them to. And while it has been working on possible changes to the pension accounting rules, investors have grown increasingly nervous about municipal bonds.

Moody’s new approach may now turn the tide in favor of more disclosure. The ratings agency said that in the future, it will add states’ unfunded pension obligations together with the value of their bonds, and consider the totals when rating their credit. The new approach will be more comparable to how the agency rates corporate debt and sovereign debt. Moody’s did not indicate whether states’ credit ratings may rise or fall.

Under its new method, Moody’s found that the states with the biggest total indebtedness included Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island. Puerto Rico also ranked high on the scale because its pension fund for public workers is so depleted that it has virtually become a pay-as-you-go plan, meaning each year’s payments to retirees are essentially coming out of the budget each year.

Other big states that have had trouble balancing their budgets lately, like New York and California, tended to fare better in the new rankings. That is because Moody’s counted only the unfunded portion of states’ pension obligations. New York and California have tended to put more money into their state pension funds over the years, so they have somewhat smaller shortfalls.

In the past, Moody’s looked at a state’s level of bonded debt alone when assessing its creditworthiness. Pensions were considered “soft debt” and were considered separately from the bonds, using a different method.

“A more standard analysis would view both of these as liabilities that need to be paid and put stress on your operating budgets,” said Robert Kurtter, managing director for public finance at Moody’s.

In making the change, Moody’s sidestepped a bitter, continuing debate about whether states and cities were accurately measuring their total pension obligations in the first place. In adding together the value of the states’ bonds and their unfunded pensions, Moody’s is using the pension values reported by the states. The shortfalls reported by the states greatly understate the scale of the problem, according to a number of independent researchers.

“Analysts and investors have to work with the information we have and draw their own conclusions about what the information shows,” Mr. Kurtter said.

In a report that is being made available to clients on Thursday, Moody’s acknowledges the controversy, pointing out that governments and corporations use very different methods to measure their total pension obligations. The government method allows public pension funds to credit themselves for the investment income, and the contributions, that they expect to receive in the future. It has come under intense criticism since 2008 because the expected investment returns have not materialized. Some states have not made the required contributions either.

Moody’s noted in its report that it was going to keep using the states’ own numbers, but said that if they were calculated differently, it “would likely lead to higher underfunded liabilities than are currently disclosed.”

After adding up the values of each state’s bonds and its unfunded pensions, Moody’s compared the totals to each state’s available resources, something it did in the past only for each state’s bonds. It found that some relatively low-tax states, like Colorado and Illinois, had very high total debts compared with their revenue, suggesting that their finances could be improved by collecting more taxes.

But some states that are heavily indebted, like New Jersey, also have among the highest tax rates, suggesting other types of action may be needed to reduce their debt burdens.

Moody’s also ranked total indebtedness on the basis of each state’s total economic output and its population. It did not factor state promises for retiree health care into its analysis, on the thinking that pensions are a fixed debt like bonds, but retiree health plans can usually be renegotiated.

Mr. Kurtter said Moody’s was not suggesting that any state was in such serious trouble that it was about to default on its bonds, something considered extremely unlikely by many analysts.

Some state officials have complained about a recent tendency to focus on total pension obligations, calling it a scare tactic by union opponents who want to abolish traditional pensions and make all state workers save for their own retirements.

Mr. Kurtter said Moody’s had decided it was important to consider total unfunded pension obligations because they could contribute to current budget woes.

“These are really reflections of the budget stress that states and local governments are now feeling,” he said. A company with too much debt could close its doors, he said, but governments do not have that option.

“They have a tax base. They have contractually obligated themselves to make these payments. These are part of the ongoing budget stress,” he said. “It ultimately all comes back to being an operating cost. Addressing those problems is really what’s happening today.”


The Looming Crisis in the States
NYTIMES Editorial
December 25, 2010

For most of this year, the state of Illinois has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments. Faced with $4.5 billion in overdue payments, Illinois has proposed a precarious plan to sell its delinquent bills to Wall Street investors in exchange for cash, calculating that the interest it must pay the investors will be less than the late fees it owes.

It is no way to run the nation’s fifth largest state, and it is not even clear that investors will agree, but these kinds of shaky deals are likely to become increasingly common as the states try to cope with the greatest fiscal drought since the Great Depression. Starved for revenue and accustomed to decades of overspending, many states have been overwhelmed. They are facing shortfalls of $140 billion next year. Even before the downturn, states jeopardized their futures by accumulating trillions in debt that they swept into some far-off future.

But that future is not so distant, and the crushing debt has made recovery far more difficult to achieve. As The Times reported, Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s. The city of Prichard, Ala., has stopped sending out its pension checks, breaking state law and shocking its employees.

A state or city unable to make its bond payments would send harmful ripples through the financial system that could cause damage even to healthier governments. But if states act quickly to deal with their revenue losses and address their debt — and receive sufficient aid from Washington — there is still time to avoid a crisis.

The most immediate cause of the states’ problems is the decline in tax revenue caused by the downturn, just as the demand for services has increased.

Over the last two years, combined sales, personal and corporate taxes have fallen by more than 10 percent. Although revenue is likely to tick up slightly in 2011, federal stimulus money — which has been keeping many states afloat — is largely scheduled to expire. Renewing a portion of that aid would be one of the most effective ways to assist the economy...full editorial here.



How Pensions Can Get Out of the Red

NYTIMES
By RICHARD RIORDAN and ALEXANDER RUBALCAVA
September 15, 2010

THIS summer’s revelation that New Jersey had misled the public about the health of its state pension funds is only the latest incident in a looming nationwide crisis.

Public pensions at the state and local level are underfunded by more than $1 trillion; in many cities, pension obligations will soon consume a quarter or more of the annual budget — money that will be unavailable for parks, libraries, street maintenance and public safety.

Part of the problem is that pension funds need significant new financing to cover the growing number of retirees. But the real issue is the lack of incentive to improve pension performance. What we need, then, is a federal program that combines stimulus with serious fund reform.

The pension-fund crisis is rooted in the intersection of excessive optimism by fund managers and the funds’ influence on the political process. Funds regularly overestimate their future performance: Calpers, California’s giant state pension fund, assumed, and still assumes, it will earn 7.75 percent annually on its investments; in fact, its returns over the last decade were, on average, less than half of that.

But Calpers wasn’t left holding the bag. Instead, it was able to force the state to increase its contribution to the fund; indeed, the state’s 2010 share will be about five times what it was forecast to be in 1999.

The Calpers case is hardly unique; the same story has been repeated across the country. Often, though, pension funds — including, until recently, New Jersey’s — have been able to hide their liabilities behind clever, nonstandard accounting methods.

This charade can’t last. Eventually debt-heavy governments will begin to default, which will disrupt the municipal bond market by blocking access to new capital for even the most credit-worthy public institutions. Ultimately, Washington may have to add local governments to the list of institutions it must bail out, next to banks and car companies.

But given how poorly pension funds have managed themselves, the federal government can’t simply hand out checks. Instead, borrowing a page from the Education Department’s Race for the Top initiative, which provides money to states that propose significant reforms for their public school systems, it should strike a grand bargain with city and state pension funds: in exchange for capping their liabilities and adopting better management practices, they could cover their costs through tax-free, federally guaranteed securities.

Here’s how it would work. A city, county or state facing insurmountable pension costs would appeal to the Department of Treasury for relief. As a first step, it would have to adopt standard accounting practices to accurately portray its current and expected financial health, including realistic projections of its investment returns and the discount rates on its debt.

Second, the applicant would have to take action to assure it can meet the debt service on its bonds, including placing a permanent cap on its pension liabilities. This means raising the retirement age, increasing employee contributions and preventing employees from manipulating their salaries in the last years before retirement to increase their pensions; it would also mean restructuring the fund’s health-care spending, which has been a significant drain.

Finally, the fund would have to move all new employees to 401(k) retirement plans, which have fixed employer contributions and therefore reduce future taxpayer liabilities.

In exchange, the Treasury would authorize the fund to issue tax-free “pension protection” bonds which, for a fee, would be guaranteed by the federal government. Proceeds from the bond sales would cover its liabilities, providing a quick resolution to the underfunding crisis.

Today’s bond market is the perfect environment in which to introduce a new security like pension-protection bonds. With their tax-free status, a federal guarantee, accurate accounting and the promise of a permanent fix, these securities might even be priced lower than Treasury bills, which are yielding 3.8 percent for 30-year bonds.

A Race to the Top for public pensions would offer something for everyone. The federal government would get a voluntary, low-cost way to avoid paying trillions down the road. Cities and states could cap their pension liabilities and close their funding gaps with inexpensive long-term debt, allowing them to get back to the business of providing needed services. And public-employee unions would get a federal guarantee behind their increasingly uncertain pension benefits.

The Obama administration’s Race to the Top initiative has been a bold experiment in education reform. The White House and Congress now have the opportunity to apply the same idea to the public-pension crisis. Otherwise, chaos is just around the corner for our cities, counties and states.



June 29, 2010, 7pm, Town Hall Meeting Room - Special Board of Finance meeting to discuss O.P.E.B.
Fannie Mae, Freddie Mac to delist shares from NYSE
YAHOO
16 June 2010

NEW YORK – Government-sponsored mortgage purchasers Fannie Mae and Freddie Mac plan to delist their shares from the New York Stock Exchange.

The companies' regulator, the Federal Housing Finance Agency, says Wednesday that it expects Fannie Mae and Freddie Mac shares to trade on the Over-the-Counter Bulletin Board, an electronic quotation service.

The move to delist the shares isn't a surprise. The crash in the housing market has pounded Fannie Mae and Freddie Mac with heavy losses on mortgage debt since 2007. Fannie shares have been below the $1 average price level for 30 trading days. NYSE rules require a company to take action to boost its shares or delist.

Fannie Mae shares closed Tuesday at 92 cents, while Freddie Mac shares closed at $1.22.



Going broke one at a time:  First there is California, then Illinois (click above, center for blow up) - Next one to go belly up?  Connecticut's unions say "no."

Underfunded pensions dwarf deficit
Lack of political will, stock market crashes leave state's obligations in precarious shape
By Ted Mann New London Day Staff Writer
Article published Dec 19, 2010

Hartford - It's one of the simpler guidelines in politics: Be careful what you promise; someone might ask you to pay up.

As the state of Connecticut prepares to face a gaping deficit in its budget for the next two fiscal years, lawmakers and Gov.-elect Dan Malloy also will be forced to reckon with an equally challenging and even bigger problem: the long-term cost of the pensions and health care the state has promised its retirees.  The challenge is one inherited from past legislators and governors, who despite occasional periods of reform and investment have repeatedly failed to set aside money for pension accounts - accounts that will owe tens of billions of dollars to retired workers over the next 30 years.

The reason isn't just the collapse in stock market investments, said State Treasurer Denise Nappier, whose office manages the investment of pension funds. That collapse only exacerbated an underlying, older problem, she said: The state for years has failed to set aside the funds it will one day be compelled to pay.

"I think the biggest issue is the fact that the state has not exercised discipline in funding its obligations," Nappier said in an interview last week.

The situation is drawing notice. Connecticut was ranked fifth-worst in its pension funding levels in a recent survey of the states, and its future cost projections are eye-popping, even by the standards of a state growing used to multi-billion-dollar deficits.

Connecticut's unfunded future liabilities - the total cost of benefits the state is obligated to pay to workers and retirees over the next 30 years, but for which no funds have been set aside - now totals some $50.4 billion, according to nonpartisan analysts for the legislature and the executive branch.

Those liabilities include pensions the state will pay to retired workers, judges and schoolteachers, as well as the cost of providing health care to retirees, all guaranteed to workers in repeated agreements between past governors and state employee unions.

If lawmakers hope to catch a break in the form of concessions from the unions, they will have to drive a hard bargain. Eighteen months after agreeing to a concession package to help Gov. M. Jodi Rell and legislative Democrats wriggle out of the last deficit, union officials say the next cut should not come out of the hides of state workers or retirees.

The bill for all this will not come due all at once - retirements happen gradually, over decades, not just years - and pension funds rarely if ever hold 100 percent of the amount they will eventually pay out. Nonpartisan groups like the Pew Center on the States give their highest marks to states that set aside 80 percent or more of the total expected obligation.  But legislators and policy experts at a number of nonpartisan organizations list Connecticut among those states with the biggest imbalance between benefits it has pledged and funds it has set aside to pay for them.

"I wouldn't characterize it as a bomb, but there is definitely a huge liability that seems to be increasing, especially in the last few years, partly because of lower investment returns," said Michael J. Cicchetti, a veteran of the governor's budget office under Rell and predecessor John G. Rowland. "These are dollars the state owes and will have to pay at some point."

The costs of pensions and retiree health care keep growing, even as the assets that will support those benefits fail to keep pace. Something, it seems, is going to have to change.

Funding less and less

As it has fallen behind the pace of the growth of its liabilities, Connecticut has joined a national trend.  A recent study by the Pew Center on the States noted that, nationwide, states were running a surplus of $56 billion in pension plans in 2000.  But liabilities have steadily risen since then, even as the value of the assets that will back future pension claims has fallen, hit by two stock market recessions. Moreover, the states have decided not to make the payments they would need to make to account for future obligations.

The Pew study totaled the amount of outstanding obligations for which states have no corresponding assets at $1 trillion nationwide, and listed Connecticut among the states that have generated "serious concerns" about the funding of their pension systems.  Much of the recent gubernatorial campaign was focused on the current budget deficit - the $3.4 billion shortfall in revenues that will challenge Malloy and legislative leaders as they try to find ways to keep the lights on.

But the underfunding of the State Employees Retirement System is approaching a "danger zone," said Nappier.

The state has too readily skimped, or skipped, on its payments into the retirement system, she said. The system's current assets, after the devastating recession, three years of deferred payments and an early retirement program that swelled the rolls of beneficiaries, are enough to support only 46 percent of what it owes.  In June 2008, the figure was 52 percent, according to the legislature's nonpartisan Office of Fiscal Analysis.

The Office of Policy and Management, which serves as the budget office for the executive branch, estimates the total liabilities of the state employee pension system at $11.7 billion, with just 44 percent of that amount funded as of June 30, the end of fiscal 2010. By contrast, in 2000, the system was projected to owe $4.3 billion in future pension payments and had enough assets to pay out 63 percent of that amount.  The state's retirement system for teachers is in better shape, primarily because of the decision by Nappier and the legislature in 2008 to issue a $2 billion bond to fund those pensions.

The bond, she noted, included language requiring the state to make payments into the teachers' retirement system at the full amount recommended by actuaries for the entire time the bonds are outstanding - a move designed to prevent lawmakers from chronically avoiding paying into the system, as they had in previous years.

Lack of financial discipline

"We do have a problem," said Nappier, a Democrat who was re-elected in November to her fourth term as treasurer. "And it didn't happen because of the economic downturn."

The unfunded ratio of the pension system has been increasing, Nappier said, in part because the total cost of liabilities - all those pension payments to all those retired workers, all that health care for all those people who are living longer and longer - is soaring.  But the problem is also that the Democratic legislature and the past two Republican governors have lacked the discipline to make sufficient annual payments into the funds that Nappier then invests, she said.

"No investment program, no matter how successful, can make up for monies not put into the fund," Nappier said.

For states trying to maintain health and pension systems, "diligence" is crucial, said Ronald K. Snell, an expert on pensions at the National Coalition of State Legislatures.

"The current crisis of under-funding is in part a legacy of underfunding in the past, and in part a result of the stock market crash," he said. "The important thing to do is to make sure that going forward, costs are controlled, and contributions are made as they ought to be made so the problem doesn't get any worse."

In all, 19 states made changes to their pension plans in 2010, Snell said, including Rhode Island and New Jersey, which reduced benefits, and Vermont, which cut benefits and boosted employee contributions to the pension system. 

More states should be expected to follow suit in 2011, Snell said, in what could be a "major year" for adjustments in both pension and retiree health care funding.

More red ink

Connecticut's State Employee Bargaining Agent Coalition (SEBAC), which negotiated the current 20-year contract that covers state workers' health and retirement benefits through 2017, agreed to benefit plan changes as recently as 2009. 

That year, the union coalition struck a deal with the Rell administration under which employees hired after July 1, 2009, must pay for 10 years into a fund that will support health costs for retired workers.  (Before a 2008 rule-change by the Government Accounting Standards Board, states were not required to account for or publish the future cost of non-pension benefits, such as health insurance for retired state workers. That change added a huge new dash of red ink to the state's books: $26.6 billion in unfunded future health benefits for retired employees, and an additional $2.9 billion for teachers.)

But the SEBAC deal also added significantly to the underfunding of the pension system: The employees union agreed to let the Rell administration defer payments into the funds into the future, increasing the shortfall, in order to help balance the budget. The state withheld pension contributions of $50 million in fiscal 2009, $164.5 million in 2010, and it will withhold another $100 million in 2011.

The challenge for legislatures and governors, Snell said, will be deciding the amount that a state can realistically afford to pony up each year to back a pension system, and whether the decided-upon amount will fund the systems they already have or require changes in benefits. And then, even in rough years like the one currently looming in Hartford, they'll have to find the "diligence and discipline" to make the payments.

"The question going forward is to make sure that the structure is sustainable, and that's a question of how much money you want to put into it" annually, Snell said.

Some have been pushing for change, including Republican gubernatorial candidate Tom Foley, who spoke during the campaign about switching the state from a traditional pension system to the 401(k) and IRA plans that dominate the private sector.

Such a drastic move is uncommon among states, but many have considered or adopted "hybrid" plans that combine a smaller guaranteed benefit with a defined contribution add-on. Such plans were adopted in Michigan and Utah in 2010, according to the NCSL.

Some change is coming, said Cicchetti, the deputy secretary at the Office of Policy and Management who chaired the state's Post-Employment Benefits Commission, which Rell formed to advise her on possible reforms of the pension and health benefits systems.

"I think that future policymakers are going to be faced with making some changes in how we fund retiree benefits for state employees, or they're going to continue to see a larger and larger percentage of the state budget going to retiree benefits and retiree health," Cicchetti said in an interview.

If lawmakers "do nothing," the annual cost of benefits could hit 19 percent of the state's budget by 2032, Cicchetti said.

"Not only have the gross amounts increased, but the percentage of the state budget will continue to grow, which means there's less and less dollars for other programs that the state funds," he said.

Nappier sits on the "asset side, not the liability side" of pension decisions, she said, but she did say the state needs to adjust the plans to ensure that costs for pensions and health care are realistic and not "exorbitant."

"We do need to get a better handle on our liabilities and become more disciplined in funding them," Nappier said. "We need to be more prudent about the kinds of the design of the plan itself. The fact is that in some cases they have been runaway benefits."

But for many pension recipients, the benefits are reasonable - "The guy who's well into six figures, and he's been there 30 years, that's not the average worker," Nappier said - and the primary problem has been the government's unwillingness to pay up the cash it has promised.

"I don't think the culprit is just the defined benefit," she added. "There are pros and cons to both… We have not properly managed this fund over the years, and now it's come home to roost."

A test for Malloy

Then there are the workers themselves.

The unions that represent roughly 50,000 state workers zealously guard the benefits - pay, retirement, health and time - that they have negotiated with the state over years.
Many also bridle at the public suggestion, from legislators and the news media, that the workers are taking home lavish pay and otherworldly benefits at the expense of fellow citizens just struggling to make it.

"We were the only ones who helped the budget out the last two years," said Patrice Peterson, the president of CSEA/SEIU Local 2001, referring to the 2009 package of union concessions, which yielded an estimated $700 million in budget savings over three fiscal years.

"It would be really nice to get some acknowledgment that we've already given, and there are a lot of other places in Connecticut to be looking," she said.

Labor leaders are preparing for a tough session and a "task master" in the person of Malloy, said Sharon Palmer, the president of AFT Connecticut, the teachers' union.

They're also preparing for a fight with conservatives or others who they feel might make public employees the target in the search for budget cuts, whether seeking to cut the work force, pay scales, benefits or all of the above.

"I don't think the research bears out" the assumption that state workers are overpaid compared to the private sector, said Palmer.

SEBAC has distributed a study by researchers from the University of Wisconsin-Milwaukee that found public sector employees were more frequently paid less than their private sector counterparts if additional qualifications, especially education and specialization, were taken into account.

While candidates like Foley have talked about shifting old-school pension systems toward a 401(k) model, Palmer said she considers it "scary... for the future of the country," and warned that the long-term implication of such a system could wind up being more expensive for taxpayers, if recipients cannot live on smaller benefit packages and resort to social programs instead.

"I know it's the trend out there; we happen to think that it's not a good trend," Palmer said. "In the labor movement, we're trying to raise everyone up, whether they're in the union or not."

Malloy has been frank but noncommittal. He refused to join Foley in pledging not to raise any taxes or fees, and has pledged to spare the state's "safety net" from damage, but he has also boasted of his reputation as a cost-cutter and streamliner during his 14 years as mayor of Stamford.

One area to test the new governor's budgeting abilities will present itself immediately: According to projections from OPM, the state's required annual contribution to the employee pension system in each of the next two years will surpass $1 billion.


Audit: state awash in pension requests
CT POST
Ken Dixon, Staff Writer
Published: 10:18 p.m., Tuesday, December 14, 2010

HARTFORD -- Understaffed state officials overseeing retirement benefits are so far behind that about 10,000 former state employees, dating back more than 20 years, are awaiting finalized payment schedules. 
According to a new report by the state Auditors of Public Accounts, some of the former workers were participants in a retirement incentive program offered by the last Democratic governor, William A. O'Neill, who left office in January 1991.

Robert G. Jaekle, of Stratford, one of the two state auditors, said this week that while retirees are not missing monthly payments, the huge pile of casework in the comptroller's office is causing lingering delays in figuring out exactly what they are due.  The chief causes of the holdup were the popularity of retirement incentive packages offered by O'Neill; his successor, Lowell P. Weicker, Jr.; two proposals during the Rowland administration and one from Gov. M. Jodi Rell.

By May of this year, there were 10,600 applications on file awaiting disposition, according to the audit.  The problem, which in the long run is not expected to result in major adjustments to current retirement payments, underscores the better-known problem of underfunded pension plans that rank among the top five most-fragile programs in the nation.

"Thousands of retirement applications are not finalized yet," Jaekle said in an interview. "That's been a fairly longstanding issue.

"I don't even know what to say is a `normal' length of time anymore."

The retirement and benefit services department of the state comptroller's office gets inundated every April with normal retirements in the state's workforce of about 52,000 employees, because it's an optimal date, followed nine months later by union-mandated cost of living increases.  The retirement incentives have added thousands more and have essentially put that unit of the comptroller's office under water.

Comptroller Nancy Wyman's office on Tuesday agreed with the audit report, noting that it is doing what it can to cope with the caseload, which was overwhelmed by a bulge of 4,700 retirement applications by June 2003 and hasn't been able to recover.

"Lots of retirements come in batches, so that builds in a delay," Jaekle said.

It's the nuances of the various retirees' union contracts that result in the protracted length of time to get the exact monthly payments figured out.  Prior to then-Gov. John G. Rowland's early retirement incentive program of 2003, 1,200 applications existed dating back to the O'Neill and Weicker years.

"At some point, you'll get a lump-sum payment and a modest amount of interest," said Jaekle, whose audit did not include an estimate for the amount of money that might be awarded when, or if, the backlog gets taken care of.

While the audit said the division doesn't have the resources to make a "near-term" reduction in the piles of applications, Jaekle said the retirement unit is doing a better job. "They have tried on a couple of occasions to address the backlog through overtime, but we're again noting that the backlog is up," he said. "Obviously, there aren't enough people."

The retirement fund must pay interest on the difference between estimated benefits retirees receive and what they are owed if the amount can't be calculated within the first six months of retirement.

"This is a problem for the retirement division, but I don't think it's a great hardship," Jaekle said.

"Those receiving pensions now could still be awaiting final calculations for six or seven years," said Jaekle, a former House minority leader who has held the co-auditor's job for 20 years and will retire when the General Assembly decides on a Republican successor.  State lawmakers in recent years have dodged fully funding the retirement plans, which are now underfunded by about $34 billion.

"The problem is the state hasn't contributed enough over a period of 30 to 40 years," Jaekle said. "Obviously, it's a really big liability."

As of 2009, the single-employer, defined-benefit pension plan covering most of the state's full-time employees, members of the General Assembly, constitutional officers and the governor included more than 49,500 active employees, 41,800 retirees and beneficiaries receiving benefits and 1,592 terminated workers entitled to, but not yet receiving, benefits.  Governors throughout the nation have been attempting to deal with the same underfunding problems.

On Monday Oregon Gov. Chris Gregoire proposed ending some benefits, including cost-of-living increases, to save more than $11 billion over the next 25 years.  In October, a panel put together by Rell offered a variety of suggestions, including possibly raising the retirement age, and increasing employee contributions to benefit plans.

"Gov. Rell fully supports structural reform of the state's pension and post-employment benefit system," said Donna Tommelleo, the governor's spokeswoman. "That is why she established a post-employment benefits commission and believes that the thoughtful and comprehensive recommendations of that commission should serve as a blueprint for the much-needed reform."

Gov.-elect Dan Malloy, who will take over from Rell on Jan. 5, said Tuesday that the state has to soon make big decisions.

"No one will dispute that we cannot continue down the path we're on with regards to our state pension system," Malloy said. "The numbers simply don't add up. We are at a 22-year high in terms of our state's unfunded pension liability, and it's not going to get any easier unless we fundamentally reform the way our state does business."


State's unfunded pension liability hits 22-year high

Keith M. Phaneuf, CT MIRROR
December 10, 2010

The state's pension fund now holds less than 45 percent of the funds its needs to meet obligations to workers, plunging below the halfway mark for the first time in more than two decades, according to the latest, biennial report from fund analysts.

The actuarial valuation prepared by Cavanaugh Macdonald Consulting of Kennesaw, Ga., also found that while fund investment earnings rebounded over the last year, they could not overcome significant losses from 2009, coupled with various pension-weakening gimmicks ordered to prop up the state budget.

And that analysis, which covers the fund's history through the end of the last fiscal year on June 30, doesn't even address another $100 million pension contribution that is being deferred in the current year.

The state's annual pension contribution, which currently stands at $844 million, is projected to grow just beyond $1 billion next year.

And even if that is met, the contribution is on pace to leap by 50 percent by 2017, double by 2026 and triple by 2038, based on consultants' report issued earlier this year for a state panel studying retirement benefits.

"We know we have to get things back on track," Rep. John Geragosian, D-New Britain, co-chairman of the legislature's Appropriations Committee, said Thursday. "This is one of many challenges that we have to begin dealing with in the next session.

State government had $9.35 billion in assets in the pension fund as of June 30, compared with $21.1 billion in obligations, which together represent a funded ratio of 44.4 percent. Actuaries typically cite a ratio of 80 percent as fiscally healthy. The last time the ratio hovered close to 45 percent was in 1988.

The ratio, which peaked at 63 percent in 2001 and has declined gradually since, stood at 52 percent in June 2008, according to previous actuarial reports.

But the slipping accelerated over the past two years as Connecticut and the nation plunged into recession.

Investment earnings, which fell by $1.7 billion in the 2008-09 fiscal year, were partially offset by an $825.8 million gain in 2009-10.

But problems on Wall Street weren't the only problem the pension fund faced.

A May 2009 concession deal negotiated by Gov. M. Jodi Rell and ratified by state employee unions and the General Assembly deferred $214 million in pension contributions over the past two fiscal years, and allowed another $100 million deferral this year.

That deal also allowed the state to offer a retirement incentive program in 2009, which increased pension benefits for about 3,800 eligible employees.

Though popular among workers, these incentive programs have been criticized by economists, legislators and some union leaders for providing illusory savings, offering a short-term reduction in salary costs that eventually is offset by larger, long-term losses suffered by a pension savings account robbed of investment earnings.

And retirement data shows state employees tend to defer their retirement plans to take advantage of these lucrative incentive programs.

State government has offered five retirement incentive programs in the past two decades, providing them in 1989, 1992, 1997, 2003 and 2009.

According to records from Comptroller Nancy Wyman's office, retirements since 1987 have averaged 738 workers in years without incentives, and 4,285 in years with them.

Connecticut's pension fund has been struggling to reform a pension system that began as a pay-as-you-go system.

For nearly four decades, state government saved nothing, and therefore gained no investment earnings, to cover pension costs.

Annual contributions into a savings account, which began in the early 1980s, fulfill two purposes: Meeting the "normal cost," or saving to cover the benefits earned by workers during the year; and making up - over a 30-year schedule - for the dollars Connecticut should have saved in decades past to meet its obligations.

Veteran state union leader Salvatore Luciano said unions realized the pension fund really couldn't afford either the contribution deferrals or the incentive program built into the concession package. But given Rell's preference for social service cuts program over tax hikes, it was the least objectionable alternative, he said.

"They were looking at cutting lead (poisoning) screening for children," he said. "Those were the kinds of choices we were making."

Rell, who repeatedly has charged the Democrat-controlled legislature with being unwilling to consider substantial cuts to any segment of state spending over the past two years, declined to comment about the new valuation.

State Treasurer Denise L. Nappier, who oversees investments of pension funds, also declined to comment.

The State Employees Bargaining Agent Coalition, which negotiations health and retirement benefits for all state workers, rejected the administration's proposal for another retirement incentive program this year.

"We don't want to see public services harmed anymore," SEBAC spokesman Matt O'Connor said Thursday adding that state unions also want restoring the fiscal health of the pension fund to be given high priority.

Though he has provided no details about what concessions he may seek from state employee unions, Gov.-elect Dan Malloy has said on several occasions that state government must reduce its reliance on fiscal gimmicks as its addresses the $3.67 billion deficit projected for the next fiscal year.

"This is another reminder of just how deep a hole our state is in," Malloy said Thursday. "The news is grim, the decisions are tough and the sacrifices will be many in order to get Connecticut's fiscal house in order.  But let me be clear: we will get there."


Pension study panel draws few conclusions
CT MIRROR
Keith M. Phaneuf
October 29, 2010

The panel tasked with crafting a specific strategy to stabilize under-funded state retiree benefit programs reached a strange conclusion this week, issuing a laundry list of suggestions, no priorities, and a warning that its seven members - who haven't met in the past month - aren't unanimous in their endorsement.

The report of Gov. M. Jodi Rell's Post Employment Benefits Commission also drew immediate criticism from its one state employee union representative, who argued its release during the final week before Election Day was designed to place two Democrats on the state ticket in a political quandary.  The report also jettisoned specific proposals from the governor to tighten benefits and boost employee costs to save an estimated $300 million - including a new 401 (k)-style plan for state workers - though the concepts behind some of those proposals were listed in the 58-page document.

"We were supposed to weigh the advantages and disadvantages and prioritize" specific solutions, "not just throw a bunch of ideas up against a wall, commission member Salvatore Luciano, a veteran state employee union leader, said Friday, citing the executive order creating the group.

State government owes $19.2 billion in pension obligations and has $10 billion in the fund, or about 52 percent of its liability. Actuaries typically cite 80 percent as a healthy funded ratio.

The report does recommend an end to fiscal short-cuts that have harmed the pension fund in the past. These include: incentive programs that allow workers to retire earlier than planned, but rob the fund of extra dollars and investment earnings; and so-called "pension holidays" in which the state, with employee union approval, makes less than the recommended annual pension fund contribution called for by pension fund actuaries.

It also suggests adopting a "more rigorous funding strategy" than the system that's been in place since the mid-1990s. To achieve immediate savings back then, state officials and public employee unions agreed to put the state employee pension program on what amounts to a balloon payment schedule.

As a result, the state's annual pension contribution, which currently stands at $844 million, is on pace to leap by 50 percent by 2017, double by 2026 and triple by 2038, based on actuarial consultants' estimates prepared for the commission.  But the panel didn't recommend any specific budget increases or changes in state employee contributions to achieve this.  The panel also recommended increasing employee contribution levels to make them more competitive with other states. No amount is recommended and the panel added another study might be needed.

Similarly, it mentioned that raising the retirement age and modifying benefits could be considered, but no specific recommendations were made.  One of Rell's specific proposals, creating a new defined contribution plan to replace pensions for new workers, was acknowledged in the report, but the group remained neutral, noting only that there are "pros and cons."

The group did not recommend additional borrowing to help bolster the pension fund.  Connecticut's retiree health care program is in even worse shape than its pension fund, with $26.6 billion in long-term liabilities and almost no savings to offset it. State government paid out $547 million to cover that cost. But according to the report, the contribution would rise next year to as much as $1.94 billion to cover both current costs and begin saving for long-term expenses.

The report recommends creating a trust fund and beginning to save for long-term costs, but doesn't propose specific additional contributions either for state government or for workers.  Similarly, it acknowledges that eligibility rules and benefit levels could be changed, but endorses few specific.

One recommendation that appears to lean toward a more specific proposal was to "consider" limiting retiree health care only to employees who retire from directly from state service. Currently, workers with 10 years of state service can leave for the private sector and still claim state health care when they retire years later.

Rell's deputy budget director, Michael Cicchetti, who headed the panel, defended the more neutral tone of the report. "We really wanted to achieve some consensus about the options available," he said. "This really is a menu of choices for the next governor and legislature to choose from. 

Cicchetti also said there was no political motivation behind the release late Thursday, adding that the administration didn't want the plan to get lost amid the post-election focus on the transition to the next governor. "The report should be released when the report is done," he said, adding that "given the factual nature of the report, I don't see how it is political."

But Luciano noted that after seven months' worth of contentious public meetings, members hadn't gathered since Sept. 30, and the administration has been communicating with them since then primarily by e-mail.

"The timing of the release is disturbing," Luciano said, adding that since the July deadline has long since been missed, there was no reason to rush now. "It does seem to be politically motivated."

Though there are no priorities cited in the report, it does speak in broad terms about reconsidering benefit levels, eligibility guidelines and employee cost-sharing - ideas opposed by state employee unions. Two of the commission's seven seats were assigned to representatives of state Comptroller Nancy Wyman, the Democratic nominee for lieutenant governor, and state Treasurer Denise L. Nappier, another Democrat, who is seeking re-election. Both enjoy strong labor support.

Nappier's director of government relations and her representative on the panel, Christine Shaw, could not be reached for comment Friday.

"I'm not agreeing with this report," Wyman said Friday, adding that it offers nothing new for her and her running mate, former Stamford Mayor Dan Malloy. "We've said everything is going to be on the table," she added. "We'll go through everything we have to go through" to improve state government's finances.

Wyman said she was disappointed that the report didn't place more emphasis on attacking health care inflation. A private consultant employed by the panel estimated a 1 percent reduction in medical cost trends could save $3.75 billion over the next three decades. "This is where we could have a big impact on reducing the fund's (long-term) liability," she said.

"It is important to note that there are commission members who did not agree with some of the strategies presented," the report states.

The report did include two proposals Wyman has long insisted on: beginning to save funds annually for retiree health benefits so investment earnings can be gained to defray costs; and dedicating a portion of future budget surpluses to help cover benefit expenses.



IN CT, A PICTURE IS WORTH...you name how many words.


Wyman, Rell differ on solution to pension woes
Thursday, September 9, 2010
By Mary E. O’Leary, Register Topics Editor
moleary@newhavenregister.com

HARTFORD — The debate on how best to deal with the unfunded pension and health benefit liabilities for state retirees continues to play out, with Comptroller Nancy Wyman telling Gov. M. Jodi Rell that her suggestions “do not address the most effective means to reduce them.”

The largest problem is the $25 billion for retiree health care, which is in addition to the $9 billion for retiree pensions.

Wyman has asked that the commission studying the liability issue separate out the cost of those workers in the Tier I pension plan hired before 1984 when the state had no investment income to help pay for pensions.

Almost $7 billion of the $9 billion liability is for this group, rather than for newer workers in the Tiers II and IIA plans, hired after October 1997.

Rell issued a cost analysis Wednesday that her suggested list of changes in the pension and health benefit liabilities would generate, something missing from her earlier statement.

By increasing employee contributions toward both the pensions and health care, increasing the retirement age to 65, calculating a retiree’s salary over five years and capping pensions at $100,000 would mean a $300 million yearly savings.

Higher co-pays for retirees for emergency room and specialist visits could result in a long-term reduction in the unfunded liability of about $3 billion, Rell said.

Wyman said her office first proposed creating a modest trust fund in 2006 as the best way to reduce the $25 billion liability and committing to fund it. She said a $100 million down payment and a $50 million annual payment would cut the liability by $6.7 billion and the annual contribution by $400 million.

The pension problem is mainly due to underfunding of the Tier 1 retirement system and not for participants in the current Tier IIA for those hired after October 1997, whose benefits are also less generous and whose costs are covered, Wyman said. This group represents 4.7 percent of payroll.

“Proposals to further reduce Tier IIA benefits or to convert to a defined contribution plan will do nothing to reduce or eliminate the current unfunded liability,” for pensions, Wyman wrote in a letter to Rell.

Decisions made by former Gov. John G. Rowland in 1995, when Rell was lieutenant governor, to change the method of paying for pensions continues to adversely affect the state. The state abandoned equal payments to whittle down the debt over 30 years and instead put in a system that back-loaded payments with the biggest payments coming due over the next few decades.


'90s pension raid haunts state officials now
Keith M. Phaneuf, CT MIRROR
September 8, 2010

A 1995 decision to put the state employee pension program on what amounts to a balloon mortgage schedule has come back to haunt Connecticut officials working now to bring fiscal stability to retirement benefits.

The state's annual pension contribution, which current stands at $844 million, is on pace to leap by 50 percent by 2017, double by 2026 and triple by 2038, based on actuarial consultants' estimates prepared for the Post Employment Benefits Commission.

The panel, which was created to propose solutions to the huge funding gaps facing retirement benefit programs, also learned it would take a nearly $550 million contribution increase next fiscal year to get state government back on a level-funding schedule that would keep contributions relatively stable over the next 30 years.

"We're dealing now with decisions that were made 10 and 15 years ago, and many people aren't happy with them," Michael J. Cicchetti, Gov. M. Jodi Rell's deputy budget director and the commission chairman, said Tuesday of the arrangement agreed to in 1995 and 1997 by then-Gov. John G. Rowland, the legislature and state union leaders. "It's so back-loaded and it's going to put the state in tremendous pain in the next 10 or 15 years if we don't do anything."

"I think it's fair to say we made a bigger dent in covering our debts with the level-funding" used prior to 1995, Hartford lawyer Daniel E. Livingston, longtime negotiator for the State Employees Bargaining Agent Coalition, said, adding unions were under heavy pressure from the Rowland administration to cut pension costs.

Connecticut still was recovering from the recession of the early 1990s when Rowland, a former 5th District congressman, took office.

The GOP governor, who campaigned on a pledge to cut taxes, made good on that promise, signing into law several new sales and corporation tax exemptions and a major new credit within the income tax in his first two years.

To help balance state finances while making these cuts, Rowland asked state employee unions for concessions. The talks produced agreements in 1995 and 1997 that combined to change pension funding dramatically.

State government, which had used no investment earnings to supplement its pension contributions for more than four decades, changed that in the early 1980s, but had only begun to reverse the damage when Rowland took office.

According to the state comptroller's annual report in 1996, the pension system had enough funding to meet 55 percent of its obligations. Actuaries typically cite a funded ratio of about 80 percent as healthy.

The state tries to close that gap each year with an annual payment designed to fulfill two purposes: Meeting the "normal cost," or saving to cover the benefits earned by workers during the year; and making up - over a 30-year schedule - for the dollars Connecticut should have saved in decades past to meet its obligations.

Still, the Rowland administration and the state worker unions agreed in the mid-1990s to abandon a pension fund contribution schedule that required largely equal payments over the next 30 years to eliminate the unfunded liability.

In its place they imposed a system that mandated a level percentage of the annual payroll be contributed. This lowered payments in the short-term, then increased them over time to account for inflation.

According to the comptroller's 1996 report, it saved the Rowland administration $255.6 million in the prior year.

This back-loaded system is acceptable under Governmental Accounting Standards Board rules. But because of its back-loaded nature, it is problematic for states that raid their pension funds in one way or another.

"That's been our problem for too long," said Rep. Vincent J. Candelora of North Branford, ranking House Republican on the Finance, Revenue and Bonding Committee.  "We have an amazing lack of focus on debt in state government and we have no one to sound the alarm when we have issues."

State government has a history of offering retirement incentive programs to cut payroll during tough fiscal times. Rowland and the legislature enacted one in 2003, and Rell and the current General Assembly did so in 2009.

The theory behind these retirement incentives is simple: Senior workers retire sooner than they planned - relieving the state of their higher salaries - and some are replaced with lower-paid hires.

But critics have argued that the savings from these programs are an illusion, and that any short-term reduction in salary costs is eventually offset by larger, long-term losses suffered by a pension savings account robbed of investment earnings.

For example, each new retiree has stopped - earlier than planned - paying into the pension system. Workers are required to contribute, but retirees are not. That same person also has begun drawing benefits sooner.

Governors and legislators also have received union permission, both in 2009 and 1991, to reduce required payments into the pension fund during fiscal crises - even though the actual benefits that must be paid out are not reduced.

The 2009 concession package negotiated by Rell and ratified by the legislature defers more than $314 million in total fund contributions between 2009 and the current fiscal year.

State government actually has lost ground since the mid-1990s in its battle to stabilize the pension fund.

According to its last, full actuarial valuation in 2008, the pension fund had $19.2 billion worth of obligations, or liabilities, and held just under $10 billion, an amount equal to 52 percent of its liability.

Livingston said Tuesday that state employee unions faced considerable pressure from the Rowland administration to provide concessions in the mid-1990s, and the change in pension program funding was a better alternative than reductions in benefits.

"We felt the sooner the state caught up with its obligations, the better off it would be," Livingston said, adding that while union leaders made a concession then, it was at their insistence in the early 1980s that pension savings began in the first place. "But we had already made a very substantial improvement."

Reginald L. Jones, a former GOP state legislator from Darien and Rowland's first budget director, died last year. Jones' successor, Michael W. Kozlowski of Granby, who oversaw the 1997 labor deal, could not be reached for comment Tuesday.

State Treasurer Denise L. Nappier and Comptroller Nancy Wyman, both of whom have representatives on the Post Employments Benefits Commission, have said the state could mitigate its pension problems by avoiding more fiscal gimmicks that drain the program, and by depositing future budget surpluses into the fund.

The Rell administration offered a plan last month to shave $300 million off annual pension costs by boosting worker contribution rates, raising retirement ages and developing a new 401(k)-style retirement plan for new employees.

Nappier challenged those estimates Tuesday in a letter to Rell, noting her office still hasn't received any detailed cost analysis.

Cicchetti said he believes that with changes like these and others, state government can gradually shift back to a level-funded program over the next few years, and develop a stable plan to meet its pension obligations.

"If you tighten the benefits and structure things differently, you can get back to within the realm of possibility," he said. "But it's going to require some pain to get there."


Rell official: Tighten retirement benefits
Keith M. Phaneuf, CT MIRROR
August 20, 2010

Gov. M. Jodi Rell's deputy budget director unveiled a new plan Thursday to shave $300 million off annual pension costs by boosting worker contribution rates, raising retirement ages and developing a new 401(k)-style retirement plan for new employees.

The proposals, offered to the governor's Post Employment Benefits Commission, were part of a larger plan to stabilize the Connecticut's severely under-funded pension program that also includes an end to retirement incentive programs and larger annual contributions by state government.

"As a long-term strategy it seems to make sense, to introduce some stability," Michael J. Cicchetti, deputy secretary of the Office of Policy and Management and chairman of the commission, said during a meeting in the Legislative Office Building.

Cicchetti, whose group is expected by mid-September to issue a blueprint for stabilizing retirement benefit programs, also called for new restrictions on retiree health benefits, including an end to coverage for vested state employees who leave for private-sector jobs before retirement.

"It's probably not something we can do overnight," Cicchetti said of several components of his plan, noting the huge funding gaps in retirement benefit program budgets developed over decades.

The next full actuarial valuation of the state employees' pension fund isn't due until November, but a preliminary analysis for the commission projects government should contribute just under $1.03 billion next fiscal year. That's up $185 million from the $844 million being contributed this year.

The annual contribution should cover two costs: the pension benefits that are accrued by covered employees during the year; and the amount needed to cover past years when the state failed to contribute enough.

It's the latter expense that is plaguing Connecticut now.

According to the last valuation, the pension fund had $19.2 billion worth of obligations, or liabilities, and held just under $10 billion--an amount equal to 52 percent of its liability. Actuaries typically cite a funded ratio of about 80 percent as healthy.

Connecticut governors, legislatures and worker unions have a history, during tough fiscal times, of allowing reduced payments into the fund, without changing the level of benefits that still must be paid out. For example, Rell, the current legislature and the State Employees Bargaining Agent Coalition has allowed $314.5 million in pension fund payments to have been deferred since 2009.

A retirement incentive program offered in 2009 also weakened the pension fund, trimming salary expenses in the short-term while prematurely stripping the fund of assets that would have earned more in interest over the coming decades.

Further complicating matters, the 20-year contract reached in 1997 by SEBAC and then-Gov. John G. Rowland allows the state to calculate its annual pension contribution based on a fixed percentage of overall payroll. Rather than following a level payment schedule, that system effectively allowed for smaller annual contributions earlier in the deal, with escalating payments as the deal nears its end in 2017.

Cicchetti said the state should eliminate its bad habits. That means switching to a level payment schedule and avoiding future retirement incentive programs. This could add an extra $363 million to next year's contribution, he estimated.

To offset nearly $300 million of that added cost, Cicchetti proposed a battery of new worker costs and limits on benefits, including.

    * Adding 3 percentage points to the share of salary that each worker must deposit into the pension fund. Most workers currently contribute between 1 and 2 percent, depending on when they were hired.
    * Raising the retirement age for all workers hired after 1984 from 62 to 65.
    * Increasing penalties for early retirement outside of state-approved incentive programs.
    * Calculating pensions based on the average salary of a worker's last five years, rather than the current three.
    * Creating a new defined contribution plan, similar to the 401 (k) programs offered by many private-sector employers, for new state workers.

State government faces an even larger problem with the health care benefits its offers to about 42,000 retirees and 100,000 dependents. The long-term liability of covering current and future retirees and their spouses over the next three decades, is projected at $21.7 billion. The state, which has saved just $10 million toward that expense, basically operates a pay-as-you-go system, paying for the benefits each year out of its budget with little investment earnings to help cover the cost.

A report issued to the commission in June projected that annual spending for this benefit, which is expected to top $490 million in this year's $19.01 billion budget, will begin rising dramatically. If Connecticut remains on the pay-as-you-go system, the average cost over the next 28 years will be $1.9 billion.

To help counter this trend, Cicchetti proposed requiring all workers to contribute toward this expense. Currently, only new workers and those hired within the last five years must contribute 3 percent of their salary toward this benefit.

Another proposal would end the so-called portability of retiree health benefits.

Currently, any state employee with more than 10 years of experience can leave state service for another job, and still claim that health benefit upon retirement. Some other states only provide health care to individuals who retire directly from state service.

Salvatore Luciano, a commission member and veteran state union leader, predicted this only would increae the ranks of Connecticut's uninsured, and lead more people to seek free treatment in hospital emergency rooms - an expense the state already helps to cover.

But commission member Julie E. McNeal, an officer with the Connecticut Society of Certified Public Accountants, said blocking those who leave state service from enjoying state-funded health benefits upon retirement would leave them no worse off than those in the private sector. "There should be individual savings available as well," she said, "just like the rest of the world."

Most recommendations offered Thursday also would require approval of state employee unions.  Luciano predicted labor would object to those that ask workers to sacrifice to cover state government's failure to save properly.

"Even if we stopped the pensions tomorrow, we'd still have huge liabilities," he said, adding state officials need to adopt a more progressive tax system that recognizes "this amazing huge gulf" of wealth and requires the rich to pay more.



Report: Connecticut No. 2 In Unfunded Pension Liability
Hartford Courant
2:56 PM EDT, August 1, 2010

HARTFORD, Conn. (AP) — An education think tank says Connecticut has the second-highest unfunded pension liability per capita in the country, which could impair efforts by schools to recruit highly qualifed teachers and administrators.

A new report by Education Sector says the deficit in Connecticut's pension fund amounts to more than $4,500 per state resident, second highest behind Alaska's rate of $5,100.

Connecticut's unfunded liability, the difference between what the state owes current and future retirees and what it has saved, totals nearly $15.9 billion.

A February 2010 report by The Pew Center on the States found that Connecticut is one of eight states with more than a third of its pension liability underfunded. The state's total pension obligations are more than $41 billion.


CT not mentioned...because CT statistically insignificant (see article above)
State budget gaps to total $84 billion for fiscal 2011: study
As revenues improve, states struggle with less federal support for medical aid

By Deborah Levine, MarketWatch

July 27, 2010, 12:03 a.m. EDT


NEW YORK (MarketWatch) -- State budget gaps are now expected to total $83.9 billion for fiscal 2011, with shortfalls anticipated for the next couple of years, according to a study released Tuesday by the National Conference of State Legislatures.

That bleak assessment contains one ray of good news: The total is slightly less than the estimate in March for an $89 billion gap.

The biggest shortfall to make up may be the reduction in federal aid for medical programs. Congress hasn't approved extending this aid after increasing support as part of last year's stimulus package.

Officials in many states told NCSL that revenues have started to improve, or at least the rate of decline has slowed. But they still worry stabilizing revenues won't be enough to replace the loss of federal stimulus funds, and several states project deficits through 2013.

"For the first time in a long time we're seeing some slight improvement in the state revenue situation," said Corina Eckl, NCSL's fiscal program director. "But glimmers of improvement are tarnished by looming problems."

Almost half of all states said fiscal 2011 gaps would be 10% or more of their general fund. The largest was Nevada, with its budget deficit amounting to 45% of its general fund, NCSL said.

New Jersey, Arizona, Maine, North Carolina and three others had gaps of at least 20%.

Five states that previously said they didn't have a deficit reported one had developed.

Of the 44 states that provided 2011 tax forecasts, half said they expect revenue growth between 1% and 4.9%.

Three states see revenue growing at least 10% -- Oregon, Washington and Colorado -- all because of various tax increases.

Fiscal 2010

As of now, seven states project deficits at the end of fiscal 2010, which for some doesn't end until later this calendar year.

The biggest is Illinois, followed by Oregon, Michigan, Kansas, Washington, Pennsylvania and South Carolina.

Many did cut spending to bring the budget into balance, with 45 states saying fiscal 2010 general fund spending fell 4.6% percent below 2009 expenditures.

Economists have noted that public budget cuts would limit the recovery of the national economy, though municipal bond investors generally have little to fear. See story on municipal budgets, bonds.

NCSL notes that the report includes complete or partial information on 49 states. Only partial information was available from California, Florida and New York.

2012 and 2013

Two-thirds of the states already forecast another round of double-digit budget gaps in FY 2012. The deficit tally so far is $72.1 billion.

Eighteen states expect the gap to be at least 10% of their general fund.

Of states that have budget forecasts extending to fiscal 2013, 23 project budget gaps, which mostly can be traced in part to the end of federal stimulus funds, NCSL analysts said.



Retirement panel splits over pension cuts
Keith M. Phaneuf, CT MIRROR
July 23, 2010

The panel created by Gov. M. Jodi Rell to propose solutions to the huge funding gaps facing state retirement benefit programs fractured Thursday over the question of whether to recommend reductions to the current benefit system.

Veteran state union leader Salvatore Luciano and Christine Shaw, director of government relations for state Treasurer Denise L. Nappier, both argued such suggestions were premature and questioned whether the Post Employment Benefits Commission's final report would be taken seriously by Connecticut's next governor and legislature.

"I've always thought this was a solution looking for a problem," Luciano, executive director of Council 4 of the American Federation of State, County and Municipal Employees, said.

As commission members discussed the long-term drain retirement incentive programs place on the pension fund, Luciano noted that the Rell administration canceled commission meetings for three weeks, starting in late April, when the governor was calling for the second incentive program in two years. The commission resumed meeting only after state unions rejected Rell's request.

"You'll have to excuse me if I am skeptical," Luciano said.

Commission members received new cost-savings projections Thursday. Proposals to calculate pensions based on a five-year average of a worker's top pay, rather than on three years as is currently done, could save as much as $17.4 million per year. Capping annual pension increases to reflect the cost of living at 1.5 or 2 percent could save between $16 million and $30.4 million per year, according to Cavanaugh Macdonald Consulting, a Kennesaw, Ga.-based actuary and health care consultant retained to study the effects of the 2009 incentive program on the pension fund.

The firm offered a preliminary analysis last month that estimated the state's annual contribution to the pension fund would have to rise next year by $217 million, from $844 million to $1.06 billion.

But that report didn't assess the fund's overall investment earnings over the past two years - the single-largest factor affecting its stability - and Shaw questioned how any recommendations for benefit changes could be made responsibly without that data.

Full actuarial valuations--extremely detailed pension fund analyses and long-range forecasts--are only prepared every two years, and the next one isn't due until November. That's three months after the panel finishes its work and only about one month before Rell's term ends. Further complicating matters, this valuation also will be the first report that assesses the impact of $314.5 million in pension fund payments that Rell and the legislature have deferred since 2009.

"To me it's like I'm operating blind," Shaw said, adding that the new governor and legislature likely won't pay attention to a report based on incomplete information. "They're going to say, 'This was a Rell construct. That was her thing. We're going to address this problem on our own.'"

The Republican governor, who is not seeking re-election, has been criticized by gubernatorial candidates from both parties for relying on nearly $3.6 billion in state emergency reserves, federal stimulus grants and borrowing to cover ongoing budget expenses this fiscal year and last.

The legislature's nonpartisan Office of Fiscal Analysis estimated in May that the 2011-12 budget, the first one Rell's successor must craft, faces a built-in shortfall of $3.37 billion.

Luciano has charged that Rell created the seven-member commission in February to deflect attention from fiscal loose ends she has left untied.

And Thursday he said that while the pension and health care programs state government offers its retirees face huge funding challenges, the problems largely were created by governors and legislatures who failed to save appropriately.

For more than two decades, state government and its employee unions routinely have agreed on annual government contributions to pension accounts far below the level recommended by fiscal analysts to cover current retiree expenses and begin saving to offset future costs.

According to its last, full actuarial valuation, the pension fund had $19.2 billion worth of obligations, or liabilities, and held just under $10 billion, or an amount equal to 52 percent of its liability. Actuaries typically cite a funded ratio of about 80 percent as healthy.

Annual contributions to the fund are supposed to cover current costs for a system that includes about 53,000 workers and just under 40,000 retirees and to gradually erase the unfunded liability over a 30-year period.

Thomas J. Woodruff, director of healthcare policy for State Comptroller Nancy Wyman and a commission member, said that while the pension systems' financial challenges are complex, "it's the funding behavior (of state government) that trumps almost everything else."

But other commission members from the Rell administration and the private sector argued that even without the benefit of a full actuarial report, it's clear the system is rapidly growing beyond the state's ability to pay.

"When, if not now, do we start paying attention to reality?" said Julie E. McNeal, an officer with the Connecticut Society of Certified Public Accountants. "I really don't see how saying anything less than 'Yes, this is a great big landfill before us' is going to be helpful."

Rell's deputy budget director and commission chairman, Michael J. Cicchetti, said regardless of how state government got into its pension fix, it can't assume the program's future will be stabilized by better savings habits. "If history is any guide," he said, "they won't be in good shape."

Cicchetti said the commission is scheduled to meet again next Thursday with the goal of submitting final recommendations to Rell in August.





Illinois seeks to borrow $3.7 billion to shore up pension shortfall
By Peter Whoriskey, Washington Post Staff Writer
Tuesday, February 22, 2011; 6:57 PM

Having fallen behind in funding its state pensions, Illinois is seeking to raise $3.7 billion through a bond issue this week, as the debate over government budget shortfalls roils state capitols.

The Illinois bond sale is viewed as a sign of how investors see the fiscal troubles in some overburdened states, where budget controversies have led to unrest and protests in places such as Wisconsin. If investors shy away from the bonds, other states, too, may have to pay higher rates when borrowing, making it harder for them to raise money.

The bond sale comes as several states are suffering fiscal shortfalls precipitated by the economic crisis. Moves by governors and Republican legislators to cut spending have drawn protesters to state capitals in Wisconsin and Indiana - where Democratic lawmakers have staged walkouts - and Ohio. In New Jersey on Tuesday, Gov. Chris Christie (R) unveiled a budget plan that would give property-tax credits to homeowners if government workers pay more than triple what they do now for health insurance. Christie is also urging legislators to enact his proposal to reduce state employee pension benefits.

Pensions for government workers are one of the prime targets in the budget debates, at least in part because most private-sector workers no longer receive them, and as the record in Illinois shows, because those obligations can grow quickly.  Illinois' pension system is one of the most poorly funded in the nation, with less than 40 percent of its $139 billion in liabilities funded, according to state figures.

Pension costs account for nearly 13 percent of the state's general fund budget. Illinois' combined pension and debt burden translates to $6,692 per person, the fifth-highest in the country, according to a Moody's report.

But borrowing to pay off pension obligations is a strategy that has flopped before in Illinois, and critics question using it again.  Under former governor Rod Blagojevich, the state sold $10 billion in bonds, hoping to make 8.5 percent interest by investing it while paying only about 5 percent interest on the bonds.  But the pension investments have earned only about 3 percent so far, making the issue a loser.

"I could walk into my local bank and borrow $10,000 and use the money to invest in the stock market, too" said Jeffrey R. Brown, a finance professor at the University of Illinois at Urbana-Champaign. "Maybe I will make money. But I am also on the hook to repay the bank and undertaking a lot of market risk."

This time, Illinois budget officials said, the intent is not to make money by borrowing and investing at higher rates, but just to make required payments to the pension fund. It similarly issued $3.5 billion in bonds to finance its pension contributions in 2010.

The money from this week's bond sale is slated to fund pensions for Illinois teachers, university workers, judges and other state employees.

But the $3.7 billion is a small patch for a very large hole. The teachers pension alone is underfunded by nearly $40 billion. It will receive slightly more than $2 billion from the bond proceeds.



The Looming Crisis in the States
NYTIMES Editorial
December 25, 2010

For most of this year, the state of Illinois has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments. Faced with $4.5 billion in overdue payments, Illinois has proposed a precarious plan to sell its delinquent bills to Wall Street investors in exchange for cash, calculating that the interest it must pay the investors will be less than the late fees it owes.

It is no way to run the nation’s fifth largest state, and it is not even clear that investors will agree, but these kinds of shaky deals are likely to become increasingly common as the states try to cope with the greatest fiscal drought since the Great Depression. Starved for revenue and accustomed to decades of overspending, many states have been overwhelmed. They are facing shortfalls of $140 billion next year. Even before the downturn, states jeopardized their futures by accumulating trillions in debt that they swept into some far-off future.

But that future is not so distant, and the crushing debt has made recovery far more difficult to achieve. As The Times reported, Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s. The city of Prichard, Ala., has stopped sending out its pension checks, breaking state law and shocking its employees.

A state or city unable to make its bond payments would send harmful ripples through the financial system that could cause damage even to healthier governments. But if states act quickly to deal with their revenue losses and address their debt — and receive sufficient aid from Washington — there is still time to avoid a crisis.

The most immediate cause of the states’ problems is the decline in tax revenue caused by the downturn, just as the demand for services has increased.

Over the last two years, combined sales, personal and corporate taxes have fallen by more than 10 percent. Although revenue is likely to tick up slightly in 2011, federal stimulus money — which has been keeping many states afloat — is largely scheduled to expire. Renewing a portion of that aid would be one of the most effective ways to assist the economy.

Many conservatives have said the revenue decline is a good incentive for states to cut their spending. That is precisely what almost all states have done, because they are legally barred from running deficits. State spending fell by 3.8 percent in the 2009 fiscal year and 7.3 percent more in the 2010 fiscal year, the only significant declines since at least the 1970s, even as the cost of education and health care rose.

School aid, Medicaid, transportation, employee salaries, social services, courts — whatever there was to cut, states have slashed it, often at ruinous costs to the most vulnerable: the poor, the sick and disabled, students, tens of thousands of laid-off workers.

But cutting spending will not affect the heaviest burden: the accumulated debt that comes from passing off the biggest problems to future generations. States and cities have nearly $3 trillion in outstanding bonds, and more than $3.5 trillion in shortfalls to pensions. Promised health benefits alone are more than $500 billion.

Some states have tried to pretend their pension obligations do not exist. New York is shortchanging its pension funds, and Gov. Chris Christie of New Jersey, who claims to be so financially responsible, is the latest in a line of governors who have simply refused to pay the billions the state owes to its employee pensions. (Instead, it has often spent that money on tax cuts.) Public employee unions will need to give ground on pensions and other benefits, but it will be hard to start productive discussions if Mr. Christie and other governors refuse to acknowledge their obligations and bargain in good faith.

During the last year, 23 states raised taxes and fees, but only eight increased personal income taxes. Ultimately, states are going to have to acknowledge that more effective, targeted tax increases are inevitable, and can be achieved if they are structured properly. Governors also must explain to voters that they have cut spending. The nation’s richest taxpayers just got a windfall in the federal tax deal extorted from President Obama by Republican senators. States should not shy away from asking for more help from those most able to pay.

Too many newly elected governors have vowed not to raise taxes — including, unfortunately, Andrew Cuomo of New York — fearing giving bad news to voters who have not yet been told how dire things really are. Dan Malloy, the incoming Democratic governor of Connecticut, is one of the few who have been honest with their constituents, saying neither cuts nor tax increases alone can deal with his state’s $3.5 billion shortfall, one of the largest, proportionally, in the nation. “This is a time when people have to be on notice that they’ll be requested to participate in shared sacrifice,” he said recently.

Many governors claim tax increases are ill-advised during a recession, but more experienced economists say it is better to raise taxes on the rich than to lay off workers and cut spending, in effect offsetting Washington’s attempts at stimulus. The federal government missed a chance to begin to act rationally about its long-term deficit by giving away the store to the rich in the tax deal. States should not make the same mistake.



The Illusion of Pension Savings
NYTIMES
By MARY WILLIAMS WALSH
September 17, 2010

Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.

Actuaries, including some who serve on the profession’s governing boards, got wind of what Illinois was doing and began to look more closely. Many thought Illinois was using an unorthodox maneuver to starve its pension fund of billions of dollars, while papering over a widening gap between what it owed and how much it had. Alarmed, they began looking for a way to discourage Illinois’s method before other states could adopt it.

They are too late. The maneuver, and techniques that have similar effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a number of other places, allowing those states to harvest savings today by imposing cuts on workers in the future.

Texas saved millions of dollars this year after raising its retirement age for future hires and barring them from counting unused sick leave in their pensions. More savings will appear in coming years. Rhode Island also raised its retirement age for future retirees last year, after being told it could save $90 million in the first year alone.

Actuaries have been using the method for years, it turns out, but nobody noticed, in part because official documents usually describe it in language few can understand.

The technique is fairly innocuous in normal times, allowing governments to smooth out their labor costs over many years. But it becomes much riskier when pension funds have big shortfalls, when they need several decades to pay down their losses and when they are cutting benefits for future workers — precisely the conditions that exist today.

“In a plan that is not well funded, I wouldn’t recommend it,” said Norm Jones, chief actuary for Gabriel Roeder Smith & Company, an actuarial firm that helps Illinois and a number of other states that have adopted the method. He said the firm’s actuaries informed officials of the risks and it was the officials’ decision to use the technique.

Struggling states and cities need to save money, but they run into legal problems if they tamper with the pensions their current workers are building up year by year. So most places have opted to let current workers and retirees go unscathed. Colorado, Minnesota and South Dakota are the exceptions, dialing back cost-of-living increases for people who have already retired. All three states have reaped meaningful savings right away, and all three are being sued.

Cuts for workers not yet hired do not save much money in the present — but that’s where actuaries can work their magic. They capture the future savings for use today by assuming, in essence, that 100 percent of today’s work force is already earning tomorrow’s skimpier benefits. When used in actuarial calculations, that assumption has a powerful effect. It reduces the amount a government must put into its workers’ pension fund every year.

That saves the government money. But it undermines the pension fund, which must still pay the richer benefits of today’s retirees. And because the calculations are esoteric, it is hard for anyone except a seasoned actuary to see what is going on.

“Responsible funding methods do not work this way,” said Jeremy Gold, an independent actuary in New York who has been outspoken about the distortions built into pension numbers. He said the technique was much like the mortgages with very low teaser rates that proliferated during the housing bubble.

“You aren’t paying down your principal,” Mr. Gold said. “You’re not even keeping up with the interest. You are actually increasing your debt every year.”

Dubious pension numbers in Illinois are not easily shrugged off after a warning shot fired by the Securities and Exchange Commission in August. The S.E.C. accused New Jersey of securities fraud, saying the state had manipulated its pension numbers to look like a better credit risk, while selling some $26 billion worth of bonds. The S.E.C. had never before taken action against a state. Now the commission is flexing its muscles, unleashing a team of specialized enforcement officials to look for more misleading public pension numbers.

An official with the S.E.C. declined to comment on Illinois’s maneuver. Commission rules bar officials from discussing investigations or revealing whether one might be in progress. Kelly Kraft, a spokeswoman for the Illinois Governor’s Office of Management and Budget, said the S.E.C. had not contacted the state and officials were confident that their disclosures were complete and accurate.

Officials in Rhode Island did not respond to phone calls seeking information about how the state achieved its pension savings. In other states, including Texas and Arkansas, officials said they were confident they were in compliance with the relevant statutes.  Actuaries must disclose their methods and assumptions, but this one has been hidden in plain view because it often goes by the name of a method that is widely used and is accepted by the Governmental Accounting Standards Board.

The technique falls into a family of complex and subtle calculations called “cost methods,” which actuaries use to spread pension costs over many years. Few outside of the profession know how the cost methods work or what their names mean.  Illinois issued public documents this year naming its cost method as one that did not permit the cost of future employees’ benefits to be factored into the current year’s contributions. The apparent contradiction caught actuaries’ attention.

Sandor Goldstein, an actuary in Springfield, Ill., who helps the state operate some of the pension funds in its big system, acknowledges that Illinois’s disclosures are “somewhat misleading.”

Mr. Goldstein made his remarks in a letter requested by the state, after an article in The New York Times raised questions about Illinois’s numbers. He recommended that the state clarify its disclosures.  He also said he had warned the state that its funding method “may not be an appropriate one.”

Mr. Jones, of Gabriel Roeder Smith, said Illinois’s disclosures might be “an incomplete description of the process,” but added that state officials “were probably trying not to get into a lot of technical detail that would be poorly understood anyway.”

Illinois’s pension funds are more fragile than most, but their survival is essential to thousands of people. The state’s teachers and certain other workers do not participate in Social Security, so for them, the pension fund is their only source of retirement income.

Frank Todisco, senior pension fellow at the American Academy of Actuaries, declined to comment on the situation in Illinois, but said the Actuarial Standards Board was working on revised standards that, if adopted, would clarify actuarial assumptions and lead to more detailed descriptions of risk.

“It’s a deliberative process,” he said. “We have to follow due process, and that sometimes takes a long time from start to finish.”

It can easily take several years to revise an actuarial standard. That may not be fast enough to help Illinois’s pension system, which continues to sink.

“When you’re in a deep hole, it’s a long way out,” said Mr. Jones.


Illinois Stops Paying Its Bills, but Can’t Stop Digging Hole
NYTIMES
By MICHAEL POWELL
July 2, 2010

CHICAGO — Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo.

He picks the papers off his desk and points to a figure in red: $5.01 billion.

“This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office.

Mr. Hynes shakes his head. “This is not some esoteric budget issue; we are not paying bills for absolutely essential services,” he says. “That is obscene.”

For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.

Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.

States cannot go bankrupt, technically, but signs of fiscal crackup are easy to see. Legislators left the capital this month without deciding how to pay 26 percent of the state budget. The governor proposes to borrow $3.5 billion to cover a year’s worth of pension payments, a step that would cost about $1 billion in interest. And every major rating agency has downgraded the state; Illinois now pays millions of dollars more to insure its debt than any other state in the nation.

“Their pension is the most underfunded in the nation,” said Karen S. Krop, a senior director at Fitch Ratings. “They have not made significant cuts or raised revenues. There’s no state out there like this. They can’t grow their way out of this.”

As the recession has swept over states and cities, it has laid bare economic weakness and shoddy fiscal practices. Only an infusion of federal stimulus money allowed many states to avert deep layoffs last year.

Cuts in Work Forces

The federal dollars are nearly spent. Last month, local governments nationwide shed more than 20,000 jobs. Should the largest struggling states — like California, New York or Illinois — lay off tens of thousands more in coming months, or default on payments, the reverberations could badly damage a weakened economy and push housing prices down still further.

“You’re not seeing these states bounce back, and that could be a big drag on the national economy,” said Susan K. Urahn of the Pew Center on the States. “It could be a very tough decade.”

In Illinois, the fiscal pain is radiating downward.

From suburban Elgin to Chicago to Rockford to Peoria, school districts have fired thousands of teachers, curtailed kindergarten and electives, drained pools and cut after-school clubs. Drug, family and mental health counseling centers have slashed their work forces and borrowed money to stave off insolvency.

In Beardstown, a small city deep in the western marshes, Ann Johnson plans to shut her century-old pharmacy. Because of late state payments, she could not afford to keep a 10-day supply of drugs. In Chicago, a funeral home owner wonders whether he can afford to bury the impoverished, as the state has fallen six months behind on its charity payments, $1,103 a funeral.

In Peoria — where the city faced a $14.5 million gap this year and could face an additional $10 million budget hole next year — Virginia Holwell, a trainer of child welfare caseworkers, lost her job when the state cut payments to her agency. She sits in her living room high above the Illinois River and calculates the months of savings left before the bank forecloses on her house.

“I’ve got enough to last until the end of August,” she says, matter-of-factly. “I’m 58 and I’m pretty good at what I do, and I got to tell you, I’m pretty devastated.”

Public colleges and universities occupy a fiscal sickbed all their own. This year they muddled through without $668 million expected from the state; the University of Illinois has yet to receive 45 percent of its state appropriation. Legislators made no pretense of promising to pay this bill soon. Instead they authorized colleges to borrow against the expected state payments.

“The big fear is that next year we’ll be down twice as much,” said Randy Kangas, an associate vice president of the university. “No one knows how to make the cash flow work.”

Illinois legislators tend to plead victim to economic circumstance, and the state’s maladies are considerable. In 2006, the Illinois unemployment rate stood below 5 percent; now it is near 11 percent, and the percentage of long-term unemployed exceeds the national average. Major manufacturers have eliminated thousands of jobs, and the state ranks in the top 10 nationally in foreclosures.

Five years ago, the Chicago suburb of Tinley Park issued about 650 home building permits; last year it processed one. The city of Rockford plans to close fire stations and lay off firefighters, and in Decatur, 180 impoverished seniors have lost their delivered meals. The lakeshore condo towers in Chicago bespeak affluence, but there are so many foreclosures on the bungalow blocks of southern and western Chicago that “for sale” signs sprout like sunflowers.

Few budget analysts are surprised to see Illinois, with a limping economy and broken political culture, edge close to the abyss. Two of the last six governors have served jail terms, and a third is on trial.

“We are a fiscal poster child for what not to do,” said Ralph Martire of the Center for Tax and Budget Accountability, a liberal-leaning policy group in Illinois. “We make California look as if it’s run by penurious accountants who sit in rooms trying to put together an honest budget all day.”

Stopgap Solutions

The Community Counseling Centers of Chicago is another of those workaday groups that are like the stitches on a baseball, holding together poor and working-class neighborhoods. With an annual budget of $16 million, the agency tends to families torn by crime and violence as well as people who are psychologically stressed and abusing drugs.

On any given Monday morning, the agency’s chief administrative officer, John J. Troy, 61, has no idea how he is going to keep its doors open until Friday. He said the state had not come through with an expected $2.2 million, which is about six months of arrears. He has laid off and recalled employees three times in the last two years.

“Two weeks ago, I had days to meet my $420,000 payroll and all I was looking at was a $200,000 line of credit from a bank,” recalled Mr. Troy. “I drove down to Springfield and said, ‘Hey, you owe us $3 million.’ They said: ‘Oh, that’s nothing. We owe another agency $10 million.’ ”

“The fact of the matter is,” he added, “I don’t sleep much these days.”

Illinois’s fiscal practices are thoroughly fractured. Large agencies survive from one payday to the next. Small agencies seek high-interest loans from out-of-state finance companies.

The state pension system is a money sinkhole and the most immediate threat. The governor and legislature have shortchanged the pensions since the mid-1990s, taking payment “holidays” with alarming regularity.

The state’s last elected governor, Rod R. Blagojevich, is on trial for racketeering and extortion. But in 2003, he persuaded the legislature to let him float $10 billion in 30-year bonds and use the proceeds for two years of pension payments.

That gamble backfired and wound up costing the state many billions of dollars. Illinois reports that it has $62.4 billion in unfunded pension liabilities, although many experts place that liability tens of billions of dollars higher.

Legislators this year raised the retirement age and slashed benefits. Though changes apply only to future employees, the legislature claimed immediate savings.

“Savings upfront and reforms down the road,” said Mr. Hynes, the state comptroller. “It’s just bad habits and bad practices.”

More broadly, Illinois is caught between blue state convictions about social safety nets and a red state aversion to taxes. For years, the Democratic-controlled legislature has passed budgets that are, in effect, in deficit. Lawmakers routinely skip around the state’s balanced-budget law, with few consequences. (Republicans are near monolithic in voting against any tax increases and borrowings. When one broke ranks to try to keep the pension solvent, he was stripped of a committee position, reducing his pay and pension.)

“The pension move was Enron-esque,” said Mike Lawrence, a press secretary to the former Republican governor Jim Edgar, who was the last governor to sign an income tax increase. “Blagojevich was not a tax-and-spend governor; he was a spend-and-borrow governor.”

The state’s income tax burden is not terribly high — Illinois ranks in the bottom half of states — and its government is not terribly large. (The budgets in New York and California, per capita, are much larger). Even if the state cut out all family and human services spending, more than half of the budget deficit would remain.

As comptroller, Mr. Hynes has trained his attention on the public and nonprofit agencies that rely on state money; he tends to roll his eyes at the notion that slashing alone is a solution.

“Only the most delusional people think you can solve this without raising taxes,” he said.

The legislature has a different instinct: to borrow. In good times, that leads to unsightly imbalances. In bad times, it becomes catastrophic. This year, leaders gave the governor authority to move money around and left town to campaign.

“Each budget has gotten historically worse during this recession,” said Laurence Msall, president of the Civic Federation, a policy research organization. “We’ve borrowed more and pushed larger unpaid bills into the future.”

‘Everything Is Triage’

So where is the exit door from this crisis? In Illinois, it depends on whom you ask. The state representative Barbara Flynn Currie, one of the Democratic leaders in the statehouse, sees salvation in the economic cycle. “In the long run, we’ll muddle our way through,” she said.

Perhaps, but many analysts, liberal and conservative, warn of a potentially far grimmer reckoning — Greece by Lake Michigan. Borrowing costs are rising, nonprofits that depend on taxpayer money are dropping contracts, and the state’s pension costs and unpaid bills balloon each month.

Newspaper reports offer stories of hundreds of young teachers moving out of state. Sounding as if she had been punched in the stomach, Ms. Johnson, 53, the pharmacist in Beardstown, said she was going to work at Wal-Mart. Mr. Troy keeps logging on to the comptroller’s Web site to see whether money might soon flow to his counseling centers.

And Ms. Holwell has joined Illinois People’s Action, which challenges banks and foreclosures. With a raspy voice, she talks of her irritation with “the people who just yammer.”

“We’ve helped save four houses,” she said. “Now I wonder: can I save my own?”

For now, Illinois spends a minor fortune papering over its budget holes. Last year, the comptroller’s office paid $55.3 million just in interest on two short-term borrowings to pay the state’s bills.

Mr. Hynes walked into his child’s elementary school recently and learned that kindergarten hours were being cut because of the state budget.

“Everything is triage now,” he said. “We work to avoid outright disaster.”

In past years, when nonprofits needed credit lines to see themselves through tough budget times, the comptroller issued letters assuring banks that vendors would be paid. Not anymore.

“I don’t feel comfortable doing that,” he said, adding with a shrug, “I mean, who knows, right?”



Schwarzenegger orders min wage for state workers

YAHOO
By CATHY BUSSEWITZ, Associated Press Writer
2 July 2010

SACRAMENTO, Calif. – Gov. Arnold Schwarzenegger on Thursday ordered about 200,000 state workers to be paid the federal minimum wage this month because the state Legislature has not passed a budget, but the state controller is refusing to comply.

Department of Personnel Administration Director Debbie Endsley sent the order in a letter to the state controller, who refused a similar order two years ago. The matter is tied up in the appellate courts, leading the controller to say he will abide by whatever final ruling emerges, which could be years down the road. He said he can't follow the order now due to technical and legal issues.

Most state employees will be paid the federal minimum of $7.25 per hour for the July pay period.

Schwarzenegger spokesman Aaron McLear said the change should be reflected in state employees' next paycheck. Workers will be paid in full retroactively once a budget is passed.

"It's a sad day when the boss wants to make his employees collateral damage in a budget dispute," said Patty Velez, an environmental scientist and president of the California Association of Professional Scientists, a union that would be affected by the cuts.

The Republican governor has been frustrated by the Legislature's failure to close California's $19 billion budget deficit, even as the new fiscal year began Thursday.

Schwarzenegger's order does not affect the 37,000 workers, including California Highway Patrol officers, who are in unions that recently negotiated new contracts with the administration. Those contracts included pay cuts and pension reforms that will save the state money.

Asked whether the governor was sending a message to the unions that have not yet signed new contracts, McLear said no.

"We're sending a message to the controller to follow the law," he said.

Schwarzenegger made a similar order two years ago, but it never took affect because state Controller John Chiang refused to comply. The courts later sided with Schwarzenegger, but the matter is on appeal.

"It's inevitable that this is going to end up being ruled against the controller," McLear said.

Chiang, a Democrat, is an elected statewide officer. His deputy press secretary, Jacob Roper, said Thursday that the controller's office does not intend to follow Schwarzenegger's order, in part because the state's computerized payroll system cannot handle the change.

"This is uncharted waters here," Roper said. "No city, county or state has ever taken this action before."

In a statement, Chiang said it was not possible with the state's current technology to pay some employees their full salaries and others minimum wage. He also said his office and the governor's have been working on a system upgrade, but it will not be ready until October 2012.

Schwarzenegger's order, if implemented, could cost the state billions of dollars because the action would violate employment law, Roper said. He cited the federal Fair Labor Standards Act, which he says entitles a worker to "double damages" if an employer cuts pay to minimum wage.

Salaried managers who are not paid on an hourly basis would see their pay cut to $455 per week.

Some of the state's roughly 250,000 employees would be exempt, including doctors and attorneys, because minimum wage laws do not apply to those professions. Under the order, they would not get paid at all until a budget deal is struck, said Lynelle Jolley, spokeswoman for the Department of Personnel Administration.

"This all goes away if the Legislature passes a budget this month," she said.

Service Employees International Union 1000, the state's largest employee union, declined to comment because union lawyers are still reviewing the matter. The union, which represents about 95,000 state workers, joined Chiang in the legal challenge two years ago.

SEIU 1000 employees generally earn more than federal minimum wage, in part because California's state minimum wage of $8 an hour is higher.



Study says state employee pension fund will be broke by 2019
Keith M. Phaneuf, CT MIRROR
June 30, 2010

Connecticut is one of seven states that will run out of money to pay state employee pensions over the next decade, coming up short in 2019 due to poor savings habits and generous guaranteed benefit levels, according to a recent study by Northwestern University.

And Connecticut's pension fund could become insolvent sooner than that, according to Joshua D. Rauh, an associate professor of finance at the university's Kellogg School of Management, if the 8 percent return on investments this state and most others typically count on are not realized in the near future.

The collapse also could be accelerated by retirement incentive programs and deferred annual contributions -- two fiscal shortcuts Gov. M. Jodi Rell and the General Assembly have employed over the past two years to mitigate tax hikes and programmatic spending cuts.

"States face the risk that higher inflation and low asset returns could make their systems even more vulnerable," Rauh wrote. "State governments face a choice between taking more risk today and funding the liabilities to a greater extent."

Pension woes are nothing new for Connecticut. For more than two decades, governors and legislatures have routinely approved annual contributions to pension accounts far below the level recommended by fiscal analysts to cover current retiree expenses and begin saving to offset future costs.

Connecticut, like most states, provides a defined benefit pension plan, meaning it promises its workers a specific annual payment once they retire. By comparison, the most common plans in the private sector involve defined contributions. Under these, employees save for their own retirement, making investments often matched in part or full by their employer.

According to its last, full actuarial valuation, the pension fund had $19.2 billion worth of obligations and held just under $10 billion in assets, or about 52 percent of its liability.

In February Rell formed the Post-Employment Benefit Commission, a panel of state budget and pension experts from management and labor charged with charting a long-term strategy to improve the system's fiscal health.

"This study just underscores the reason why the governor put together the commission," Office of Policy and Management Deputy Secretary Michael J. Cicchetti, who chairs the commission, said this week. "It also underscores the fact that we cannot sit back and do nothing. We have to get our arms around this and make some real changes."

Cicchetti has urged the panel to investigate a broad range of possible changes to a package of retirement benefits that critics of state government have called too generous. The changes include shifting to a defined contribution system, requiring pension recipients to pay more for health care, and restricting access to health care for workers who leave state service before they reach retirement age.

Under current law, workers with 10 years of state service remain eligible for both a pension and health care even if they leave for other jobs before reaching retirement age.

A new report submitted last week to the commission by a Kennesaw, Ga.-based actuary and health care consultant showed Connecticut's problem has worsened due in part to a 2009 retirement incentive program that saved $110 million that year. Further complicating matters, the governor and legislature have ordered $314.5 million in union-approved reductions to pension fund contributions to squeeze through tight fiscal straits over the past two years and in fiscal year that starts July 1.

Connecticut, like most states, also is vulnerable because it assumes a healthy return on what money it does invest in its pension program. Most states rely on 8 percent or more -- Connecticut assumed 8.25 percent in its 2008 actuarial analysis. This is based largely on the historical average growth of the stock market since 1927.

If Connecticut and other states assumed a more conservative, guaranteed rate, closer to the 3 percent a U.S. Treasury security would yield, Rauh wrote, their pension savings would be even more inadequate.

According to Rauh, under the current scenario Illinois would the first state to face pension-fund insolvency, going belly up in 2018. Connecticut, Indiana and New Jersey would follow one year later, followed by Hawaii, Louisiana and Oklahoma in 2020.

By 2025, 20 state funds will have run out of money, according to Rauh. By 2030, 31 state funds will be broke. And because the problem is so widespread, he added, taxpayers will find it increasingly challenging to avoid the burden simply by moving to other states.

"There seems to be a high likelihood that future generations will have to bear the substantial burden of making up pension benefits for previous generations of state employees," Rauh wrote. "While citizens of states that are particularly hard-hit by the pension crisis may be able to escape to other states, an acceleration of this demographic phenomenon would leave a dwindling taxpayer base behind in the states facing the largest liabilities."


State faces hefty up-front costs to fix its retiree benefits system
Keith M. Phaneuf, CT MIRROR
June 7, 2010

State officials recently got their first glimpse of the cost of escaping a pay-as-you-go health insurance program for retired workers, and it wasn't pretty.

But on a long-term basis, the state's health care consultants said, it's far less expensive the the current practice of paying the bills out-of-pocket.

A preliminary analysis issued last week to the Post Employment Benefits Commission projected that annual spending, which currently approaches $500 million, will rise on the pay-as-you-go plan so that the average cost over the next 28 years will be $1.9 billion--a total outlay in excess of $53 billion.

If the state adopts a longer-term plan for funding the costs, the annual outlay would jump immediately to $1.2 billion, according to Milliman Inc. of Windsor, which provides health care consulting and actuarial services for the state comptroller's office--but then stay relatively stable over 28 years, for a total outlay of roughly $34 billion.

Both scenarios could be dramatically affected if health care costs grow in excess of projections, Milliman warned.

"We all knew we were going to be looking at big numbers here," state Office of Policy and Management Deputy Secretary Michael Cicchetti, the commission's chairman, said afterward, adding there are no easy options for reversing a system state government has followed for decades. "There are no quick fixes here. ... We're looking to find ways to make the system more manageable."

Gov. M. Jodi Rell created the panel, which includes representatives from her administration, state employee unions, and the treasurer and comptroller's offices, to analyze longstanding under-funding problems tied to both the health insurance and pension benefits state government provides its workers.

State government is slated to spend $490.6 million in the fiscal year that begins July 1 on health insurance for about 42,000 retired workers. That's about 2.5 percent of a $19.01 billion total budget.

That $490.6 million only covers the cost of health care for 2010-11.

But with people continuing to live longer and medical inflation stretching some years into double-digits, the potential for that bill to escalate is huge, analysts said. The state's "accrued liability" - meaning the cost of covering eventual retirement health benefits for all current employees and retirees - now is projected to top $26 billion.

An alternative to the pay-as-you go scenario involves covering annual health care costs and depositing additional dollars into a trust fund so that investment earnings can pick up a share of the future expenses.

William Thompson, a health care actuary with Milliman, estimated based on 2008 numbers that Connecticut would have to budget $1.2 billion per year to convert into a trust fund system. That additional $700 million available after current costs are met would allow the state to amass enough extra through savings and interest to cover all future liabilities over the next three decades.

Without major investment income to offset costs, state government would need to reserve more than $1.9 billion per year, on average, to cover retiree health care over the next three decades, according to the Milliman analysis. If medical costs rose 2 percent beyond current inflationary trends, that cost tops $3.1 billion.

"That's really the peril of the pay-as-you-go approach," commission member Christine Shaw, state Treasurer Denise L. Nappier's director of government relations, said of the lack of investment income available under the current system.

Thomas Woodruff, director of Comptroller Nancy Wyman's health care policy and benefit services division, said health care costs have grown about 7 percent per year since 2008. Based on that estimate, the $1.2 billion projection could rise another $150 million or more.

But Cicchetti noted that the report did not analyze the cumulative effects of several health care cost-saving measures the Rell administration negotiated with the State Employee Bargaining Agent Coalition in 2009. These include higher co-payments for prescription drug purchases and a new requirement that workers with less than 10 years of experience contribute 3 percent of their annual pay toward retirement health insurance costs.

Commission members asked Milliman officials to prepare revised estimates for later this month.

The commission was given a July 1 deadline to submit cost-saving recommendations to the governor's office, but Cicchetti said the panel still is awaiting further analysis of both health insurance and pension costs, and may need to seek a short extension into the summer.



UNDERFUNDED: Connecticut Ranks 5th-Worst In U.S. In Funding State Employee Pensions

Hartford Courant
By CHRISTOPHER KEATING, ckeating@courant.com
February 18, 2010

Connecticut ranks as the fifth-worst state in the nation in funding pensions for its state employees, and the problem is growing worse, according to a national study to be released today.

The report says the problem is "cause for serious concern."

Connecticut's pension fund is only 62 percent funded, far short of the 80 percent that federal experts deem as preferred. The only states ranked lower than Connecticut are Illinois, Kansas, Oklahoma and Rhode Island.

If left unchecked, the growing unfunded pension liability could eventually force states such as Connecticut to either raise taxes or cut services in order to pay for the pensions that are mandated under union contracts. Though currently underfunded, the pensions must be paid.

"The growing bill coming due to states could have significant consequences for taxpayers — higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms," said Susan Urahn, managing director of the Pew Center on the States, which issued the report.

Since the state legislature and governors have not set aside enough money through the annual budgeting process, the state's unfunded pension liability has increased by more than $9 billion since 2000. Connecticut's pension fund grew by 89 percent between 1999 and 2008, the report says, but the liabilities — the amount the state owes to the pensioners over the long term — grew even faster, essentially doubling.

The nonprofit Pew Center on the States said, "Connecticut's management of its long-term pension liability is cause for serious concern, and the state needs to improve how it handles the bill coming due for retiree health care and other benefits."

Concerned about the state's growing benefit problems, Gov. M. Jodi Rell announced on the opening day of the legislative session that she would create the Post-Employment Benefits Commission, which will recommend short- and long-term solutions for the pension system. Rell's office on Wednesday said the state's pension system is currently underfunded by $9.3 billion.

In addition, the state is on the hook for future health insurance and other retiree benefits of $24.6 billion.

"The state of Connecticut has a commitment to its workforce that must be honored," Rell said two weeks ago. "We cannot do that if we fail to meet our financial obligations to these accounts."

The new commission, which has already been created by executive order, will include representatives from the top state offices that are involved in solving the problem, including the state comptroller, treasurer, governor's budget office, actuaries, certified public accountants, and the state employee unions coalition, known as SEBAC.

Urahn said the 50-state report showed "highly troubling" findings nationwide with total liabilities of more than $3.3 trillion for pensions and health care that have been promised to state workers.

The problem has worsened in recent years as states have postponed contributions to pension funds. In Connecticut, Gov. John G. Rowland and the state legislature agreed to postpone payments to the pension fund in order to save money in the short term and balance the budget.

The problem, though, is that the savings are only temporary, because the amount of money state workers were scheduled to receive was never decreased. The legal, contractual amounts remained the same.

The practice continued under Rell as the state deferred a payment of $100 million under an agreement with the state-employee unions.

Nationally, more than half of the 50 states had fully funded pension systems in 2000, according to the Pew report. Eight years later, only four states — New York, Florida, Wisconsin and Washington — had 100 percent-funded systems.

Connecticut ranks among eight states in which at least one-third of the liability remains unfunded. Illinois is in last place, with 54 percent of its pension system funded, followed by Kansas at 59 percent. Rhode Island and Oklahoma are tied at 61 percent, and Connecticut is next at 62 percent.

"Too often, policy makers kick the can down the road," Urahn told reporters Wednesday in a conference call. "It is important to note that this problem was not created by the current recession."

Despite the low numbers, Urahn said states can solve the problem if they don't let it get even worse.

First, the states could start fully funding their pension obligations each year, something that often is not done. Second, they could reduce the overall liability by reducing the benefit levels. For example, Iowa in recent years raised the amount of money that must be contributed by state employees.

"Even small changes, made today, can have a significant impact in the future," Urahn said. "The consequences of inaction are simply too great."

Another way to cut costs is to eliminate the pension plan for new state employees and instead enroll them in a 401(k)-style plan that is common in the private sector.

R. Nelson "Oz" Griebel, who is seeking the Republican nomination for governor, has proposed such a system in his campaign. Griebel says he understands that there are contractual obligations for current employees, but he says the state should consider a different plan for new employees.

Two states — Alaska and Michigan — have already moved toward the 401(k)-type plan. In Minnesota, the state saved $650 million over 20 years by simply raising the retirement age by one year — from 65 to 66. That move, which was made in 1989, has proven beneficial through the decades, Urahn said Wednesday.

"If they wait, it's going to continue to get worse," Urahn said.

Copyright © 2010, The Hartford Courant


WESTON AND O.P.E.B.
Board of Finance Meeting Notice/notes
December 11, 2008, at 8pm, Town Hall Meeting Room

1.  Discussion/decision regarding proposed supplemental appropriation or Insurance Reserve* transfer in the amount of $22,900 for the purpose of meeting current year OPEB obligations ($4100 school, $18,800
town)/insurance reserve funds for school and town to be reduced by these numbers.

2.  Discussion/decision regarding recommended OPEB custodial services agreement with Wachovia/to become Wells Fargo eventually - requested that before we go about investing OPEB $$ there be a clear
statement of investment policy (asset allocation suggested: 45% fixed income, 50% equities, 5% REIT).

3.  Discussion/decision regarding recommended investment consulting agreement with Fiduciary Investment Advisors/more to come.

-------------
* = "Insurance Reserve" at $1,800,000 (Education) and $350,000 (Town) before this action. Board of Ed at $7 million and Town at $1.4 million - numbers possibly needed to cover 100% costs???


M A D O F F

NEWSMAKERS OF DIFFERENT STRIPES: VICTIMS - http://www.stamfordadvocate.com/ci_11645299?source=most_viewed
Mr. Madoff, former founder and Chair. of the NASDAC market; Former First Selectman of
Fairfield, now in the Malloy Administation, as "gambling overlord" -  before the fall; things go back further!


GASB Chairman Robert H. Attmore to Retire in June 2013
Norwalk HOUR
Posted: Tuesday, October 2, 2012 10:30 am

NORWALK -- Robert H. Attmore, chairman of the Norwalk-based Governmental Accounting Standards Board (GASB), will retire in June 2013, the Board of Trustees of the Financial Accounting Foundation (FAF) announced Tuesday. A former auditor and deputy comptroller for New York State, Attmore has served as GASB chairman since July 2004.

"On behalf of the Board of Trustees and, more importantly, taxpayers, municipal bond investors, and state and local government officials across the country, I want to offer my sincere thanks to Bob for nine years of thoughtful and dedicated leadership of the GASB," John J. Brennan, chairman of the FAF Board of Trustees, said. "During Bob's tenure, the GASB has tackled such important -- and difficult -- accounting issues as pensions and other retirement benefits, derivatives, municipal bankruptcies, and fund balance reporting with professionalism and a regard for the concerns of every affected party. I look forward to continuing to work with Bob until next year, when he begins his well-deserved retirement."

Attmore started serving as chairman of the GASB on July 1, 2004. On July 1, 2009, he began serving a second and final five-year term as chairman. Prior to joining the GASB, Attmore worked for New York State for more than 23 years, serving as deputy state comptroller and state auditor from 1986 until 2003.

Brennan said the FAF will begin a search for Mr. Attmore's successor soon.

"Serving as the GASB chair has been a distinct honor, particularly as we've worked through some key areas of financial reporting in the public sector," Attmore said. "After balancing the GASB's accomplishments and the ongoing work of the Board with my desire to devote more time to my family in the Albany, New York area, I made the decision to retire next year. While the GASB continues to have important work under way, the next nine months will provide adequate time for us to ensure a smooth transition to new leadership."



Conn. court: Town may not seek money Madoff lost
New York Post
Last Updated: 2:11 PM, August 10, 2011
Posted: 2:09 PM, August 10, 2011

HARTFORD, Conn. — The Connecticut Appellate Court ruled Wednesday that the town of Fairfield may not make claims for millions in losses to its pension fund due to disgraced financier Bernard Madoff’s fraud scheme.

The state’s second highest court ruled 3-0 that a Stamford Superior Court judge decided correctly in April 2010 that Fairfield was not directly affected by the actions of two partners in an investment firm accused of conspiring with Madoff.

Richard Robinson, the lawyer representing Fairfield, told the court May 19 that Walter M. Noel Jr. and Jeffrey H. Tucker, the two partners, conspired with Madoff. As a result, they should be included among those responsible for a $42 million loss in Fairfield’s pension fund, he said.

The pension fund provides benefits to 1,500 town employees.

Robinson said Wednesday that although Fairfield did not have direct contact with Noel or Tucker, the two men were involved in what amounts to a conspiracy and “acting in concert is the functional equivalent of contacting other people,” he said.

“We think they got it wrong,” he said, referring to the Appellate Court judges.

The town’s attorney, Richard Saxl, said Fairfield officials are considering their options, including a possible appeal to the state Supreme Court.

Noel and Tucker were principals of Fairfield Greenwich Group, one of several investors sued by a trustee seeking to recover money lost by Madoff. Fairfield Greenwich has claimed to be an innocent victim of Madoff’s massive Ponzi scheme.

Attorney Stanley Twardy who represented Tucker and spoke for him and Noel before the Appellate Court in May, told the judges there was no link between the two men and Fairfield. Noel and Tucker never solicited investments from Fairfield, he said.

Twardy did not return a call Wednesday seeking comment.

The Appellate Court said that although Fairfield’s complaint is “rich with allegations” that Noel and Tucker acted in concert with Madoff or aided his fraud, “it is devoid of any allegation” that the two partners played a role in inducing the town to invest.

Fairfield accused Sandra L. Manzke, chief executive of investment firm Maxam Capital, and Noel and Tucker of telling potential investors that Madoff achieved consistent annual returns of between 8 percent and 12 percent while also limiting losses. The town accused them of misrepresenting the investment potential, saying they knew the strategy could not produce such consistent returns in good years and bad.

The trustee, Irving Picard, has alleged that the Connecticut firm “knew or should have known” that Madoff’s operation was predicated on fraud and that the returns had to be fiction.

Madoff is serving a 150-year prison sentence in Butner, N.C., after pleading guilty in 2009 to fraud charges. He fleeced victims out of billions of dollars.


Judge Explains 150-Year Sentence for Madoff
NYTIMES
By BENJAMIN WEISER
June 28, 2011

With the sentencing of Bernard L. Madoff only a week away, Judge Denny Chin received a letter from Mr. Madoff’s lawyer asking for a prison term substantially below the 150-year maximum.  The lawyer, Ira Lee Sorkin, listed several reasons, including Mr. Madoff’s confessing to his sons, knowing he would be turned in; his “full acceptance” of responsibility for his crimes; and his efforts to assist in the recovery of lost assets.

Citing data that showed Mr. Madoff, who was then 71, could expect to live about 13 more years, Mr. Sorkin asked for a term of 12 years — “just short of an effective life sentence,” as he put it — suggesting that Mr. Madoff might be allowed a year of freedom before he died. Mr. Sorkin also proposed another option: 15 to 20 years.

Judge Chin says he understood Mr. Sorkin’s goal. “It’s a fair argument that you want to give someone some possibility of seeing the light of day,” the judge said, “so that they have some hope, and something to live for.”

“And,” he added, “that was one of the struggles in Madoff.”

Judge Chin said he quickly rejected the idea of a 12-year sentence for Mr. Madoff, but pondered whether 20 to 25 years might be acceptable. The judge ultimately concluded that even that “would have been just way too low.”

“In the end, I just thought he didn’t deserve it,” he said. “The benefits of giving him hope were far outweighed by all of the other considerations.”

Judge Chin would impose a term of 150 years on Mr. Madoff, perhaps the most stunning and widely discussed sentencing in the history of American white-collar crime. In doing so, he seemed to find a way to translate society’s rage into a number.  Two years later, Judge Chin’s recollections resurrect all the anger, shock and confusion that surrounded Mr. Madoff’s crimes, and provide a rare peek at the excruciating pressure faced by a judge who had to balance the law, the public’s emotions and his own deeply held beliefs while meting out a sentence that was just and satisfied the court’s need to send a message.

Judge Chin agreed to an extensive series of interviews as part of a broader look into his sentencings in Federal District Court in Manhattan, which will appear in a later article. “Most judges will tell you sentencing is the most difficult thing we do,” he said.

The New York Times also interviewed Mr. Madoff, who offered his first comments about the judge and the sentence, which will have occurred two years ago on Wednesday.

Mr. Madoff, speaking by phone from federal prison in Butner, N.C., said he believed that Judge Chin went along with “the mob psychology of the time.”

“Explain to me who else has received a sentence like that,” Mr. Madoff said. “I mean, serial killers get a death sentence, but that’s virtually what he gave me.”

“I’m surprised Chin didn’t suggest stoning in the public square,” he added.

‘Thanks (I Guess)’

Judge Chin, 57, said he learned he had received the Madoff case from his staff as he entered his chambers on March 6, 2009, after a court proceeding.  He had also received an e-mail that day from a colleague, Gabriel W. Gorenstein, a magistrate judge who had reached into the wooden wheel that is used to randomly assign cases in the courthouse and selected an envelope that contained Judge Chin’s name.

“Just thought I’d give you the heads up,” Judge Gorenstein wrote.

“Thanks (I guess) for spinning the wheel in my favor!” Judge Chin wrote back.

Judge Chin also learned that day that Mr. Madoff would plead guilty to all 11 counts against him, including fraud, money laundering and perjury.  A few days before the sentencing, Judge Chin’s law clerks and interns joined him for their weekly lunch around a large wooden table in his chambers.

“I said to my interns, ‘What do you think?’ ” the judge recalled. Two interns, both law students, suggested a term of 75 years, but when the judge asked them why, he said, they had trouble articulating their reasons.

“I said, ‘So basically you’re splitting the baby?’ ” Judge Chin remembered. “And they kind of looked at each other and said yes.” They agreed that it was probably not the best thing to do, he added.

Although the judge did not tell his staff his own views that day, he made it clear that he would not choose a term arbitrarily, nor would he compromise with a number halfway between zero and 150 years.  Judge Chin noted in the interviews that 20 or 25 years would have effectively been a life sentence for Mr. Madoff, and any additional years would have been purely symbolic. Yet symbolism was important, he said, given the enormity of Mr. Madoff’s crimes.

“Splitting the baby, to me, was sending the wrong message,” he said. “Often that’s the easy way out, but as we know from the old parable, that wasn’t the right thing to do.”

The judge reflected on the fraud’s unprecedented scale, its duration over two decades and its thousands of victims. At that point, the judge said, symbolism “carried more weight.”

He began to consider how best to articulate the message he wanted to send. The court’s probation department had recommended a 50-year term, while the government had requested 150 years.  He said he struggled to find the right number — “the just sentence,” as he described it.

Another dilemma, he said, rested in the fact that because none of the 11 counts against Mr. Madoff carried a sentence of life imprisonment (indeed, none carried more than 20 years), he could not impose a conventional life sentence.

Instead, he was required to stack the maximum sentences for each count — they totaled 150 years — to calculate a recommended sentence under the federal advisory guidelines. He was not bound by that figure, and he considered going beneath it, he said.

But he decided that a term of 150 years would send a loud and decisive message. He felt that Mr. Madoff’s “conduct was so egregious,” he said, “that I should do everything I possibly could to punish him.”

Moreover, any sentence of less than 150 years could be seen as showing him mercy. “Frankly, that was not the message I wanted to be sent,” he said.

Weighing Victims’ E-Mails

Typing on a computer in chambers, and on a laptop at home, he continued preparing a working draft of the statement that he would read in court.  On the Sunday before sentencing, Judge Chin returned to the roughly 450 e-mails and letters that had come from victims. He took notes and sketched out themes as he went, with a view toward working them into his draft:

“Not just the wealthy or institutional clients.”

“Middle-class folks, elderly, retirees.”

“Not just money: It reaches to the core and affects your general faith in humanity, our government and basic trust in our financial system.”

“The loss of dignity, the loss of freedom from financial worry.”

Judge Chin said he was particularly moved by an account of a man who had invested his life savings with Mr. Madoff, then died of a heart attack two weeks later. The man’s widow had met with Mr. Madoff, who had put his arm around her and told her not to worry, that her money was safe with him.

“She eventually gave him her own pension, 401(k) funds,” Judge Chin wrote in his notes. He would include the story in his draft.

He also wrote that he had received no letters on Mr. Madoff’s behalf: “The absence of such support is telling.”

The judge, explaining why he had rejected the defense’s request for a substantially shorter sentence, provided two reasons why the symbolism of a much longer term was important: to send the “strongest possible message” of deterrence, and to help Mr. Madoff’s victims heal.  Judge Chin also responded to the assertion in Mr. Sorkin’s letter that the “unified tone” of the victims’ statements suggested a desire for “a type of mob vengeance” that would seemingly negate the judge’s role.

“I do not agree,” Judge Chin wrote about the victims. “Rather, they are doing what they are supposed to be doing — placing their trust in our system of justice.”

But as he finished for the night, he said, he felt vaguely unsatisfied with the draft, which he saved on his computer at 9:29 p.m. “I was still struggling with the reasoning,” he recalled.

He decided to review it again the following day. He knew he would be arriving at work early. A former law clerk had e-mailed him to say that more than a dozen television trucks were already lined up next to the courthouse.

‘Extraordinarily Evil’

By the time Judge Chin entered his chambers on the morning of Monday, June 29, he had decided what his draft was missing, he said. In explaining how the 150-year sentence was symbolically important, he had neglected to include a third, crucial reason: retribution.

“A defendant should get his just deserts,” Judge Chin remembers thinking.

He had an intern quickly research relevant cases; he reviewed them, and began writing, adding about 100 words to the draft.  He recalled that as he had thought about Mr. Madoff’s conduct, two words had come to mind: “extraordinarily evil.”

He put them in his draft.

“One of the traditional notions of punishment,” he wrote, “is that an offender should be punished in proportion to his blameworthiness.” Mr. Madoff’s crimes were “extraordinarily evil,” he added.

In a society governed by the rule of law, he wrote, the message had to be sent that Mr. Madoff would “get what he deserves,” and would be “punished according to his moral culpability.”

He saved the document at 9:12 a.m., printed it, and soon headed for the 10 a.m. hearing which, because of the expected crowds, would be held in the court’s expansive ceremonial courtroom.

As Judge Chin listened from the bench, nine of Mr. Madoff’s victims described the devastation he had caused in their lives. Mr. Madoff rose and offered a lengthy apology, saying that he felt “horrible guilt.” He turned to face the victims, and apologized again.

To Judge Chin, Mr. Madoff seemed sad, almost as if he were grieving. “But I did not believe he was genuinely remorseful,” the judge recalled.

Judge Chin then began reading his statement from the bench, adding a few phrases to acknowledge what he had seen and heard in court that morning.  He cited Mr. Madoff’s victims — “individuals from all walks of life” — and told the story of the widow who had been personally reassured by Mr. Madoff. “Now, all the money is gone,” the judge said.

Judge Chin read his passage on retribution, which, after the length of the sentence itself, appeared to have the greatest impact. In the headlines and news accounts that followed, the words “extraordinarily evil” seemed to be everywhere.


Getting Away With It
NYTIMES
By JOE NOCERA
June 13, 2011

Not long ago, I came into possession of the names of the investors in the now-defunct Galleon Group, the hedge fund firm that was run by Raj Rajaratnam, who last month was convicted of insider trading.

It’s a long and impressive list. Cornell, Colgate and Texas A&M each entrusted part of their endowments to Galleon. State pension funds in New Hampshire and Virginia invested with Rajaratnam. There were a handful of foundations, like the Michael and Susan Dell Foundation, and lots of family trusts. Private wealth managers, like Banque Privée Edmond de Rothschild, steered clients to Galleon. A.I.G., the insurance giant, and Yuengling, the beer company, were investors.

So were Kenneth Cole, the fashion designer; Peter Peterson, the Blackstone co-founder; and Jeffrey Vinik, the long-ago former manager of the Fidelity Magellan mutual fund. In other words, the investors were pretty much whom you’d expect to find in a big-time hedge fund with a stellar long-term track record. And, of course, as Galleon enriched its investors, Rajaratnam also got rich: Shortly before he was arrested, Forbes magazine listed his net worth at $1.5 billion.

As I pored through the Galleon list, though, I couldn’t help thinking about another group of investors who had unwittingly hitched their wagon to a crooked hedge fund manager. Like Rajaratnam, Bernie Madoff had a client list that included institutions and foundations, public figures and wealthy executives, family trusts and retirement accounts.

Yet, despite the similarities, the two groups of investors have been treated completely differently since the crimes of their respective fund managers were exposed. For many investors in Madoff’s Ponzi scheme — the “net winners” who took out more money than they put in — the experience has been hellish. Irving Picard, the trustee in the Madoff case, has sued many of them to recover some or all of their ill-gotten gains. By contrast, the Galleon investors have paid no price at all. They’ve been able to keep every ill-gotten penny.

Why is this so? More to the point, why is it right?

One reason is that, unlike Rajaratnam, Madoff only pretended to be running a hedge fund; like all Ponzi schemers, he used money coming in from new investors to pay other investors. That’s why the law justifies clawing it back: Picard is essentially trying to return stolen money to the “net losers.”

Yet isn’t insider trading also a form of stealing? After all, Rajaratnam was convicted of stealing information that gave him an unfair advantage over other investors. The gains he made from those unfair trades robbed the people who, lacking the information he had obtained, sold the shares that Galleon bought. In insider-trading cases, prosecutors try to find those people so that appropriate restitution can be made. But only Rajaratnam will have to make that restitution. His investors get to keep the profits that resulted from his illegal trades.

There is a second issue. In the Madoff case, Picard has been particularly punitive toward investors who “knew or should have known” that Madoff was crooked; that is, people who, in the trustee’s view, ignored red flags that should have alerted them to Madoff’s wrongdoing. The most prominent people in this category are Fred Wilpon and Saul Katz, the owners of the New York Mets, whom the trustee has sued to claw back a cool $1 billion — despite their insistence that they had no clue.

But there were plenty of red flags around Rajaratnam, too. Hedge fund managers will tell you that there were always rumors about insider trading at Galleon. Indeed, it was at the heart of Rajaratnam’s business model.

It is implausible that every one of Rajaratnam’s sophisticated investors were in the dark. Yet the law says that, unlike the Madoff investors, they bear no responsibility for ignoring red flags. On the contrary: They are being rewarded for looking the other way. And even though Rajaratnam is likely to spend years in prison — and will have to pay tens of millions of dollars in restitution and fines — he will remain supremely wealthy, as will his family. This is one more contrast to Madoff, whose family is likely to be penniless by the time the trustee is finished.

The phrase I find myself muttering a lot these days is: “There oughta be a law.” There oughta be a law, for instance, that executives who create corporate cultures that encourage employees to commit fraud, as Angelo Mozilo did at Countrywide, should be held criminally liable for fostering that culture. But there isn’t any such law, so Mozilo gets a pass, despite all the fraudulent mortgages Countrywide underwrote.

The more I think about it, the more I’m convinced that there ought to be a law that says that if a fund manager’s “edge” is insider trading, his investors should have to pay a price, too. Maybe then, they’d be less willing to look the other way when their fund manager starts doing things he shouldn’t.





Austria, Britain Broaden Madoff Probe
DAY
By William J. Kole , Associated Press
Published on 7/7/2009

U.S. and British investigators have joined Austrian prosecutors in examining possible ties between a Vienna fund manager and disgraced financier Bernard Madoff, whose multibillion-dollar Ponzi scheme wiped out thousands of investors and charities worldwide, an official said Monday.

Gerhard Jarosch, spokesman for the Vienna public prosecutor's office, told The Associated Press his office is aiding the U.S. Justice Department and Britain's Serious Fraud Office in separate investigations of Bank Medici AG and its chairwoman, Sonja Kohn.

Both Kohn and Medici also have been the focus of a fraud investigation in Austria since February, Jarosch said, stressing that Kohn has not been charged with any criminal wrongdoing.

”I can confirm that we are assisting the U.S. and British authorities in their investigations of Mrs. Kohn in connection with the Madoff case,” he told AP. Jarosch declined to elaborate or say whether Kohn has been questioned by investigators from either country.

Kohn, 60, has an unlisted phone number and could not be reached for comment Monday. Her attorney, Andreas Theiss, said she was not giving media interviews - but he insisted she had no personal dealings with Madoff.

”It's just not true,” Theiss told AP.

”There are some investors who lost money. Even the Kohn family lost a lot of money, full stop,” he said. “That wasn't caused by Ms. Kohn. That was caused by Madoff.”

”Ms. Kohn is saying she never, ever got money from Mr. Madoff ... and there's no evidence of any payments like that,” Theiss added.

The Wall Street Journal, citing affidavits filed in the case, reported Friday that prosecutors from all three investigations believe Madoff - sentenced a week ago to 150 years in prison - paid Kohn in exchange for allegedly funneling billions of dollars in European investments to Madoff.  In London, the Serious Fraud Office would not comment, saying it does not identify suspects until they are formally charged.

Vienna-based Bank Medici disclosed in December that it had suffered huge losses it blamed on Madoff. It said nearly all of its Herald USA Fund and Herald Luxemburg Fund _ with a total volume of $2.1 billion - were invested with Madoff.  In subsequent interviews with Austrian media, Kohn has characterized herself as one of Madoff's biggest victims and has described Medici's ordeal as a personal and professional tragedy.  In late May, the Financial Market Authority - Austria's top financial supervisory authority _ revoked Bank Medici's banking license.

Kohn, a former adviser to Austria's economics and foreign affairs ministers and the Vienna Stock Exchange, owned 75 percent of Bank Medici, which recently changed its name to 20.20 Medici AG. Bank Austria, a unit of Italy's UniCredit SpA, held the remaining 25 percent.  The Journal said prosecutors suspect Kohn may have used the Medici funds as “feeders” that supplied Madoff with an estimated $3.5 billion from European investors. In return, it said, they believe she was paid more than $40 million.

But Theiss, her attorney, said Kohn headed Medici's supervisory board, not the bank itself.

”Her job was not to generate business,” he said. “Her job was only to control and to check and to act as a supervisor - not to work at the front.”


Democratic fundraiser convicted of corruption
CT POST
By TOM HAYS Associated Press Writer
Updated: 05/19/2009 11:18:53 AM EDT

NEW YORK—Longtime fundraiser Norman Hsu was convicted Tuesday of violating campaign finance laws in a case that became an embarrassment to Secretary of State Hillary Rodham Clinton and other prominent Democrats. Prosecutors had argued that Hsu, 58, used straw donors to make thousands of dollars in campaign donations to bypass rules limiting the amount any single individual or group can donate.

Hsu's defense argued he was framed by investors who cut deals with the government to avoid prosecution.

A federal jury in Manhattan convicted Hsu after deliberating for over two days.

A prosecutor said during closing arguments Monday that Hsu thought he could get away with breaking campaign contribution laws by using actresses and other political neophytes as straw donors.

During the trial that began May 12, prosecutors played a voicemail recording of Clinton, then a senator, effusively praising Hsu for his loyal support. After his 2007 arrest, the senator returned more than $800,000 to donors whose contributions were linked to him.

Jurors also heard testimony from several investors who recounted how Hsu wowed them by showing off his political connections. Another witness has testified she met President Barack Obama, Secretary of State Clinton, President Bill Clinton, Sen. John Kerry, Sen. Ted Kennedy and Rep. Patrick Kennedy of Rhode Island at fundraisers she attended with him.

Television actress Susan Chilman testified that she given nearly $42,000 to Hillary Rodham Clinton and other Democratic candidates. Once Chilman took out her checkbook, Hsu would simply give her a name and an amount, she said.

Hsu's trial came just days after he pleaded guilty to 10 counts of wire and mail fraud, admitting that he cheated investors of at least $20 million in a Ponzi scheme.



NY Trustee Sues Connecticut Fund in Madoff Case
NYTIMES
By THE ASSOCIATED PRESS
Filed at 8:34 p.m. ET

May 18, 2009


NEW YORK (AP) -- The New York trustee overseeing the liquidation of Bernard Madoff's assets has reportedly sued another of his major investors.

In a complaint filed Monday in bankruptcy court in Manhattan, the trustee claims Fairfield Greenwich Group ignored clear warning signs Madoff was orchestrating a giant Ponzi scheme. He wants the Connecticut fund to return $3.5 billion to pay off claims from burned investors.

Like other investors sued by the trustee in recent weeks, Fairfield Greenwich has claimed to be an innocent victim of the disgraced financier.

The 70-year-old Madoff pleaded guilty in March to charges that his secretive investment advisory operation was a multibillion-dollar scam. The former Nasdaq chairman faces up to 150 years in prison.

Side suites...Fairfield's here.
Cuomo Sues Financier for Fraud Over Funds Invested With Madoff
NYTIMES
By DIANA B. HENRIQUES
April 7, 2009

J. Ezra Merkin, a prominent New York financier whose private clients lost more than $2 billion in the collapse of Bernard L. Madoff’s Ponzi scheme, has been accused of fraud and deception in a civil lawsuit filed Monday by the New York attorney general, Andrew M. Cuomo.

The lawsuit, filed under state charity and securities laws, claims that Mr. Merkin improperly collected more than $470 million in fees from his clients, who included more than a dozen nonprofit organizations, by “falsely claiming he actively managed their funds” when in fact he simply handed their money over to Mr. Madoff, without adequate investigation or oversight.

The complaint charged that Mr. Merkin had failed to carry out the diligent research and investigation he had promised, and in some cases had deliberately deceived clients about investing with Mr. Madoff.

“Merkin’s deceit, recklessness, and breaches of fiduciary duty have resulted in the loss of approximately $2.4 billion,” according to the complaint filed by Mr. Cuomo’s office, which opened an investigation of Mr. Merkin soon after the Madoff scheme collapsed in mid-December.

The accusations echo charges that have already been made against Mr. Merkin in private lawsuits filed by some affected charities and institutions, which include the New York University Law School and a charitable foundation established by Mortimer B. Zuckerman, the publisher and real estate executive.

A lawyer for Mr. Merkin, Andrew J. Levander, could not immediately be reached for comment, but he has said in the past that his client would “fully cooperate with any investigation by the New York attorney general’s office.”

Exhibits filed with the complaint on Monday include transcripts of extensive interviews with Mr. Merkin, in which he was questioned about his relationship with Mr. Madoff, whom he said he had met in “the very late ’80s, maybe 1990.”

Mr. Madoff, who is in jail awaiting sentencing, has pleaded guilty to defrauding clients up more than $65 billion they believed they had in their Madoff accounts since the early 1990s, although federal prosecutors say the fraud began at least a decade earlier.

Mr. Merkin’s three investment funds — Ascot Partners, Ariel and Gabriel — had been either fully or partially invested with Mr. Madoff since 1990, according to the complaints. The Ascot fund was formed in 1992 “for the sole, but undisclosed, purpose of serving as a feeder to Madoff,” according to the state complaint.

Despite what Mr. Cuomo’s office portrayed as a minimal role in managing his clients’ assets, Mr. Merkin collected hundreds of millions of dollars in management fees from his clients — fees which dwarfed Mr. Merkin’s personal losses in the Madoff fraud, according to the complaint.

Since Mr. Madoff’s arrest on Dec. 11, Mr. Merkin has avoided any public comment. He retained his position as president of the Fifth Avenue Synagogue, but has left many of the other boards on which he served.

New York University is suing Mr. Merkin over $24 million it lost. According to its lawsuit, its chief investment officer had specifically rejected a suggestion by Mr. Merkin last year that part of the school’s endowment be invested in a Madoff fund — without knowing, or being informed by Mr. Merkin, that he had been investing part of its endowment with Mr. Madoff for eight years.

Other victims who had invested with Mr. Merkin include Yeshiva University, where he was a trustee and led the investment committee. Yeshiva lost $110 million of the money invested with him. Marc Rich, the financier who was pardoned by President Bill Clinton, lost $10 million to $15 million. And Bard College, where Mr. Merkin sat on a board, estimates losses of $3 million of its $11 million investment.

Through its civil complaint, Mr. Cuomo’s office is seeking restitution and unspecified damages from Mr. Merkin, who has long been a formidable figure in finance and philanthropy.

His father, Hermann Merkin, fled Nazi Germany and ultimately made a fortune in the shipping business. The elder Esther Merkin became a major figure in New York’s Jewish philanthropic elite and was a founder of the Fifth Avenue Synagogue, a center of modern Orthodox Judaism. He contributed millions to help build Yeshiva University and the Merkin Concert Hall near Lincoln Center.

His son expanded his social connections with important links on Wall Street, specifically with Stephen A. Feinberg, head of Cerberus Capital Management, a private investment fund with big stakes in Chrysler and GMAC, the financing arm of General Motors. Mr. Merkin became an investor in Cerberus and put money from Merkin funds into Cerberus and its portfolio companies.

In 2006, Cerberus appointed Mr. Merkin as nonexecutive chairman of GMAC, a position Mr. Merkin recently resigned early this year.


 
Madoff’s Future: Where the Case Is Likely to Go
NYTIMES "Dead Book"
Peter J. Henning, a professor at Wayne State Law School, occasionally writes as a guest blogger for the Deal Professor. Mr. Henning specializes in issues related to white-collar crime and is a former editor of the White Collar Crime Law Prof Blog.
March 11, 2009, 3:52 pm

Bernard L. Madoff is prepared to plead guilty to charges arising from his vast Ponzi scheme, which cost investors tens of billions of dollars. At a hearing on Tuesday to consider his waiver of conflicts of interest with his lawyer, Mr. Madoff’s counsel indicated that his client would enter a guilty plea, and prosecutors filed an 11-count criminal information.

As Winston Churchill once said, “It is the end of the beginning.” The government’s investigation will continue, and the fallout from the fraud will reverberate for years. Mr. Madoff’s anticipated guilty plea provides some indications as to where the case is headed:

The 11 Charges: The government’s criminal complaint is rather bare-bones, giving little more than an outline of the long-running fraud, with few details of particular misstatements or deceptive conduct. Prosecutors did not go into the usual amount of detail one would see in a grand jury indictment because of the expectation that Mr. Madoff will plead guilty, so only the minimum is required.

The 11 charges include the usual securities, mail and wire fraud counts, along with theft from an employee pension plan. There are two money-laundering counts, which serve as the basis for forfeiture claims that will allow the government to seize all of Mr. Madoff’s assets.

Asset forfeiture is an important tool for taking anything connected to the fraud, as I discussed in an earlier Deal Professor post, “Can Ruth Madoff Keep the Penthouse?” The government has asked the district court to issue an order authorizing the forfeiture of up to $170 billion from the fraud, which is far more than any amount previously discussed in connection with Mr. Madoff’s scheme.

One important new detail in the criminal information is that Mr. Madoff used $250 million from his investment advisory business to prop up his stock trading operation, which had been viewed as a separate — and legitimate — enterprise. If money from the fraud was used by the brokerage firm, then that business is subject to forfeiture, and any funds derived from it may be the proceeds of the crimes and also subject to forfeiture under the “relation back” principle. The government could then seek to seize assets from Mr. Madoff’s wife, sons, brother and other former employees if anything they own can be traced to that part of his business operation.

A Little Cover for the S.E.C.: In addition to the fraud and money-laundering charges, the criminal information includes charges of false statements, perjury and filing false documents with the Securities and Exchange Commission. These counts may give the S.E.C. a little relief from the unrelenting criticism it has received for not discovering Mr. Madoff’s Ponzi scheme earlier.

The perjury relates to an aborted investigation of Mr. Madoff in 2006 in which he testified about his investment operation. The net result of that case was to have him register as an investment adviser, which is the basis for the other two counts for making false statements in his registration with the commission and later filing a false audit report. The S.E.C. never did catch a whiff of the fraud in its investigation.

The S.E.C. can now point to these charges as showing it was deceived just like everyone else. Whether that absolves the agency for not having discovered even a hint of the fraud much earlier is another question, especially when a whistle-blower had been raising doubts about Mr. Madoff for years.

A Guilty Plea, Not a Plea Bargain: Prosecutors stressed in a letter to Mr. Madoff’s counsel that there is no plea agreement. Instead, Mr. Madoff will plead guilty to the 11 charges, which means there is no known arrangement with the government for him to cooperate or provide any assistance in the future.

By simply pleading guilty, Mr. Madoff preserves the stated position that he acted alone in the fraud, fooling his family and employees for years. At the plea hearing, he will only have to admit to the charges without necessarily having to describe in detail what happened or how he perpetrated the crime.

The hearing most likely will be quite unsatisfying for those who want to hear him explain what he did and whether he feels even the slightest remorse. I expect that he will say the minimum necessary to plead guilty, perhaps simply mumbling “guilty as charged” to the 11 counts and reiterating the government’s minimal allegations of misconduct.

Entering a plain guilty plea to the criminal complaint without any agreement to cooperate also means Mr. Madoff could be a witness for anyone else charged in connection with the Ponzi scheme, including any family members who might be charged. If prosecutors indict others for assisting him, the defense lawyers could call him to testify that he was the only one responsible for the fraud and that he deceived those who worked for him as much as the investors.

Would a jury actually believe Mr. Madoff? All a defendant has to do is raise a reasonable doubt about his or her own guilt, and having the primary perpetrator take all the blame could be an effective defense to charges of complicity in the scheme. Odd as it may sound, Mr. Madoff could be a valuable defense witness if the government seeks to convict others for assisting in the execution of the Ponzi scheme.

What Happens to His Bail: The bail issue is a bit complex. Mr. Madoff has been free on $10 million bail since being charged in December, but he is being held under 24-hour house arrest in his Manhattan penthouse apartment. He was allowed to remain out on bail because, under federal law, there is a presumption in favor of release if the defendant does not pose a risk of flight or a threat — which means a physical danger — to witnesses or the community. After a conviction, however, the burden shifts to the defendant, under 18 U.S.C. § 3143(a), to show by “clear and convincing evidence” that the person is not a flight risk or dangerous.

Once Mr. Madoff pleads guilty, the presumption is in favor of his being incarcerated unless he can demonstrate otherwise to Judge Denny Chin of Federal District Court in Manhattan. Whether he can do that remains to be seen, but there is a chance that he will be led away from court in handcuffs at the end of the plea hearing. If that happens, he very likely would be held at the Metropolitan Correctional Center until sentencing, which is not a very pleasant place to be.

How Much Time Is He Facing: The total possible sentence for the 11 crimes charged in the criminal information is 150 years, but it is unlikely Judge Chin will impose a sentence of that length.

Under the Federal Sentencing Guidelines, which are only advisory, the recommended sentence is life imprisonment based on a range of factors, including the amount of the loss, the number of victims, the sophistication of the scheme and the use of a registered broker-dealer to commit the fraud. Interestingly, by pleading guilty, Mr. Madoff could qualify for a slight reduction in the sentencing range for “acceptance of responsibility” — saying “sorry” is not a requirement for this benefit.

While the federal guidelines call for a life sentence, the highest prison term for the crimes is 20 years for the mail fraud, wire fraud and money-laundering counts. Judge Chin would have to sentence Mr. Madoff to consecutive prison terms on the various charges to impose a sentence higher than 20 years, and federal judges tend to impose concurrent sentences. Thus, 20 years is a likely prison term in this case, although the judge could decide to add an extra 5 or 10 years by having one of the other charges, such as perjury, run consecutively.

Even a 20-year prison term is virtually a life sentence for a defendant who is 70 years old. For crimes that are the financial equivalent of murder, that seems like a fair sentence.

The Sentencing Hearing: Unlike the plea hearing, at which Mr. Madoff’s victims are likely to play only a minor role at most, the sentencing hearing will allow the victims to fully vent their positions on the appropriate punishment. Federal Rule of Criminal Procedure 60(a)(3) provides, “The court must permit a victim to be reasonably heard at any public proceeding in the district court concerning release, plea or sentencing involving the crime.”

Sentencing may be the best — and last — opportunity for victims of the Ponzi scheme to communicate their pain to Mr. Madoff. I would recommend that the first victim to speak be the Nobel Peace Prize winner Elie Wiesel, who has already described Mr. Madoff as “one of the greatest scoundrels, thieves, liars, [and] criminals.” Who better to express the harm inflicted by the defendant’s greed and brazen disregard for the financial well-being of his clients and, in some cases, lifelong friends?

Once Mr. Madoff is sentenced, he will come under the authority of the Federal Bureau of Prisons, which may assign him to a medium-security prison if his sentence is in the 20-year range. But I expect that he will end up in a low-security prison because he is not a danger to anyone and, at his age, such a facility is probably better suited to his needs. This will end the first chapter in the biggest Ponzi scheme in history.



Fairfield sues pension fund advisers

CT POST
By Genevieve Reilly, staff writer
Posted: 02/26/2009 05:53:14 PM EST

FAIRFIELD -- The town's pension boards have filed lawsuits against the former consultant and auditor for the municipal retirement funds, claiming the companies failed to do their jobs in protecting the town's retirement assets in the alleged Ponzi scheme orchestrated by trader Bernard Madoff.  NEPC LLC, formerly New England Pension Consultants, and KPMG LLP, the auditor, are named in the suit filed Thursday in Bridgeport Superior Court.

The pensions lost close to $42 million invested in Madoff's hedge fund through a feeder fund, Maxam Capital. David Golub, the lawyer hired by the retirement panels, said at least one more lawsuit is expected to be filed in the coming weeks against Tremont Partners, an affiliate of MassMutual, and Maxam.

"This is the first in a series of litigations we will be bringing," Golub said.

Golub said the issue with NEPC and KPMG is the firms were hired particularly because of their supposed expertise in alternative investments, like hedge funds. From 2006 to December 2008, NEPC undertook "no due diligence investigation of Madoff," according to the suit.

"The pension consultant especially touted themselves as having particular expertise in evaluating alternative investments such as hedge funds," Golub said. "The pension plan in Fairfield has a right to rely on the experts who were sophisticated."

The consultants, he said, spend their days evaluating stocks and investments on a far different basis than the volunteers who serve on the town's two retirement boards.

KPMG's audits in 2006 and 2007 of the feeder funds and Madoff used inaccurate data and failed to notify the town boards the financial statements could not be verified.

Had the town been advised the financial statements could not be verified, the town would have withdrawn its investments, the suit states.

Golub said color-coded charts provided by NEPC that indicated the risk of the pensions' different investments listed the Madoff fund as a "conservative" risk. "The pension board was told it was the most conservative of their investments," he said.

He said for whatever reason, the Securities and Exchange Commission chose not to do a full investigation of Madoff when financial experts raised questions about the fund, but that cannot be used as a defense by either NEPC or KPMG.

"These two entities were charged, by their retainers [with the pension boards], to do a full investigation," Golub said. Had these professionals done their jobs well, he said, potential problems should have been detected in the Madoff fund and its returns.

First Selectman Kenneth Flatto, who serves as chairman of the Police & Fire Retirement Board, said the town "did not find Madoff." Rather, he said, the investment was recommended to the board by the previous pension consultant, and continued to be touted as a conservative investment by NEPC.

When NEPC was hired in 2006, the town had an investment in American Masters Broad Market Fund, a hedge fund in the form of a limited partnership that placed all investments under the management of Madoff. In 2007, the plan was approached by Maxam Capital Management, formed by a former principal of Tremont Partners Inc. that had recommended the original investment in the Broad Market Fund.

Maxam indicated it was starting a limited partnership hedge fund that, like Broad Market, would place all its investments under Madoff. Maxam offered to charge a slightly lower fee if the plans switched from Broad Market to Maxam.

The switch to Maxam was recommended by NEPC.

In a statement e-mailed to the Connecticut Post, however, NEPC said when the firm was retained by Fairfield in 2006, it recommended the trustees reduce their exposure to Madoff, but the trustees disregarded such advice.

"Given these facts, it is disappointing that Fairfield has chosen to sue NEPC," the company said. "To be clear, NEPC, at all times, fulfilled its responsibility to provide prudent and professional investment advice to the town's pension funds and their beneficiaries. NEPC will vigorously defend against the suit and is confident that, when all the facts are known, it will prevail."

Golub said there is also a possibility of a third lawsuit against individuals more "actively involved in the fraud."

In addition, Town Attorney Richard Saxl said a claim has been filed with the Securities Investor Protection Corp. on behalf of 1,567 current and former employees claiming a credit of $41.88 million lost through the Madoff scandal.

Money invested in hedge funds is guaranteed by the federal government up to a maximum of $500,000, but both Golub and Saxl said there has been no determination yet whether that $500,000 limit is for the retirement program as a whole, for the two retirement boards separately or all municipal employees as individuals.



Madoff Scandal
Two Physicians Sue Bank, Pension Firm Over Madoff Losses
The Hartford Courant
By LYNN DOAN
February 23, 2009

Dr. Stephen R. Levinson was an ear, nose and throat surgeon for 26 years. He wrote two books for the American Medical Association.  When it came to his retirement fund, the physician from Easton thought he was playing it smart by investing solely in bonds and an "ultra-conservative" investment fund managed by Bernard Madoff.  Satisfied with steady returns, he eventually poured most of his retirement savings into Madoff's fund.

Then he brought in his brother. And his two daughters, whom he'd lectured about building nest eggs, even while they were in college. It was not until 22 years later — last December — that Levinson learned he'd been duped.  He was among a group of Fairfield County doctors who invested with Madoff, the once esteemed fund manager now accused of running a $50 billion Ponzi scheme to defraud investors.

In an effort to recoup some of their losses, Levinson and another doctor have filed suit against Westport National Bank, custodian of the account with Madoff, and Westport-based PSCC Services Inc., the pension consulting firm that recommended Madoff's fund to them.  The suit, filed on behalf of the two doctors, their families and other colleagues who invested in the account, basically says the bank and pension firm failed to recognize "numerous red flags" that should have tipped them off that Madoff's fund was bogus.

Levinson said Friday that, despite the lawsuit, he will probably never restore his depleted retirement fund or erase the guilt he feels for roping in his brother and daughters.

"It was devastating," Levinson said. "My family trusts me. And I trusted these people. There's no way to avoid this feeling of guilt and of not living up to my responsibility to my children, who are wonderful."

Levinson said he was telling his story to show that the effects of Madoff's alleged swindle run deeper than the much-publicized nonprofit organizations, charities and trusts that suffered after making large investments in the fund. The scandal ruined the savings of real people, he said, like him and his family.

Levinson and Dr. Richard E. Layton of Baltimore filed their lawsuit in U.S. District Court in Hartford on Feb. 13. They say in the suit that Westport National Bank "deprived [them] of the security that an independent custodian is retained to provide."

They also accuse the bank and PSCC Services of violating the federal Racketeer Influenced and Corrupt Organizations Act and the state Unfair Trade Practices Act, breach of fiduciary duty, fraud, negligent misrepresentation, aiding and abetting conversion and statutory theft, and other offenses.

"... There were numerous red flags that should have alerted defendants to the truth, but were recklessly disregarded," the lawsuit says.

Instead, they "completely ignored these red flags and did little more than collect significant fees," according to the lawsuit.

In a letter to the bank's clients last month, Rich Cummings, president of Westport National Bank, said the bank had taken on the Madoff account from another financial institution in 1999 and that "nearly all of these individuals and entities had been investing with Madoff long before the bank was founded in 1998."

"Each of these Madoff investors entered into a custodian agreement with the bank, and became a custodial client of the bank. This agreement reflected the fact that each custodial client directed the bank to give Madoff 'full discretionary authority' to invest the custodial client's funds."

TD Banknorth, which through a series of mergers acquired a bank that once served as custodian of the Madoff account, is also listed as a defendant in the lawsuit. TD Banknorth officials said Friday that they wanted to review the lawsuit before commenting. PSCC Services did not return calls for comment.

The doctors are suing for the estimated $60 million that they, their families and others who had invested in the account lost in retirement savings.  Now semi-retired, Levinson declined to say exactly how much his family lost in the scheme, but generally put his brother's loss at several hundred thousand dollars and each of his daughters' loss at less than $100,000 each. Levinson said his personal loss was "in the low seven-figure range."

As the list of Madoff's victims grows and details of the scandal continue to unfold, Levinson and his wife have occupied themselves with thinking up small ways of dealing with significantly shrunken savings.  They no longer go out to eat. They discontinued their landscaping service. Various home improvements and a two-week trip to the Mediterranean have been put on hold, and they can no longer help their daughters with medical school expenses, Levinson said. The couple are exploring a new life insurance policy because, without their "safety belt," Levinson said, he's afraid his wife would be left vulnerable if he died.

"There's no starting over to rebuild a nest egg at this age. It just seems like there's no personal recourse," said Levinson, who turns 63 next month. "It's like coming home and finding out your 30-year house has burned down and having your insurance company shut down on the same day."

Layton, who was not available for comment, is a pediatrician who had been planning to retire in the next few years, said Edith M. Kallas of the New York law firm Whatley, Drake & Kallas, which is representing the doctors in the lawsuit.  Kallas said Layton is one of several involved in the lawsuit who are no longer in a position to retire because their savings have been swept away in the Madoff scheme.

"This is not extra money. It's having a significant toll on them," Kallas said. "They worked very hard for what they have. They didn't expect this to happen to them."

"My family trusts me. And I trusted these people. There's no way to avoid this feeling of guilt and of not living up to my responsibility to my children, who are wonderful."

Trustee: No Evidence Madoff Bought Any Securities
NYTIMES
By THE ASSOCIATED PRESS
Filed at 12:11 p.m. ET

February 20, 2009


NEW YORK (AP) -- The trustee in charge of untangling the mess brought on by the Bernard Madoff scandal told investors Friday there was no indication the disgraced money manager bought securities for his clients.

''We have no evidence to indicate securities were purchased for customer accounts,'' said Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff's assets.

He told a meeting for investors that he has recovered $650 million so far and noted that victims could qualify for up to $500,000 in funds from the Securities Investor Protection Corp., also known as the SIPC.

Madoff was arrested in December after investigators said he confessed to his sons that he had swindled investors of $50 billion in a Ponzi scheme. The 70-year-old former Nasdaq chairman remains confined to his Manhattan apartment under house arrest.  Picard detailed the history of the case for the group and how claims will be processed. He said his office has received 2,350 claims so far and expects the number to double. He also said the deadline for submitting claims is July 2.

At the hearing, David Sheehan, a lawyer working for Picard, called the alleged fraud ''a Ponzi scheme where no stock was purchased.''

Sheehan also said the SIPC will be trying to recover ''false profits'' earned by some investors.

''There wasn't any stock bought or sold,'' he said. ''It was all just made up. ... You got somebody else's money.''

Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts.  Picard said his office and criminal investigators are reviewing a mountain of evidence, including 7,000 boxes of records at a Queens warehouse that go back more than a decade.  Sheehan added that investigators are reviewing ''thousands and thousands of e-mails'' from Madoff's operation.

Picard also said his office plans to issue dozens of subpoenas in the coming weeks related to Madoff's business dealings.  He cautioned that the criminal investigation is ongoing and said: ''We are operating out of a crime scene. There is a limit to what we can say.''

Picard called the meeting at a museum in lower Manhattan for investors who lost money because of the alleged fraud. An auditorium that holds 460 was mostly full although it wasn't clear which of those attending had actually invested with Madoff.  One investor complained about both Madoff and the federal Securities and Exchange Commission.  Raymond Spungin, 77, of Staten Island told Picard he had checked with the SEC before investing with Madoff in the early 1990s.

''They said Madoff was the greatest,'' he said. ''We're the victims not only of Madoff but of the incompetence of the SEC.'' He and his wife believe they had $1.8 million in two accounts.

Experts have said that the first of any recovery payments for investors who lost money with Madoff might be years in the future.  The most likely source is liquidation of Madoff's personal assets and any cash in accounts tied to the investment firm. Picard has identified more than $830 million in liquid assets that may be subject to recovery -- far short of the potential tens of billions of dollars in losses.

Madoff has homes in Montauk, N.Y., and Palm Beach, Fla., a penthouse in Manhattan and a handful of luxury yachts. Prosecutors have accused him of mailing off millions of dollars in personal assets to family members while under house arrest.

Outside of liquidating assets, some investors in the scheme could actually be on the hook to make payments in a situation known as ''clawbacks.'' In that case, investors that received alleged profit payments might have to return the money for redistribution.  Sheehan said the assets of Madoff ''insiders'' could also be seized and liquidated.

''We are looking at every member of the Madoff family,'' he said.


Money Manager Is Missing in Florida
NYTIMES
By REUTERS

January 18, 2009


MIAMI — A Florida money manager is missing and the police have opened an investigation into the possible disappearance of “hundreds of millions” of dollars, according to the authorities.

The police are searching for Arthur Nadel, 75, a prominent Sarasota philanthropist and fund manager who was reported missing by his family Wednesday. He left a note, described as a suicide note by The Sarasota Herald- Tribune, that reported that investors could be out as much as $350 million.  The Sarasota police are investigating complaints from at least five investors in Mr. Nadel’s funds, run from a management office in Sarasota, that their money has disappeared.

“It was brought to our attention that there has been a very significant number of victims with a very significant amount of money that has disappeared,” Captain Bill Spitler of the Sarasota police said. “Allegedly it’s hundreds of millions of dollars.”

The investigation began just over a month after the authorities arrested Bernard L. Madoff, the suspected mastermind of a Ponzi scheme that may have cost investors $50 billion.

Lieutenant Chuck Lesaltato, a spokesman for the Sarasota County Sheriff’s Office, said investigators were told Mr. Nadel left his home in a Sarasota suburb Wednesday morning for work but later called his stepson and told him there was a note at his house. The family then called the police.

“They thought he was distraught,” Lesaltato said, adding that he could not divulge the contents of the note. “We are following up a couple of leads. We are concerned for his safety.”

The newspaper reported that Neil Moody, an associate of Mr. Nadel, told investors in a statement that the funds “may have virtually no remaining value.” It said Mr. Moody had contacted the U.S. Securities and Exchange Commission and other authorities to report the situation.  A call to the fund’s offices was not returned.

Spitler said that the police investigation began on Friday afternoon after calls from at least five possible victims and that many more called after news of the situation broke.

“You’re talking about people who have lost the majority of their life savings,” he said. “We are investigating all of the funds at that place.”

“Many of our victims have lost $500,000 and up,” he said.

Mr. Nadel’s wife, Peg, told the newspaper: “The way I want to be represented is we are totally open and cooperative with all our clients and the authorities, and that includes the SEC.

“We have nothing to hide. But until our counsel has a statement prepared for us to make public, we cannot comment on what is happening here.”



’92 Ponzi Case Missed Signals About Madoff
NYTIMES
By ALEX BERENSON
January 17, 2009

Seventeen years ago, federal investigators questioned for the first time whether Bernard L. Madoff was connected to a Ponzi scheme. Their inquiry centered on Frank Avellino, an accountant who had been funneling investors to Mr. Madoff since the 1960s.  The investigators did not get far. Within days, Mr. Avellino agreed to return to investors the money he and his partner had raised and to pay a small fine to the Securities and Exchange Commission. The inquiry petered out, and Mr. Avellino — represented in the case by Ira Lee Sorkin, the same lawyer who now represents Mr. Madoff — kept sending money to Mr. Madoff.

Now questions have again arisen about the ties between Mr. Madoff and Mr. Avellino. A lawsuit claims that Mr. Avellino warned his housekeeper, who had invested with him, that her money was lost 10 days before Mr. Madoff’s fraud became public.  Through his new lawyer, a former federal prosecutor, Mr. Avellino declined to comment on his relationship with Mr. Madoff.

But archived court documents from the 1992 case reveal numerous red flags that raise questions about the S.E.C.’s failure to examine Mr. Avellino and Mr. Madoff long before Mr. Madoff’s apparent Ponzi scheme spread worldwide. The documents show that Mr. Avellino and Michael Bienes, his business partner, kept almost no records at Avellino & Bienes, a firm that oversaw $440 million. When court-appointed auditors asked Mr. Avellino to prepare a balance sheet, he responded that “my experience has taught me to not commit any figures to scrutiny.”

Subsequently, Mr. Sorkin and Mr. Avellino managed to curtail the audit, even though a federal judge eventually concluded that Mr. Avellino had not been a credible witness in the case.  The S.E.C. also took at face value Mr. Avellino’s depiction of the deal he offered investors, which guaranteed returns of up to 20 percent a year while requiring him and Mr. Bienes to make up any shortfalls.  It is unclear whether commission investigators even discussed the case with Mr. Madoff. His name does not appear in the agency’s complaint, which referred only to an unnamed broker.

The government lawyers who handled the case are now in private practice. Richard Walker, then head of the S.E.C.’s New York office, is general counsel of Deutsche Bank. Kathryn Ashburgh, the lead lawyer on the case, works from her home in McLean, Va. And Keith W. Miller, a senior lawyer in the New York office, is a partner at Paul, Hastings, Janofsky & Walker. Through a spokesman, Mr. Walker declined to comment on the case. Mr. Miller and Ms. Ashburgh did not return calls.

Mr. Avellino did not respond to calls or visits to his homes in Nantucket, Mass.; Palm Beach, Fla.; and New York, or to messages left with his son Joseph Avellino in Chester, N.J. Gary Woodfield, the former federal prosecutor who represents Mr. Avellino, also declined to comment. Francis B. Brogan, a longtime lawyer for Mr. Avellino and a partner at Greenberg Traurig in Fort Lauderdale, Fla., asked that questions be e-mailed to him, then did not respond.

Mark Raymond, a lawyer for Mr. Bienes, said that his client had no knowledge of Mr. Madoff’s fraud and had lost tens of millions of dollars, most of his savings, in the fraud. Mr. Bienes worked mainly as a fund-raiser, while Mr. Avellino actively managed Avellino & Bienes, according to court documents and people who knew the men.  Mr. Avellino has been connected to Mr. Madoff for his entire career. After graduating from the City University of New York in 1958, Mr. Avellino began working as an accountant at a firm run by Saul Alpern, Mr. Madoff’s father-in-law.

Mr. Madoff also briefly ran his securities business from the firm’s offices. As early as 1962, according to the S.E.C.’s complaint against him, Mr. Avellino began raising money for Mr. Madoff, who was running a small brokerage company. Mr. Bienes joined in 1965.  In 1977, Mr. Avellino and Mr. Bienes formed an accounting firm in Midtown Manhattan. Mr. Avellino owned half the company; the remainder was owned by Mr. Bienes and his wife, Dianne. In 1980, the Bieneses moved to Fort Lauderdale, while Mr. Avellino remained in New York.

The two men gradually shifted their focus from accounting to raising money for Mr. Madoff. Their business expanded until 1992, when the S.E.C. received marketing materials showing that Avellino & Bienes had promised investors annual returns of up to 20 percent. Commission officials said at the time that they believed they had stumbled upon a Ponzi scheme.

But when the investigators went to Mr. Avellino, they found, to their surprise, an apparently legitimate explanation. The money, $441 million from 3,200 clients, was being managed by Mr. Madoff, whose brokerage firm by then was one of the biggest stock traders on Wall Street. In a deposition, Mr. Avellino explained that he had promised returns of 13.5 to 20 percent a year. If Mr. Madoff fell short of producing those returns with his stock trades, Avellino & Bienes would make up the difference, Mr. Avellino said.

“If I was short and there was a shortfall, I would be in trouble,” Mr. Avellino said in a deposition.

No one at the securities commission seems to have questioned why Mr. Avellino and Mr. Bienes offered clients a double-digit guaranteed return on money that they did not even control. Nor do the records offer any hint that the commission considered whether Mr. Madoff, rather than Avellino & Bienes, might be operating a Ponzi scheme.  Instead, once the commission was satisfied that the money existed in Mr. Madoff’s accounts and would be returned, it quickly reached a deal with Mr. Avellino and Mr. Bienes. Through Mr. Sorkin, the lawyer who once oversaw the regulator’s New York office, the men agreed to return the money to investors, shut down their firm, undergo an audit and pay a fine of $350,000.

So went the public version of the case presented by the agency. “There’s nothing to indicate fraud,” Martin Kuperberg, an administrator at the commission, told The Wall Street Journal on Dec. 1, 1992.

But court records reveal a much messier investigation. On Nov. 17, 1992, as part of the deal, a federal judge ordered Price Waterhouse to audit the financial statements of Avellino & Bienes.  The accountants soon learned that Avellino & Bienes did not keep conventional books, only the basic ledgers necessary to prepare tax records. Price Waterhouse then asked Mr. Avellino to put together records for 1992. He declined.

“My experience has taught me to not commit any figures to scrutiny when, as in this case, it can be construed as ‘bible’ and subject to criticism,” Mr. Avellino wrote somewhat ungrammatically. “In this present instance, quite severely. I explained how the profit and loss can be computed from the records you now hold in your possession that Bernard L. Madoff and I supplied.”

Even after learning of the missing records, the commission did not reopen its investigation.  The case then took an unusual turn. Mr. Avellino and Mr. Sorkin complained about Price Waterhouse’s fees and demanded that federal Judge John E. Sprizzo, who was overseeing the case, quickly end the audit.

“I am not a cash cow, and I will not be milked,” Mr. Avellino wrote in an affidavit.

By the end of January 1993, both the securities investigation and the Price Waterhouse audit were effectively over. But in a hearing over the disputed fees in April, Judge Sprizzo sharply criticized Mr. Sorkin, who acknowledged that Avellino & Bienes had agreed to the audit in part to avoid a deeper investigation.

“If you didn’t consent to the audit, the commission could have pursued other remedies. They would have asked for a hearing, they would have asked for discovery,” Judge Sprizzo said.

“That is true,” Mr. Sorkin said.

Judge Sprizzo said he did not believe Mr. Avellino’s testimony. Mr. Avellino “was worried about self-incrimination,” the judge said. He ordered Avellino & Bienes to pay Price Waterhouse its bill of $428,679 in full.

In an interview, Mr. Sorkin said this week that he could not recall whether Mr. Madoff referred Mr. Avellino and Mr. Bienes to him. He has known Mr. Madoff since at least the early 1980s, he said, but did not represent Mr. Madoff at the time of the Avellino case.

After the settlement, Mr. Avellino and Mr. Bienes disbanded their firm. The Bieneses, who own a $7 million house in Fort Lauderdale, became philanthropists, contributing millions of dollars to Holy Cross Hospital in Fort Lauderdale and the Broward County Library. Mr. Avellino and his wife, Nancy, split their time between Nantucket, Manhattan and south Florida. In 2003, the Avellinos bought a $4.5 million house in Palm Beach less than five blocks from Mr. Madoff’s house there. Their Manhattan apartment is similarly close to Mr. Madoff’s apartment.

Through Mr. Brogan, his lawyer, Mr. Avellino set up a web of foundations and partnerships, including the Kenn Jordan Foundation. The foundation had $6 million in assets, at least some of which were invested with Mr. Madoff, and was nominally controlled by a man named Kenneth Jordan, who lived in a small Fort Lauderdale apartment.

Lola Kurland, who retired as the office manager for Avellino & Bienes, said in an interview that Mr. Jordan was a “personal friend” of Mr. Avellino. After Mr. Jordan died in 1999, the Kenn Jordan Foundation transferred its assets to Mr. Avellino’s family foundation and was dissolved. But Mr. Avellino continued to use Mr. Jordan’s name to raise money from investors, according to a lawsuit filed against him in state court in Nantucket last month.

His former housekeeper, Nevena Ivanova, alleges in that suit that Mr. Avellino raised $200,000 from her and her husband in September 2006 — and he directed her to make out her check to Kenn Jordan Associates, “a fictitious entity.” In July 2008, Ms. Ivanova asked Mr. Avellino to return her investment, which at the time stood at $124,000. He put her off for months, according to the lawsuit. Then, on Dec. 1, 10 days before Mr. Madoff’s Ponzi scheme became public, Mr. Avellino told Ms. Ivanova that her money had been lost.


 

Ruth Madoff Finally Breaks Her Silence
NYTIMES "Dealbook"
June 29, 2009, 1:14 pm

With Bernard L. Madoff now sentenced to 150 years in prison, his wife, Ruth, said Monday that she felt “embarrassed and ashamed” and “betrayed and confused” by his crimes.

In her first statement since Mr. Madoff’s enormous Ponzi scheme came to light in December, Mrs. Madoff assailed her husband, saying, “The man who committed this horrible fraud is not the man whom I have known for all these years.” Read Mrs. Madoff’s entire statement:

I am breaking my silence now, because my reluctance to speak has been interpreted as indifference or lack of sympathy for the victims of my husband Bernie’s crime, which is exactly the opposite of the truth.

From the moment I learned from my husband that he had committed an enormous fraud, I have had two thoughts — first, that so many people who trusted him would be ruined financially and emotionally, and second, that my life with the man I have known for over 50 years was over. Many of my husband’s investors were my close friends and family. And in the days since December, I have read, with immense pain, the wrenching stories of people whose life savings have evaporated because of his crime.

My husband was the one we (and I include myself) respected and trusted with our lives and our livelihoods, often for many, many years, and who was respected in the securities industry as well. Then there is the other man who stunned us all with his confession and is responsible for this terrible situation in which so many now find themselves. Lives have been upended and futures have been taken away. All those touched by this fraud feel betrayed; disbelieving the nightmare they woke to. I am embarrassed and ashamed.

Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years.

In the end, to say that I feel devastated for the many whom my husband has destroyed is truly inadequate. Nothing I can say seems sufficient regarding the daily suffering that all those innocent people are enduring because of my husband. But if it matters to them at all, please know that not a day goes by when I don’t ache over the stories that I have heard and read.

Madoffs Shared Much; Question Is How Much
NYTIMES
By DAVID SEGAL and ALISON LEIGH COWAN
January 15, 2009

To friends, they were “Bernie-and-Ruth” or “Ruth-and-Bernie,” a pair so inseparable that you wouldn’t mention one without the other. After nearly 50 years of marriage, they worked in the same Midtown Manhattan office, they traveled together, and they dined together night after night, just the two of them.

“They came once or twice a week, for about 22 years, and for the last five I could count on one hand the number of times they came with another couple,” says Giuliano Zuliani, owner of Primola, an Italian restaurant in Manhattan. “They always wanted a quiet table in the back, just the two of them.”

But little about the love story of Ruth and Bernard Madoff looks enviable today.

On Dec. 10, according to a court filing by the Madoffs’ lawyer, Mr. Madoff admitted to his wife and their two sons that his multibillion-dollar hedge fund was an elaborate Ponzi scheme. If that is true, Ruth Madoff learned of her husband’s crimes as suddenly as the rest of the world. One day, she was married to a stock-market genius, the next she was married to one of history’s great con men.

That, anyway, is the official Madoff version of events. At this point, as a mess that Mr. Madoff himself is said to have estimated at $50 billion lands in litigation, the main characters aren’t talking. In the absence of direct answers, all that’s left is the sort of psychological puzzle that belongs in Act II of a David Mamet drama, right before we find out who are the players and who are the played.

Was Mrs. Madoff really blindsided? In the social circles where the couple once traveled, both possibilities are unnerving — that Ruth Madoff was in on this, or that she wasn’t. If she isn’t a confederate, after all, then she arguably should be counted among Bernard Madoff’s victims. Either way, wittingly or not, she was an essential asset to her husband, humanizing him and drawing people into his orbit.

“All I will say on the subject is that it’s hard to imagine that she could live with the guy for 50 years and have no inkling,” says Donald Rosenzweig, a childhood friend of Ruth’s and an investor in Madoff Investment Securities. “Could she attract people to him? Yes. Was she out there shilling for him? I doubt it. But maybe.”

Federal prosecutors have not charged Mrs. Madoff with any crimes, and though she is currently living with her husband, who is under house arrest in their Upper East Side penthouse, she can come and go as she pleases. She has surrendered her passport and agreed to a deal with the United States attorney’s office that freezes her assets and grants her an undisclosed monthly allowance for living expenses, the cost of security for the couple and legal fees. The conditions of bail for Mr. Madoff include a $10 million bond secured by homes in Mrs. Madoff’s name.

The Legal Tangle

Ira L. Sorkin, a prominent white-collar defense lawyer who represents Mrs. Madoff and her husband, declined to comment. That the Madoffs now share a lawyer suggests she is not currently in any legal peril, lawyers say, because if prosecutors were to hint that she was a target of this investigation, she would most likely need her own representation.

But negotiations over a possible plea deal with Mr. Madoff are not over. If they stall, prosecutors could threaten to indict Mrs. Madoff as leverage.

“This is tender territory for prosecutors, because you never want to seem like you’re overreaching,” says Sean O’Shea, a lawyer who was chief of the business and securities fraud unit of the United States attorney’s office in Brooklyn. “But this is the scam of the century, so the prosecutors will leave no stone unturned. It’ll be hard for them if they have evidence against Mrs. Madoff to leave her on the sidelines. But they won’t threaten her in order to get him without very good proof.”

The Madoffs grew up in the same Queens neighborhood, Laurelton, then a lower-middle-class and predominantly Jewish area, not far from what is now Kennedy Airport. Ruthie Alpern, as she was then known, was a poised and chatty blonde with an updo and a winning smile. As a senior, she was voted “Josie College,” a ’50s-vintage yearbook honor that pegged her as preppy, bright and going places.

“She was cute and she had really good manners,” said Millie Beck, a classmate. “Always very sweet, very lovely. Kind of all-American looking.”

It’s a look she made an effort to maintain. One of the duties of a manager in Mr. Madoff’s London office was to provide Mrs. Madoff with a steady supply of Boots No. 7 Protect & Perfect Beauty Serum. Her tastes in clothing run toward Bergdorf and Barneys, but she isn’t a flashy or pretentious dresser. She wears a simple wedding band, rather than the oversize diamond that is the ring of choice among New York’s moneyed elite.

It sounds strange to say of a woman whose name is on the registration of a 38-foot yacht and who hopscotches among homes in Manhattan; Montauk on Long Island; Palm Beach, Fla.; and Antibes, France, but by the standards of her peers, Mrs. Madoff lives a relatively modest life.

‘Added to His Credibility’

She is more outgoing and warmer than her husband, business associates say, freeing Mr. Madoff to play the avuncular wizard. And that is just part of the role she has played in the success of Madoff Investment Securities. Her mere presence helped make Mr. Madoff the most reassuring of archetypes, the devoted husband, which had a way of pre-empting questions about his integrity.

“Look, I’m an ex-litigator and I can usually smell a crook a mile away,” says Frederick Adler, a Palm Beach entrepreneur who invested a modest sum with Mr. Madoff in the ’90s and withdrew the money when he pulled out of stocks altogether during the tech bubble in 2000. “But I didn’t get any odor from him, and I’m sure she helped. He’s got this pleasant, sweet wife of 30 or 40 years. Not some young chick. It somehow added to his credibility.”

Three years younger than her husband, Mrs. Madoff attended Queens College, where she earned a degree in psychology. “After college I married Bernie Madoff, FRHS class of ’55,” she wrote in an update for the 50th reunion of the Far Rockaway High School in Queens. “Bernie and I worked together in the investment business he founded in 1960.”

When Mrs. Madoff wasn’t working with her husband, she raised her two sons and helped run the Madoff Family Foundation. In 2007, it listed assets of $19 million and gave money to a variety of health-related and cultural charities.

Mrs. Madoff also earned a master’s of science in nutrition at New York University and co-edited “Great Chefs of America Cook Kosher: Over 175 Recipes From America’s Greatest Restaurants.” It sold poorly, though, and has probably yielded more “cooked book” jokes than hot meals.

It’s unclear how involved Mrs. Madoff was in her husband’s business. In the cookbook, she describes her role as “director” in Madoff Securities, and visitors to the firm’s office say she was an occasional presence. One of the obvious mysteries is whether Mr. Madoff had any collaborators in his fraud. When it comes to his wife, there is a related question: How hard would it be to keep a multibillion-dollar Ponzi scheme a secret from your spouse?

The answer, according to Stephen Greenspan, author of “Annals of Gullibility,” is pretty easy. Pulling off a Ponzi is mostly about nerve and bookkeeping, and an outsider would need to study those books pretty hard to figure out they were cooked.

“Unless Madoff told her, why would she have any suspicion?” Mr. Greenspan says. “I know plenty of wives that stay out of their husbands’ business, particularly from that generation. And all she knows is that she’s living well and everyone keeps telling her how wonderful her husband is.”

Whatever her role, many of Mrs. Madoff’s friends wound up investing with her husband. Not that the fund was a hard sell. People were constantly calling Mrs. Madoff and pleading for entree into the wondrous and reliable cash machine that yielded 10 to 15 percent returns each year and that so many of their acquaintances were profiting from.

The fund, lore had it, was nearly always closed, and in Mrs. Madoff’s coterie, she was the insider who could wave you past the velvet rope. Which is why the Madoffs were treated a bit like celebrities when they showed up at their high school’s 50th reunion, held in November at a Doubletree Hotel in Fort Lee, N.J. To the many who attended, it seemed like the room could be divided into those who had invested with Mr. Madoff and those who were hoping to.

“I had a friend say she couldn’t believe how many of our class was in the fund,” says Cynthia Arenson, a classmate and childhood friend of Mrs. Madoff. “She was actually a little jealous, and she was hoping that Bernie would go to the morning-after breakfast, so she could try to talk to him there.”

Luckily for Ms. Arenson’s friend, the Madoffs skipped that event. Ms. Arenson herself wasn’t as fortunate. She and her husband, now a retired school teacher, lost $1.2 million with Mr. Madoff. Adding guilt to injury, about five years ago, she said, she called Mrs. Madoff at home and finagled her cousin into the fund. Some of Ms. Arenson’s friends were investors, too, many of them regulars at a Borscht Belt hotel that Ms. Arenson’s family owned for years and that Mrs. Madoff’s parents patronized. At the time of the reunion — about a month before the fraud was revealed — Ms. Arenson felt nothing but gratitude.

“I walked up to him and said, ‘I’ve got to give you a big hug from me and all my family!’ ” she recalls. “We were up in the market and everyone else was getting killed. The word was that Bernie had pulled the fund’s money out of the stock market just as it started to tumble.”

Entree to the Fund

Mr. Rosenzweig, another classmate of Mrs. Madoff’s who attended the reunion, was feeling grateful at the time, too. In 2003, he had called Mr. Madoff for advice about whether to invest with a particular brokerage firm. The two men hadn’t spoken in decades, but Mr. Madoff couldn’t have been warmer or more gracious with his time.

“I played a little cute and I said, ‘What are you up to?’ And of course, I knew because when you’re from a small town and someone makes it that big, you know about their accomplishments and you’re very proud. And he told me. And I said, ‘Well, will you handle my money for me?’ He said: ‘I’m sorry, we’ve been closed for four or five years. By the way, Ruth is sitting right here, would you like to say hello to her?’ ”

Mr. Rosenzweig had actually taken Ruth out on a couple of dates, when they were 13 years old. (“A couple movies,” he recalls.) He and Mrs. Madoff reminisced on the phone for a bit and then she said that her husband wanted to say something.

“And he got back on the phone and said, ‘Look, Donny, we go back a long way, I’ll get you into the fund.’ ”

He told Mr. Rosenzweig that the minimum investment was $2 million. That was more than Mr. Rosenzweig had, so he asked family members to pitch in. Ultimately, his mother, brother, sister, sister-in-law and brother-in-law and an 83-year-old uncle all contributed.

“At no time did it feel like he was pulling me in,” says Mr. Rosenzweig. “It felt like he was doing me a favor.”

Diana B. Henriques and Landon Thomas Jr. contributed reporting.


Fairfield dumps pension consultants; Town ends deal amid Madoff mess
By Genevieve Reilly, CT POST staff writer
Updated: 01/09/2009 09:44:09 PM EST

FAIRFIELD -- In the wake of the Bernard Madoff investing scandal, the town's joint pension boards voted Thursday to end its contract with New England Pension Consultants, which advised the town on its pension funds.

The town had a contract with the Cambridge, Mass.-based firm since 2006.  Fiscal Officer Paul Hiller and First Seletman Kenneth Flatto declined to comment on the specific reasons for the contract's termination.

"I think the motions speak for themselves," Flatto said. "The pension board is determined to use its best efforts to protect the pension fund and our retirees' interest in every possible way we can."

In December, town officials learned Fairfield's municipal employee pension funds took a $42 million hit when Madoff, a Wall Street investment legend, revealed his fund was nothing more than a Ponzi scheme.  The town first began investing in the Madoff fund in 1995, and over the years, had made a net investment in the fund of $17 million. The rest of the town's loss was the reported gain on that investment.  Prior to the Madoff scandal, the town believed its pensions were overfunded. Now, based on a value of about $230 million without the Madoff funds and liabilities of about $270 million, the town is contemplating the need for an infusion of money -- about $1.4 million -- through the municipal budget.

The town has not had to make any contributions to the pension funds for the last decade.  The pension board trustees' vote to drop the consultants came after about three hours in a closed-door discussion.  The town paid NEPC, one of the largest pension consulting firms in the nation, a percentage based on the pension fund assets, Hiller said: seven basis points, or $70,000, for the first $100 million; three basis points for the next $100 million; and two basis points for anything over that. The contract also called for a minimum annual fee of $110,000.

Douglas Moseley, a partner in the firm, could not be reached Friday for comment.

The joint pension boards also authorized Town Attorney Richard Saxl to hire outside counsel to "investigate and pursue any and all claims to recover Madoff related losses sustained by the funds."

A litigation committee, made up of Chairman John Starr, Flatto, Eric Kaliper, Bonnie McWain and Ken Brachfeld, was also established.  While the pension boards were contemplating its situation, federal prosecutors revealed this week that investigators found 100 signed checks worth $173 million in Madoff's desk, ready to be sent to his closest family and friends at the time of his arrest last month.

"This continually unfolding story truly continues to be mind-boggling," Flatto said.

Madoff 'victims' do math, realize they profited
DAY
By DAVID B. CARUSO, Associated Press Writer   
Posted on Jan 8, 5:54 PM EST

NEW YORK (AP) -- The many Bernard Madoff investors who withdrew money from their accounts over the years are now wrestling with an ethical and legal quandary.  What they thought were profits was likely money stolen from other clients in what prosecutors are calling the largest Ponzi scheme in history. Now, they are confronting the possibility they may have to pay some of it back.

The issue came to the forefront this week as about 8,000 former Madoff clients began to receive letters inviting them to apply for up to $500,000 in aid from the Securities Investor Protection Corp.

Lawyers for investors have been warning clients to do some tough math before they apply for any funds set aside for the victims, and figure out whether they were a winner or loser in the scheme.  Hundreds and maybe thousands of investors in Madoff's funds have been withdrawing money from their accounts for many years. In many cases, those investors have withdrawn far more than their principal investment.

"I had a call yesterday from a guy who said, 'I've taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?'" said Steven Caruso, a New York attorney specializing in securities and investment fraud.

"I'm hard-pressed to give advice in that situation," Caruso said.

Among the options: Get in line with other victims looking for restitution. Keep quiet and hope nobody notices. Return the money. Or hire a lawyer and fight to keep profits that were probably fraudulent.  No one knows yet how many people will emerge as net winners in the scandal, but the numbers appear to be substantial. Many of Madoff's long-term investors have, over time, cashed out millions of dollars of their supposed profits, which routinely amounted to 11 percent to 15 percent per year.

Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.

"There are a lot of net winners," he said.

Asked for an example, Levitt said one caller, whom he declined to name, invested $1.8 million with Madoff more than a decade ago, then cashed out nearly $3 million worth of "profits" as the years went by.

On paper, he still had $4 million invested with Madoff when the scheme collapsed, but it now looks as if that figure was almost entirely comprised of fictitious profits on investments that were never actually made, leaving his claim to be owed anything unclear.  Other attorneys report getting similar calls.

Under federal law, the court-appointed trustee trying to unravel Madoff's business can demand that people who profited from the scheme return some or all of the money.  These so-called "clawbacks" are generally limited to payouts over the last six years, but could still amount to big bucks for some investors.  When a hedge fund run by the Bayou Group collapsed and was revealed to be a Ponzi scheme in 2005, the trustee handling the case sought court orders forcing investors to return false profits. Many experts anticipate a similar process in the Madoff case.

Applying for the aid could give the trustee evidence he needs to initiate a clawback claim. On the other hand, investors who ignore the letter would most likely forfeit any chance of recovering lost funds.  No matter how they respond, it may only be a matter of time before investors wiped out in the scandal turn on those who unknowingly enjoyed the fruits of the fraud.

"The sharks are all circling," Caruso said.

Some hedge funds that had billions of dollars invested with Madoff are already going through years worth of records, trying to figure out which of their investors withdrew more than they put in.  That data could be used by the fund managers to defend themselves against lawsuits, or go after clients deemed to have profited from the scheme and get them to return the cash.

The future is equally cloudy for investors who cashed out entirely before Madoff's arrest.

Their lucky ranks include the Fort Worth Employees Retirement Fund, which invested $7.5 million in a Madoff-related hedge fund years ago, then cashed out last summer after a consultant raised concerns about the investment.  The consultant, due diligence firm Albourne Partners, of London, had long been skeptical of Madoff's reported investment returns.  Fort Worth walked away with $10 million - a sum that included $2.5 million in what now appears to be fraudulent profit.

A lawyer for the public pension fund, Robert Klausner, said he couldn't discuss whether that money might have to be returned, but said the decision to divest was not made because of "special or inside knowledge of what was later reported to be misconduct."

"There just aren't any winners in this deal," Klausner said.

Stephen Harbeck, chief executive of the Securities Investor Protection Corp., told The Associated Press neither he nor the trustee handling Madoff's business, Irving Picard, have decided what to do about Madoff investors who made money. He predicted the process would be "a legal and accounting nightmare."

"Between money in and money out, versus statements received, it is a real difficult pile of issues," Harbeck said. "There are some customers who would want us to use clawback procedures against other customers, and there are other customers who would resist that."

Asked if SIPC would rule out paying claims to investors who appear to have net profits, Harbeck said it was "too early" to say. He encouraged people to file claims, even if they think it might ultimately be denied, but said investors had no legal duty to do so.  Picard will oversee the liquidation of assets from Madoff's investment firm as the SIPC attempts to help investors recoup their money. The SIPC was created by Congress in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts.

S.E.C. Accused of Failing to Act on Madoff Warnings
NYTIMES
By EDMUND L. ANDREWS and DAVID STOUT
January 6, 2009

WASHINGTON — Democratic lawmakers charged on Monday that the Securities and Exchange Commission had “failed miserably” in following up on warnings that could have uncovered several years ago possible wrongdoing by Bernard L. Madoff, who is accused of running a $50 billion Ponzi scheme.

“This elaborate Ponzi scheme fell through the cracks of our regulatory system,’” said Representative Paul E. Kanjorski, Democrat of Pennsylvania.

“We now know that our securities regulators have not only missed opportunities to protect investors against massive losses from the most complex financial instruments like derivatives, they have also missed the chance to protect them from the simplest of scams, the Ponzi scheme,” Mr. Kanjorski said.

But the financial examiner Harry Markopolos, the star witness who had warned the S.E.C. for nearly a decade about Mr. Madoff, begged off at the last minute for reasons that were not entirely clear.

In a letter sent by his lawyer, Mr. Markopolos said he was too ill to travel, that he needed more time to prepare and wanted “special dispensation” to have two lawyers, rather than one, with him at the witness table.

The S.E.C.’s inspector general, meanwhile, told lawmakers on Monday that his investigation into the agency’s failure to uncover Mr. Madoff’s apparent Ponzi scheme will go further than its chairman, Christopher Cox, has proposed.

“It is our opinion that the matters that must be analyzed regarding the S.E.C. and Bernard Madoff may go beyond the specific issues that S.E.C. chairman Cox has asked us to investigate,” H. David Kotz, the agency’s inspector general, told the House Financial Services Committee.

“Our efforts must include an evaluation of the broader issues regarding the overall issues” of the agency’s enforcement operations,” he continued.

Among the questions that Mr. Kotz said he would investigate were whether S.E.C. officials had “conflicts of interest” in their relationships with Mr. Madoff. Without naming names, he said he would look at the role of a former agency official who had “a personal relationship with a Madoff family member.” Mr. Kotz appeared to be referring to Eric Swanson, a former S.E.C. compliance lawyer who married Shana D. Madoff, Mr. Madoff’s niece.

Mr. Swanson acknowledged that he worked occasionally on some issues involving Mr. Madoff, though no evidence has yet surfaced of any work he did at the time he became romantically involved with Ms. Madoff in the spring of 2006.

Mr. Kotz said he would also be looking into whether enforcement officials might have been influenced by Mr. Madoff’s “reputation and status” as a result of participating on several advisory committees to the S.E.C.

Despite the dry, formal language of Mr. Kotz’s prepared remarks, it was clear as the afternoon hearing unfolded that the crimes that Mr. Madoff is accused of, and the human suffering he is said to have caused, will be a driving force in the 111th Congress, which begins on Tuesday.

Representative Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, which received Mr. Kotz’s testimony, said “the country will not work” if everyone is afraid to invest, and that such a contagion of fear is not far-fetched, given the dimensions of the fraud that prosecutors say Mr. Madoff carried out over years.

The panel’s ranking Republican, Representative Spencer Bachus of Alabama, said the Madoff affair demonstrated the need for “a statutory and regulatory structure for the 21st century,” a subject whose details are likely to be intensively debated in the new Congress. Moreover, he said, “there’s every reason to believe” that other fraud schemes are lurking in the markets, waiting to ensnare other investors.

The question that dominated the hearing was the one that has been asked over and over in the weeks since, according to prosecutors, Mr. Madoff confided to his sons that his supposedly steady but safe investment operation was nothing more than a giant Ponzi scheme: How could the S.E.C. have missed all the warning signs, given that the supposedly huge Madoff investment operation was overseen by a tiny storefront accounting firm?

Perhaps, one lawmaker suggested, the term “Ponzi scheme,” named after the Italian immigrant who engineered the huge pyramid-investment scheme of the early 20th century, should be declared obsolete and replaced by “the Madoff scheme.”

It may be a while before the courts determine if Mr. Madoff deserves to be branded a criminal. But there were signs that his actions have already ignited a collective anger that the lawmakers will feel from their constituents.

“In the blink of any eye, savings that I had struggled my entire lifetime to earn have vanished,” one investor wrote the panel. He is 76 years old, and he and his wife had been living a retirement that was not only peaceful but seemingly prosperous — until Mr. Madoff’s empire collapsed, and with it the investor’s financial foundation.



Pension consultant apologizes for remarks; Said he warned Fairfield about Madoff investment
CT POST
By Genevieve Reilly, staff writer
Posted: 01/02/2009 05:41:17 PM EST

FAIRFIELD -- A representative of the town's pension consultant issued an apology to First Selectman Kenneth Flatto and other officials after he was quoted as saying in a published report that he recommended Fairfield reduce its investments in a feeder fund linked to disgraced investor Bernard Madoff.  Town investments of about $22 million in the Madoff fund had grown, at least on paper, to about $42 million, or 14 percent of the town's total pension fund, when Madoff, the former chairman of Nasdaq, was charged with orchestrating a $50 billion Ponzi scheme. If none of the town's holdings in Madoff's investments can be recovered, the pension fund's balance stands at approximately $230 million, with liabilities of about $270 million.

In an e-mail to Flatto, Fiscal Officer Paul Hiller and John Starr, chairman of the joint pension board, Douglas Moseley, of the Cambridge, Mass.-based New England Pension Consultants, apologized "for the way that the discussion at the Greenwich Retirement Board was portrayed" in a story that appeared Dec. 19 in the Connecticut Post and Greenwich Time.

Moseley said Greenwich officials were "extremely concerned" about NEPC's role in overseeing Fairfield's fund and they initiated a pointed conversation with him at their meeting Dec. 18. "I am extremely upset that the reporter used my comments from that discussion with Greenwich to draft the article that appeared" the next day, he said.

In the Greenwich discussion, Moseley was quoted as saying, "We made multiple recommendations that [Fairfield officials] reduce the concentration."

Flatto, in response, said NEPC should never be discussing its specific work with Fairfield without prior permission from the town.

"I have not attributed nor sought to attribute wrongdoing to any particular party or person," Flatto said.

He added that it was disappointing to read a story implying there was a specific warning or "repeated efforts" regarding any particular town manager when, "as we know, that is not accurate and that board discussions have primarily involved overall portfolio diversification for the past couple of years."

According to the minutes from Fairfield's joint pension board meeting Nov. 20 -- prior to the news about the Madoff scandal -- a NEPC representative was asked about whether a particular fund was overexposed, and the board was told that NEPC didn't feel the town was "overweight to any particular style."

Minutes from a January 2007 meeting indicate that Moseley was concerned about the Pequot Fund, listed as a single individual hedge fund category, and felt the town should diversify. He also said he feels strongly about the "10 percent rule" being in place with hedge funds in the alternative category.

Since first investing about $22 million with Madoff since 1997, the town has reduced it allocations on several occasions in the last five years. Since 2002, a net of $5 million was redeemed, making the town's overall investment $17 million, Flatto said.

"I think people should know the boards did not invest nearly as much into the now-bad investment," the first selectman said.

As the dust settles around the Madoff case, the town's actuary is calculating the amount of money the town would have to include in the coming budget year for its pension funds, while officials ponder what legal action to take to recoup any of the lost investment.

"About two months ago, before Madoff tanking, the actuary gave an estimate to the Board of Finance that about $900,000 should be contributed in the next budget and that was because of the overall change in the markets," Flatto said. "There was already going to be a slight contribution."

He said a preliminary estimate now shows that number may have to be about $500,000 more, assuming that the town has lost all of its investment in the alleged Madoff scheme.

"In the big picture, that's a relatively small impact on a $250 million budget," Flatto said, but added, "It's still not good news."

Flatto said from about 1987 to 1997, taxpayers contributed about $20 million to the fund, while employees contributed about $1 million a year. The town hasn't contributed to the funds through the municipal budget in about 10 years, while employees continue to contribute about $1 million annually.

"They did a terrific job, even with this," Town Attorney Richard Saxl said of the pension boards. "We're closer to being fully funded than just about any other community."


Pension boards under increased scrutiny
CT POST
By Bill Cummings, Staff writer
Updated: 12/27/2008 01:15:37 AM EST


Stratford Finance Director John Norko wasted little time earlier this month when he learned Fairfield had likely lost $42 million in pension funds in an allegedly fraudulent scheme run by Wall Street trader Bernard Madoff, which may have cost his investors as much as $50 billion.

Norko went into work early on a Saturday to fire off a memo to town employees assuring them that Stratford had not invested in any of Madoff's funds and had not lost any money.

A similar reaction was played out across the region as the citizen volunteers who serve on town and city pension boards digested news of the Madoff scandal and counted their own good fortune for not having invested with the once-respected trader.

A former NASDAQ chairman, Madoff was arrested for orchestrating a maze of allegedly fraudulent investing schemes that's been compared of alleged fraud. Investors big and small were out millions.

"Was it a wake up call?" asked Dan Roach, a long time member of Bridgeport's Board of Police Commissioners, which also oversees the department's multi-million dollar pension fund.

"No question about it. The first thing I thought was, 'are we affected by that.' Inquiries were definitely made and we had a meeting," Roach said.

Bridgeport, like other communities in the region, had not invested its pension funds with Madoff. Still, the financial nightmare Fairfield faces struck a chord with those who oversee retirement funds.

For the most part, pension boards are made up of ordinary citizens, and many of those unpaid volunteers have little financial expertise. Some towns place a city official -- either a finance director, treasurer or elected council member -- on the board, but that's more the exception than the rule.

These guardians are on their own, charged with making decisions about how to invest millions of dollars in an increasingly complex financial world. All pension boards in the region hire professional managers to offer recommendations and develop strategies, but at the end of the day each board member knows the buck stops with them.

"Sometimes I wonder myself," said Roach, who runs a Black Rock store. "I'm not a financial expert. The board members are not trained for this. We rely on the fund manager."

Along with Roach, Bridgeport's police pension board includes several lawyers, the former president of the regional water company and a minister.

To understand what pension boards do, think of a 401k plan on steroids. The boards authorize investments in various types of funds, based on the fund's history and the likelihood of generating regular returns on the investment. The main difference is the amount invested by a person fund, and the risk is much greater than with any personal 401k plan.

Joseph Sartor, a retired air-conditioning technician, has served on the Milford Pension and Retirement Board for 24 years. Milford does not allow politicians or city employees to serve on its board, only citizen volunteers.

"We are all unpaid volunteers and we have exclusive control and power," Sartor explained. "And we take that role seriously."

Like most pension boards, Milford hires a manager or adviser to make recommendations and plot strategy. Sartor said the pension adviser is more crucial today than ever.

"In the old days we invested in stocks and bonds. Today, everything travels together. We have $300 million invested. It's a lot of money," Sartor said.

Sartor said he heard talk about Madoff and his supposed record of investing success, adding that some had urged Milford to invest with the trader. He was promising returns of up to 14 percent, an unheard of gain over the long term in the world of pension investments, Sartor said.

"Fairfield put too much money into it. You have to diversify. This guy was the biggest con artist. He had so many people snowed over," Sartor said.

"Our adviser is expensive, but we get every penny back. He gives advice and he knows the business. We set the guidelines," he said.

Dan LaBelle, a Westport lawyer and a member of Trumbull's pension board, agreed that board members rely on their adviser. "At the end of the day you have to trust that person."

LaBelle said Trumbull looked closely at its fund and investment choices after the Madoff scandal became public.

"It could happen to anyone. The truth is people like myself are investing town pension money and you try to do the best you can. Who would have thought. You can't expect pension board members to know the in and out of every fund. You get quarterly reports and you ask questions. A lot of it is getting the diversity right," LaBelle said.

Stratford Town Councilman Joseph Kubic, R-9, is the chairman of the town's Pension Board. He said the recent Madoff crisis is a "frightening example of what can happen because pension boards are comprised of mostly people who know very little about how to invest pension funds."

"These boards are made up of citizen volunteers with virtually no in-depth knowledge of the world of stock and bonds investments. This scandal must serve as a reminder that these investments must be made very carefully and conservatively, and only after consulting with experienced financial experts," Kubic said.

"It was a relief to know we had none of our investments tied up with [Madoff]," Kubic added.


Fed Lets GMAC Tap Bailout Fund
NYTIMES
By THE ASSOCIATED PRESS
Filed at 5:54 p.m. ET
December 24, 2008

WASHINGTON (AP) -- The Federal Reserve has granted a request by the financing arm of General Motors to tap the government's $700 billion rescue fund, bolstering GM's ability to survive.

The Fed announced Wednesday that it had approved GMAC Financial Services' request to become a bank holding company. That designation makes GMAC eligible to receive a portion of the bailout fund and get emergency loans directly from the Fed.

Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival. The Fed cited ''emergency conditions'' in justifying its decision.

The move to rescue an auto financing company was just the latest extension of the federal bailout program, which has designed to shore up ailing banks but has grown to include insurers and credit card companies.

GMAC provides financing for both GM dealers and customers as well as home mortgage loans through its Residential Capital LLC division. The company is 51 percent owned by Cerberus Capital Management LP, the investment fund that also owns Chrysler. GM owns the remaining 49 percent of the company.

Under the Fed's order, Cerberus and GM, whose businesses are mainly outside banking, would both have to significantly reduce their ownership stakes in GMAC. GM has committed to reducing its ownership in GMAC to less than 10 percent. Cerberus was ordered to reduce its stake to 33 percent of total equity in the company.

A GMAC bankruptcy filing would have cut off financing to the roughly 85 percent of GM's North American dealers it does business with.

The future of Chrysler Financial, Chrysler's financing arm, is also uncertain. Earlier this month, Chrysler Financial, which provides financing for 75 percent of Chrysler dealers, said it could be forced to temporarily suspend funding for dealer vehicle inventories if dealers keep pulling large amounts of their money out of an account used to fund those loans.

The Fed's decision was announced after the close of a shortened trading day on Wall Street. GM shares closed up more than 8 percent earlier Wednesday.

The Fed said the plan will ''benefit the public by strengthening GMAC's ability to fund the purchases of vehicles manufactured by GM and other companies and by helping to normalize the credit markets for such purchases.''

In a statement, GMAC praised the Fed's action.

''This is a very significant positive step for the company, and it marks a key turning point in our 89-year history,'' said spokeswoman Gina Proia. ''GMAC believes becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and business, including auto dealers.''

She said the change in status would provide the company with ''improved access to funding.''

The decision to change the status of GMAC to a bank holding company follows the Fed's action on Monday granting the request of CIT Group to become a bank holding company so that it could qualify for federal rescue funds.

The Fed also has granted bank holding status to Goldman Sach's Group Inc., Morgan Stanley and American Express Co., all of which have changed their status in an effort to get access to more support after the financial crisis erupted with force in September.

Congress approved the bailout program on Oct. 3 with the original intent of buying up troubled mortgage assets.

That part of the program has never been implemented. Instead, Treasury Secretary Henry Paulson switched course. He began an effort to use $250 billion of the $700 billion fund to make direct purchases of bank stock, to inject more funds into financial institutions and fight the most severe financial crisis in seven decades.

But the effort has come under attack from critics who say that the Bush administration is not overseeing the program sufficiently to make sure that the banks actually increase their lending.

Many lawmakers are also upset that the program has already obligated half of the $700 billion total without making a serious effort to help troubled homeowners avoid a rising tide of mortgage foreclosures.



New York University Sues Fund Exec Over Madoff
NYTIMES
By REUTERS
Filed at 3:44 p.m. ET
December 24, 2008

NEW YORK (Reuters) - Hedge fund executive Ezra Merkin has been sued again for entrusting investments with confessed swindler Bernard Madoff, this time by New York University, which said it lost about $24 million.

The lawsuit in New York State Supreme Court is among a series against Merkin and other funds during the past week as investors seek to recover losses from the purported $50 billion Madoff scandal that would be Wall Street's biggest fraud.  A judge issued a temporary order on Wednesday, barring Merkin from liquidating Ariel Fund Ltd, named in the lawsuit by New York University, which calls itself the largest private university in the United States.

The order, which expires on January 6, will have no impact on plans announced December 18 to wind down the Ariel fund, Merkin's attorney Andrew Levander said in a statement. He said the investment manager would not receive fees and attorneys had promised to preserve documents.

"Mr. Merkin remains committed to obtaining for shareholders the best results possible in the wake of the terrible fraud committed by Bernard Madoff," the statement said.

Madoff, a 70-year-old investment adviser and former chairman of the NASDAQ stock market, was arrested on December 11 and charged with securities fraud. Authorities said Madoff confessed to running a $50 billion Ponzi scheme in which early investors were paid off with the money from new clients.  He is under house arrest in his Manhattan apartment on $10 million bail.

Investors can also make claims for money lost with Madoff through the Securities Investor Protection Corp (SIPC), which is overseeing the liquidation of Bernard L. Madoff Investment Securities LLC via a court-appointed trustee.  A U.S. bankruptcy court judge on Tuesday authorized the nonprofit group, created by Congress in 1970, to mail claim forms to customers in the first week of January. Customers have six months to return the forms.

"They will return those claim forms to the trustee with data indicating what they believe they were owed, how much they put in, how much they withdrew," said Stephen Harbeck, SIPC president and chief executive. "Since the records in this case are unreliable, the more information people can get us the faster we will be able to satisfy the claim."

Harbeck expects it will take several years to sort through investor losses in the Madoff scandal.

Merkin, who is chairman of GMAC LLC, is named in the lawsuit brought by NYU, along with his Gabriel Capital LP fund and Ariel Fund Ltd. GMAC is the finance business owned by General Motors Corp and private equity firm Cerberus Capital Management LP.

"The Funds 'feeding' money to Madoff, including Ariel, made a conscious effort to conceal Madoff's involvement from their own investors," the NYU lawsuit said. "This concealment was a requirement dictated by Madoff, which was agreed to by Merkin and other 'feeder' funds."

Merkin was sued last week in U.S. District Court in Manhattan for his management of Ascot Partners LLP, a fund he founded that lost an estimated $1.8 billion with Madoff.  On Tuesday, hedge fund executive Thierry Magon de la Villehuchet, 65, was found dead in his office in an apparent suicide, reportedly distraught over being duped by Madoff.  New York City Police Commissioner Raymond Kelly said Villehuchet had cuts on his wrists from a box cutter and pills nearby.

The Frenchman's Access International had an exposure of $1.5 billion, officials said.  The total amount of money lost in the Madoff scandal is not yet known, but it could be the largest fraud on Wall Street, duping rich people all over the world as well as charities and nonprofit organizations.

The case is New York University v. Ariel Fund Ltd 08- 08603803 in New York State Supreme Court (Manhattan).


Blumenthal Seeking Madoff Clients 
DAY
By Susan Haigh 
Published on 12/24/2008

Hartford - Attorney General Richard Blumenthal wants to know the number and identity of Connecticut investors who were clients of Bernard Madoff, a Wall Street financier accused of running a $50 billion Ponzi scheme.

Blumenthal said Tuesday that he believes numerous individual investors and charitable organizations entrusted money with Madoff and have suffered major financial losses because of the fraud.

”The victims here run the gamut, literally from people of very modest means to big-time investors to small and large charitable organizations. The ripple effects are staggering,” he said. “The financial roots here go deep and broad.”

The town of Fairfield, for example, may have lost as much as $42 million of its pension fund investments.

Blumenthal, hoping to possibly help recoup some of the lost investments, wrote last week to Irving H. Picard, recently appointed to oversee the liquidation of Madoff's investment firm. Blumenthal has asked Picard to provide information about Connecticut investors that were clients of Madoff and are at risk of losing their money.

Blumenthal said he's particularly concerned about charitable organizations that invested the donations they've raised with Madoff. The Connecticut Attorney General's Office has jurisdiction over registered charities.

”We are focusing on whether board members or trustees of these charitable organizations may have failed in their due diligence, which requires that they do research and fact-finding,” he said.

”I have a responsibility under the statute to make sure nonprofit organizations' assets are used as donors intended,” Blumenthal said. “We want to make sure that the trustees or board members were doing their jobs.”

Connecticut is one 30 states that has adopted the Prudent Investor Act, which requires trustees and board members to exercise due diligence and care that a prudent individual investor would use in a similar situation.

Blumenthal said he also wants to help charitable organizations hold “anyone and everyone accountable for losses they have suffered through the Madoff debacle.” He said that could include accountants, investment advisers or other investors who withdrew their money early from the scheme.

”There is a kind of circle of potential individuals or entities who can and perhaps should be held responsible and we want to assist those nonprofits because they have limited means to fight for recovery of those assets that may have been lost,” Blumenthal said.

Blumenthal sent his letter on Dec. 16. He has not yet received a response. 



Madoff misled SEC in '06, got off
The Wall Street Journal (via the Greenwich TIME)
By Gregory Zuckerman
Article Launched: 12/18/2008 08:04:39 AM EST

Securities and Exchange Commission investigators discovered in 2006 that Bernard Madoff had misled the agency about how he managed customer money, according to documents, yet the SEC missed an opportunity to uncover an alleged Ponzi scheme.

The documents indicate the agency had Madoff in its sights amid multiple violations that, if pursued, could have blown open his alleged multibillion-dollar scam. Instead, his firm registered as an investment adviser, at the agency's request, and the public got no word of the violations.

Harry Markopolos - who once worked for a Madoff rival - sparked the probe with his nearly decadelong campaign to persuade the SEC that Madoff's returns were too good to be true. In recent days, The Wall Street Journal reviewed emails, letters and other documents that Markopolos shared with the SEC over the years.

When he first began studying Madoff's investment performance a decade ago, Markopolos told a colleague at the time, "It doesn't make any damn sense," he and the colleague recall. "This has to be a Ponzi scheme."

For Markopolos, the arrest last week of Madoff was something of a vindication after his long campaign. At a certain point, he says, "I was just the boy who cried wolf."

A lawyer for Madoff declined to comment on Markopolos's allegations.  On Jan. 4, 2006, the SEC's enforcement staff in New York opened an investigation, based on Markopolos's allegations, into whether Madoff was, in fact, running a Ponzi scheme.

The SEC staff received documents from Madoff and Fairfield Greenwich, a hedge fund that placed money with Madoff on behalf of its clients. The SEC also interviewed Madoff, his assistant, an official from Fairfield Greenwich and another employee.

Among other things, the SEC found that Madoff personally "misled the examination staff about the nature of the strategy" used by the Fairfield funds and other hedge-fund accounts, and also "withheld from the examination staff information about certain of these customers' accounts," the SEC documents say.

The SEC report said that neither Madoff nor the Fairfield funds disclosed to investors in the Fairfield funds that Madoff was the investment adviser.  A lawyer for Fairfield couldn't be reached for comment.

The SEC report also said Madoff had violated rules requiring investment advisers to register with the SEC, which makes them subject to inspections and examinations. Investment advisers must register if they have more than 15 clients.

The staff recommended closing the investigation because Madoff agreed to register his investment-advisory business and Fairfield agreed to disclose information about Madoff to investors. The SEC report said the staff closed the case "because those violations were not so serious as to warrant an enforcement action."

Markopolos says his suspicions started in late 1999, after a colleague returned from New York with tales of Madoff's trading prowess. Whether the markets were up, or down, Madoff managed to clock in with steady gains of 12 percent or so a year, reportedly achieving that by trading a mix of stocks and stock-index options.

Markopolos says his bosses liked the look of those returns - and asked him why he couldn't do the same thing.  Under pressure to deliver, Markopolos and a colleague at their Boston investment outfit tried to reconstruct Madoff's purported strategy. Their results paled in comparison, and Markopolos began suspecting possible fraud.

His bosses told him to go back and check the math, given Madoff's renown as a trader.

So Markopolos turned to Daniel DiBartolomeo, a top financial mathematician in Boston. DiBartolomeo says he spent hours poring through Markopolos's data, and ultimately agreed: The strategy Madoff said he used couldn't have achieved the returns he boasted of.  In early 2000, Markopolos shared his explosive concerns with Edward Manion, a staff examiner at the SEC's Boston office.

In his documents, Markopolos said that there's a chance "I'm an idiot for wasting your time." But he argued forcefully that "I believe an SEC visit is warranted" to look into Madoff's practices.

"This sounds serious," Manion told him, inviting Markopolos in for a meeting.  In May 2000, Markopolos says he sat down with Manion and an SEC attorney.

Markopolos argued his case: A key part of Madoff's strategy relied on buying and selling options on the Standard & Poor's 100-stock index. But Markopolos said his research showed there weren't enough S&P-100 options in existence at the time to support Madoff's stated strategy, given all the money he seemed to be managing. So something else must be going on.

Markopolos, a native of Erie, Pa., who had trained in "unconventional warfare," including intelligence gathering, as a reservist in the Army, says he came to "consider Madoff a domestic enemy."

In the months after the initial meeting with the SEC, Markopolos kept hearing about Madoff's outsized gains, and how the firm was growing - sparking frequent calls to Manion to discuss the case.  Over a year passed. Then, in late 2001, Manion told Markopolos the case appeared to have fallen through the cracks. He asked Markopolos to resubmit his documents and arguments, so they could be passed on to the SEC's New York office.

Markopolos sent the documents, adding three pages arguing that the fraud was growing in size as Madoff's assets under management grew beyond $12 billion.  Markopolos also diagrammed how he believed the Madoff organization seemed to work, using a Byzantine flow chart with circles, squares, rectangles and arrows.

Markopolos continued to receive sympathetic calls from Manion. "He's the one that kept me going, I would have stopped long ago," Markopolos says.

But Manion pointed out that any investigation would have to be conducted by the New York office, where Madoff's firm was based.

Markopolos says that worried him. "I was told that the relationship between the SEC's Boston and New York offices is about as warm and cordial as the Yankees-Red Sox rivalry," Markopolos says.

Markopolos left his firm in 2004, and started a fraud-investigation practice. Markopolos's old colleagues, prodding him not to give up, spoke by phone for hours at a time about Madoff.

"Some people play fantasy sports, that was how it was with us - Madoff was our fantasy sport," Markopolos recalls. "We wanted him nailed."

In 2005, an SEC official in Boston called to say the agency was again looking into the case, and told Markopolos to contact Meaghan Cheung, a supervisor in SEC's New York office, Markopolos recalls.  In November 2005, Markopolos sent Cheung a 21-page report outlining his concerns.

He presented a series of 29 "red flags," ranging from in-depth mathematical calculations that purported to show the Madoff investment strategy couldn't work, to little more than rumor or innuendo - such as claims that a group of Arab investors were barred from using a major accounting firm to examine Madoff's books.

He also questioned the fact that Madoff, unlike most money managers of his stripe, didn't charge his investors a fee for handling their money. Instead, he seemed to make profits on commissions generated by the trades on investors' behalf.

"Bernie Madoff's returns aren't real," Markopolos said. "And if they are real," it's because Madoff might be engaging in "front running," or buying shares for his investors' accounts just before filling orders for other clients that have the potential to send the price higher, an illegal practice.

Markopolos's allegations against Madoff were far from bulletproof. Markopolos provided no definitive evidence of a crime. His reports were laden with frothy opinions.  In his lists of "red flags," he occasionally got things wrong. Sometimes he even misstated the starting date of his own campaign against Madoff.

Cheung was a respected attorney known for quickly bringing high-profile charges against executives of cable-television company Adelphia Communications several years earlier, after that company issued a questionable earnings report.  Markopolos thought he had a chance for his campaign to succeed.

"I had my hopes up, I thought it was a good enough package that they would go and shut this man down," Markopolos recalls.

He sent an email adding more evidence - noting that he might be eligible for the SEC's bounty program if it turned out that Madoff was, in fact, front running.  An SEC spokesman wouldn't comment on the agency's communication with Markopolos.

In its resulting investigation, the SEC searched for evidence of "front running" but found no indications that was happening, according to an individual familiar with the matter.

Investigators also checked out Markopolos's claim that Madoff was running a Ponzi scheme. But the billions of dollars of assets held by Madoff's asset-management unit appeared to match those that various investment firms said they had placed with Madoff, suggesting that there weren't problematical.

Today, it is now known that that Madoff had many more investors - such as individuals and charities - which weren't disclosed in regulatory filings, making it harder for investigators at that time to ascertain precisely how much money he was managing.

On Tuesday, SEC Chairman Christopher Cox also said that Madoff kept several sets of books and false documents. That, too, could have thrown off investigators a few years ago.

As part of the inquiry, the SEC did find that the firm had violated technical rules about executing trades.

Early this year, Markopolos made one last major effort after receiving an email from Jonathan Sokobin, an official in the SEC's Washington, D.C., office whose job was to search for big market risks. Sokobin had heard about Markopolos and asked him to give him a call, according to an email exchange between them.

With low expectations, Markopolos got in touch. "The way I figured it," he says, "if they didn't believe you at $5 billion, and not at $10 billion, they didn't believe you at $30 billion, then why would they believe you at $50 billion?"

Markopolos also sent Sokobin an email - with the stark subject line "$30 billion Equity Derivative Hedge Fund Fraud in New York" - saying an unnamed Wall Street pro recently pulled money from Madoff's firm after trying to confirm trades supposedly done in his account, but discovering that no such trades had been made.  It was his last try. He never heard back about his allegations regarding Madoff.

"I felt pretty low," Markopolos recalls.  Sokobin, through an SEC spokesman, declined to comment.

Last Thursday, as Markopolos watched his children take a karate lesson near his home in Whitman, Mass., 20 miles outside Boston, he checked his voice mail, trying to ignore the noise from the children. Walking out to the foyer, Markopolos returned one of the calls, and heard an old friend tell him that Madoff had been arrested.

"I kept firing bigger and bigger bullets" at Madoff, "but I couldn't stop him," Markopolos says. With the SEC's mea culpa and Madoff's arrest, "I finally felt relief."



Madoff Scandal Shaking Real Estate Industry
NYTIMES
By CHRISTINE HAUGHNEY
December 18, 2008

Almost no segment of New York City’s real estate industry was spared in the Madoff scandal, which may be history’s largest Ponzi scheme: commercial brokers large and small, little-known developers and prominent families like the Wilpons and Rechlers all lost money to Bernard L. Madoff, industry executives say.  The outsize impact on the industry may have resulted largely because Mr. Madoff (pronounced MAY-doff) managed his funds much the way that real estate leaders have operated successfully for decades: He provided little information and demanded a lot of trust.

“You have a lot of wealthy people who made a lot of money on handshakes,” said Mark S. Weiss, a commercial real estate broker at Newmark Knight Frank, where several brokers had invested heavily with Mr. Madoff. There was “something about this person, pedigree and reputation that inspired trust,” he said.

Across the city, industry executives said deals had been scuttled or jeopardized because of the scandal. Residential brokers are taking calls from Madoff investors who have had to put their apartments on the market. Many developers had pledged their investments with Mr. Madoff as collateral for projects, and are now worried that their banks will call in their loans.

“The level of devastation, both financial and on a human level, is astounding,” said Robert J. Ivanhoe, a lawyer who is representing 10 developers and investors who lost $5 million to $50 million each with Mr. Madoff.

Indeed, at an industry fund-raiser at the Grand Hyatt hotel in Manhattan last weekend, much of the chatter over sushi and crudités was about money feared lost with Mr. Madoff, according to people who attended. And a Manhattan psychotherapist who counsels real estate leaders and bankers said most of the patients he has seen this week have close friends and relatives who lost money with Mr. Madoff.  The victims include executives at the global commercial brokerage CB Richard Ellis, most prominently Stephen Siegel, a major Bronx landlord who is chairman of worldwide operations at the brokerage and whose wife, Wendy, helped organize Saturday’s fund-raising dinner.

Brian S. Waterman, a principal at Newmark, also invested with Mr. Madoff. So did the Rechler family, which has been a major owner of office buildings in the region. Scott Rechler, the head of RexCorp, one of the family’s largest firms, called the family’s exposure “limited.”

Jerry Reisman, a lawyer based in Garden City, N.Y., said he was representing six commercial real estate investors and developers in the area who lost a total of $150 million to Mr. Madoff. They met Mr. Madoff through contacts at country clubs in the tristate area, he said.

“They knew him from golfing in the Hamptons. They knew him from the locker rooms,” Mr. Reisman said. “He was considered a wizard.”

Mr. Reisman said his clients were especially concerned because they counted on Madoff investments to complete some of their real estate projects, pledging their investments as collateral for projects. Those developers fear that when their banks realize that their investments with Mr. Madoff have disappeared, they will demand new collateral from other sources, Mr. Reisman said.  Finding those alternative lenders will be difficult given the financial crisis — and given that many other real estate investors have been hurt by the Madoff case.

“Many of these developers, their resources are all with Madoff,” Mr. Reisman said.

There are widespread concerns that some developers will have trouble completing projects currently under construction. Edward Blumenfeld, who runs Blumenfeld Development Group, had invested heavily with Mr. Madoff and considered him a friend. Gary Lewi, a spokesman for Mr. Blumenfeld, said he still planned to complete a shopping complex in East Harlem that is to include a Target and a Costco, as well as several other projects where construction is “in the ground.”

Beyond that, though, Mr. Blumenfeld is uncertain of what his development plans hold. His friendship with Mr. Madoff is even more uncertain, Mr. Lewi said.

“Any long-term plans are being reviewed as we conduct a far larger analysis of this scandal and the impact it could have on us and the development community as a whole,” Mr. Lewi said. “Mr. Blumenfeld was friend to a man who apparently didn’t exist.”

The Wilpon family, the major owners of the Mets, has acknowledged investing millions with Mr. Madoff. The family controls a real estate firm, Sterling Equities, whose Web site says it owns 3,000 residential units and 600,000 square feet of office space. It is unclear whether the firm’s real estate holdings are affected by the Madoff investments.

“We are shocked by recent events and, like all investors, will continue to monitor the situation,” said Richard Auletta, a spokesman for Sterling.

Other real estate developers are finding that their charitable giving has been wiped out by Mr. Madoff. Leonard Litwin, one of the city’s largest apartment landlords and head of Glenwood Management, had nearly all of his charitable foundation’s investments managed by Mr. Madoff.

Gary Jacob, executive vice president of Glenwood, said Mr. Litwin had never met Mr. Madoff but had invested with him on the advice of a friend. The Litwin Foundation had donated money to research for cancer and Alzheimer’s disease and charities, many of them supported by the real estate industry.

“It would have no impact to us as a real estate company,” Mr. Jacob said. “But it affects the charitable giving.”

Some members of the real estate industry are receiving the news with a mix of schadenfreude and sadness for their peers. Jeffrey R. Gural, chairman of Newmark Knight Frank, the brokerage firm, said Mr. Madoff had turned his family down as investors about eight years ago because they would not invest at least $20 million. For years, he said, colleagues introduced to Mr. Madoff through relatives or country club friends had sung his praises.

“People used to brag how they were getting these great returns when everybody else was struggling,” he said. “They thought Bernie Madoff was a genius, and anybody who didn’t give them their money was a fool.”

The impact is already spreading to the residential real estate business. Brad Friedman, a lawyer representing about 100 investors primarily in New York and Florida, said several clients have already said they plan to put their apartments on the market. They depended on their Madoff investments to pay their mortgages and co-op fees.

“With that source of money frozen, they’ve got no cash,” Mr. Friedman said. “They can’t pay the electric bill. They can’t pay the mortgage.”

Other buyers have already backed out of deals because they had invested with Mr. Madoff and can no longer finance their purchases. Michele Kleier, a prominent Upper East Side broker, had buyers pull out of purchases on two $2 million apartments because they had lost money to Mr. Madoff. The first buyer put in an offer at 3 p.m. last Thursday, the day of Mr. Madoff’s arrest, only to withdraw it by 5:30 p.m.

The second set of buyers had visited an apartment three times, requested the financial information about the co-op and had the broker notify Ms. Kleier that they would be making an offer on Monday morning. On Monday, she learned that the buyers had backed out because their money was tied up with Madoff funds.

“It’s now two deals in the last four days,” Ms. Kleier said. “It’s amazing.”

Kenneth Mueller, a Manhattan psychotherapist who counsels many real estate and financial executives, said those who lost money to Mr. Madoff called his indictment “the nail in the coffin for the commercial real estate industry,” which had already been hurt by the recession.

Dr. Mueller said many patients were re-evaluating whether they can trust their business partners after Mr. Madoff’s betrayal.

“Madoff was considered a member of the family,” he said.



Madoff's victims reel; others count blessings
Stamford ADVOCATE
By Michael C. Juliano, Staff Writer

Posted: 12/16/2008 02:47:44 AM EST

The recently uncovered Ponzi scheme by prominent Wall Street investor Bernard Madoff will not affect municipal investments in Stamford, Norwalk and Greenwich, officials said, but a hedge fund in Greenwich may become its worst victim.

Fairfield Greenwich Group, a fund of funds manager with an office at 2 Soundview Drive in Greenwich, had $7.5 billion of its $14.1 billion in assets invested with Bernard L. Madoff Investment Securities LLC as of November.  Madoff, 70, was arrested Thursday by the FBI after admitting to the scheme that he said may have bilked investors out of $50 billion.

In New York on Monday, U.S. District Judge Louis Stanton signed an order saying investors who may have been duped in one of Wall Street's biggest frauds need the protection of the Securities Investor Protection Act. Stanton also directed that proceedings to liquidate the assets of Madoff Investment Securities be moved to bankruptcy court.

Fairfield Greenwich Group, founded in 1983, said it plans to sue Madoff to recover losses and protect investors in its Fairfield Sentry Fund, which holds all of its Madoff-related investments.

"It is our intention to aggressively pursue the recovery of all assets related to Bernard L. Madoff Securities," Jeffrey Tucker, founding partner of Fairfield Greenwich Group, said in a statement. "We are also committed to the operation of our continuing funds. We hope to have a better idea of the situation as the facts develop."

In Stamford, Norwalk, Greenwich and Westport, officials confirmed municipal investments were not exposed to the Madoff scheme. Town officials in Fairfield, however, were reeling Friday after learning that $42 million in pension money - nearly 15 percent of the fund's $286 million value - was entrusted to Madoff. The case should remind finance directors to practice caution in investing funds, said Sandy Dennies, Stamford's director of administration.

"I think this was a very big wake-up call for everyone," Dennies said, adding that pension fund managers are especially leery. "It certainly raises a certain amount of doubt as far as what you're getting into."

Norwalk officials said they were relieved that none of the city's money was tied in with Madoff's Ponzi scheme, a type of fraud that pays high returns to initial investors out of money paid by subsequent investors, rather than from real business profits.  Comptroller Frederic Gilden said Norwalk has a diversified portfolio and avoids investing too much money in one area. The city has a contract with an independent investment consulting firm, Evaluation Associates LLC of Norwalk, to ensure pension money is safely invested, he said.

"They're tasked with doing the due diligence and whether or not these investments are suitable for us," Gilden said.

The firm also monitors the information provided by fund managers to ensure they are up to date, he said.  James Lavin, Greenwich's retirement plans administrator, notified workers that none of their retirement portfolios was invested with Madoff.

"The town of Greenwich is not at risk for losses resulting from this alleged fraud," Lavin said in a statement.  Calls to Darien, New Canaan and Wilton officials were not returned.  The Royal Bank of Scotland, which has its U.S. headquarters in Greenwich, said it had exposure through trading and collateralized lending to funds of hedge funds invested with Madoff's firm.

"If as a result of the alleged fraud the value of the assets of these hedge funds is nil, RBS's potential loss could amount to approximately 400 million pounds" or $612 million, said Carol McAdam, an RBS spokeswoman in the United Kingdom.

Chris Riley, an RBS spokesman, said the exposure will not change its construction of a 12-story, 550,000-square-foot U.S. headquarters at 600 Washington Blvd. in Stamford.

"We're on track for the first half of 2009," Riley said.

Maxam Capital Management LLC, a Darien investment firm, marketed a $280 million fund that was solely invested with Madoff. Sandra Manzke, Maxam's chairman and chief executive officer - who told The Wall Street Journal she may be wiped out - did not return calls. Tremont Capital Management of Rye, N.Y., a fund of funds manager founded by Manzke in 1985 that invested with Madoff, has yet to disclose the amount.

UBS, which has its securities trading floor at 677 Washington Blvd. in Stamford, has "only a limited and insignificant counterparty exposure" to Madoff, said Kris Kagel, a UBS spokesman.

Virginia Parker, founder and president of Parker Global Strategies, said her firm competed for business with Madoff about six years ago but was beat out by another investor.

"It's very unfortunate that something like this has happened with such magnitude that has touched some sophisticated investors and not-so-sophisticated investors," Parker said. "This demonstrates the importance of transparency that money managers must have from hedge funds."

Brett Dougherty, director of the Stamford CFA Society, said money managers and the Securities and Exchange Commission may be more scrutinized because of the Madoff scheme.

"It takes this sort of catastrophic market condition to reveal the fraud," he said.

The turn of events should not scare investors and money managers away from hedge funds, Dougherty said.

"It's going to make people shrug their shoulders," he said. "If they're sophisticated investors, as they should be, then they'll know what this means."

Bank Benedict Hentsch of Geneva said Monday it has ended its partnership with Fairfield Greenwich three months after merging with the firm. The bank confirmed its exposure to Madoff products was $47.5 million, or 5 percent of its managed assets.  Joel Schwab, managing director of hedgefund.net in New York City, said investors would have avoided Madoff if they had done their homework.

"Handing money over to professional investment advisers should not be done without due diligence," Schwab said.

Victor Zimmermann, managing partner of the Stamford office of law firm Curtis Mallet-Prevost, Colt & Mosle and former attorney with the SEC's Enforcement Division, said the Madoff scheme may hamper investor confidence and make it harder for smaller funds to survive.

"The silver lining is some good things will come out of this from a regulatory standpoint," Zimmermann said.


Global impact...
Fairfield expects pension fund loss;  Town eyes recouping $42m in fraud case
CT POST
By Genevieve Reilly, Staff writer
Updated: 12/13/2008 08:33:46 PM EST


FAIRFIELD -- Three days after legendary Wall Street trader Bernard L. Madoff was charged with orchestrating a $50 billion Ponzi scheme that, among its thousands of victims, includes a $42 million stake in the town's pension fund, officials are still trying to comprehend the implosion of what they once considered a reliable and steady investment.

First Selectman Kenneth Flatto and Fiscal Officer Paul Hiller huddled Saturday to try to sort through the potential losses in the town's pension fund, but insisted the overall solvency of the retirement plan is secure. Any losses would be limited to the $42 million invested with the Madoff fund, or about 15 percent of the total $286 million in the town's pension accounts.  Madoff's alleged fraud has rocked the financial markets like an earthquake, with an ever-expanding sphere of devastation coming to light since word of his arrest broke Thursday.

The 70-year-old former Nasdaq chairman was charged by federal agents with one count of securities fraud amid accusations he may have bilked investors of as much as $50 billion.  Hiller, for example, said he heard of a charitable group in Boston that was forced to shut down Friday because of the Madoff debacle. A local man, he added, had just invested in the Madoff fund in November, after first paying J.P. Morgan to conduct a review of its worth.

"The best and the brightest have been duped on this," he said. "It's going to take a long time for this thing to sort out, but we go on."

In hindsight, Hiller said, "Some people have said it was too good to be true," but added the Madoff fund was touted as a conservative risk. "Even in the real good times, for example in 2003, our equity manager was up 25 percent; in 1991 our hedge fund was up 47 percent."

The Madoff fund, however, he said, produced relatively consistent gains, with returns running between 7 and 14 percent. "He would never hit a home run, but that wasn't the way it was sold," Hiller said.

Town retirees receiving pension payments will not be affected by fallout from the Madoff scandal, regardless of how large the town's loss on its investment is eventually determined to be, Hiller said. Because of the overall solid status of the town's pension funds, even if all current employees retired today, the fund would be solvent, he said.

"That is secure," Hiller said of the pension fund. Projected payouts over the next 50 to 70 years are around $280 million, according to town officials.

"Even with this loss, our fund is better capitalized than any of the surrounding communities," Flatto said Saturday. By comparison, he said, the state teachers' retirement fund is about 50 percent funded.  Fairfield's pension fund now covers more than 800 active municipal employees, plus 108 police officers and 96 firefighters. There are now about 300 retired municipal workers receiving benefits, as well as just under 200 retired police and fire personnel.

While town officials plan to hire outside counsel to protect its interests and believe some of the losses may be covered by insurance, Flatto said he still believes the town will lose a significant portion of the $42 million in the Madoff fund.  In a bid to make at least some restitution to Madoff's investors, federal regulators have reached an agreement freezing his firm's assets and appointed a receiver to manage its financial affairs.

Flatto has sent an e-mail to town employees providing as many details of the meltdown that local officials now know, and he said while he was running errands Saturday, he was approached by several employees.

"They haven't been angry," he said. "They seem to be taking it in stride. They are asking questions and I'm trying to give them as much information as I can."

Sgt. Keith Broderick, president of the Fairfield police union, said the news of Madoff's deception is unbelievable. "I've received several calls already today," he said Saturday. "They called as soon as they opened the paper."

Broderick said he is concerned, "I think everybody is ... We have to hope the town does the best job for us."

A special meeting of the pension board to discuss the potential pension losses has been called for 5 p.m. Monday in Sullivan-Independence Hall.

"I think that after the meeting we will assign counsel," Hiller said. "We fully intend to pursue every legal means" to recoup the town's investment.

Hiller said the town continues to review the remaining 86 percent of the pension investments on a daily basis. Flatto said the pension board had been in the process of diversifying its assets even further when this happened.

"We were in the process of seeking to reduce our largest three manager holdings," he said.

The town's initial investment in Madoff's fund was $5 million in 1997. Ironically, one of the largest investments -- $12 million -- into that fund was made in 2001 with proceeds from the sale of Enron stock, just six weeks before Enron went under.

The town's at-risk pension funds were invested in MAXAM Absolute Return Fund as a limited partner, with MAXAM Capital GP LLC, of Darien, as the general partner. The fund is managed by Madoff Securities and specifically Bernard L. Madoff.  That investment was made during the administration of First Selectman Paul Audley, whose chief fiscal officer was John Leahy. Leahy was not available to comment Saturday.

The remaining 86 percent of the town's pension money is split between two fixed-income managers, three equity managers, a mutual and a hedge fund.  While the Board of Finance doesn't have any authority over the pension fund under the town charter, Chairman Kevin Kiley said Saturday the panel is ready to lend assistance, if needed.

"At this time, with this potential financial crisis, the town needs to work together," Kiley said. "We need leadership, not fingerpointing. We need answers and we need a solution."

A vice president of finance and adminstration with a local firm, Kiley said, "There's a lot of Monday morning quarterbacking" going on in the financial world.

The Madoff fund "had a steady 7 to 8 percent return in good and bad markets, which made it attractive to a lot of long-term moderate investors," Kiley said.

"My financial colleagues across the country are generally very surprised at what has happened to this fund."


Fairfield pension at risk in trader fraud; Town could lose up to $42m in trader's investment scam
CT POST
By Genevieve Reilly, Staff writer
Updated: 12/12/2008 09:01:22 PM EST

FAIRFIELD -- Town officials were reeling Friday after learning that $42 million in pension money -- nearly 15 percent of the fund's total $286 million value -- was entrusted to Bernard L. Madoff, the Wall Street trader arrested this week amid accusations he may have looted investors of $50 billion.

FBI agents arrested the 70-year-old Madoff in New York City, where he was charged in Manhattan federal court with a single count of securities fraud and released on a $10 million bond.  Madoff allegedly admitted to his employees Wednesday that the fund was "just one big lie." "This was certainly a shocker," First Selectman Kenneth Flatto said. "It's somewhat troubling news."

The $42 million invested in Madoff's fund is a portion of the entire $286 million town pension fund. Until this point, officials believed the town's pension obligations were 100 percent funded.  In a worst-case scenario, according to both Flatto and Fiscal Officer Paul Hiller, if none of that $42 million in the Madoff fund can be recouped, the remaining town's pension funds would be unaffected.

"In my opinion, I believe a significant portion of this investment is at risk," the first selectman said.

Flatto, Hiller and John Starr, chairman of the Joint Pension Board, agreed that so far no one is certain about the extent of the loss.

"There are rumors as to how much, but that would just be guessing," Flatto said.

Since 1997, when the town made its first $5 million investment into the fund, it has received monthly statements showing gains, as well as audited statements from McGladrey and Pullen. Another $17 million has been invested since then. The Nov. 30 statements received indicate the investment was purportedly valued at $41.8 million.

"This is a real puzzle right now to everybody," Flatto said. "He has misled a lot of people."

The town's funds were invested in MAXAM Absolute Return Fund as a limited partner, with MAXAM Capital GP LLC, of Darien, as the general partner. The fund is managed by Madoff Securities and specifically Bernard L. Madoff. The town's $42 million was part of a group of seven accounts, totaling about $290 million, invested by MAXAM.

"We're not in it alone," Hiller said, although the Fairfield officials were not certain if other area pension money may have been invested in the Madoff fund.

Starr said Madoff had been well respected on Wall Street, "and appeared to have had a stellar record and one that was very conservative. These allegations, if true, are startling. I think that we hope what we're seeing is not as bad as what it looks like."

He said people in the financial field are "just stunned" and wondering how long the alleged scam had transpired. "It all just doesn't add up," Starr said, via telephone from China. "It's just very, very sad that something like this could happen with all the protections that are out there."

At one point, Starr said, Madoff capped the fund and would not allow any new investments. "If you had money with Madoff, you were in a very elite group," he said, "which is kind of contrary to how a Ponzi or pyramid scheme works."

Hiller said during this time the town has had three different investment advising firms and all three have been comfortable with the town's pension investment into Madoff's fund.

"Nobody ever said they didn't think this was a good fund," Flatto said. "It could be weeks or months until we know the extent of it."

"The problem is measuring the extend of what losses there may be," Hiller said. "We're in the process of speaking with several major New York law firms."

There will also be a special meeting of the town's pension boards at 5 p.m. Monday in Sullivan-Independence Hall "to discuss what our options are," Hiller said.




Special Town Meeting June 11, 2008 - approval for Auditorium and O.P.E.B. in one vote "yes"
There were two (2) items on this "call" and the lesser known one was approve the use of $1.1 million of the General Fund surplus to go into the special fund for G.A.S.B. - the first step in accumulating the post-employment benefits $$ to cover what the town owes for "other [post employment benefits" of its employees not yet retired.  Studies show that Weston has approximately $12 million plus that it has already due - and a plan to fund this over ten years with a large first deposit into a special account administered by the Board of Finance is now OK'd!  Interest accrued, we presume, will go to pay down any of the remaining O.P.E.B. liabilities.

Towns forced to face huge retirement price tags
By:Kimberly Phillips, Manchester Journal Inquirer
01/10/2008

Manchester officials are facing an estimated $145.56 million liability in retiree health care and life insurance benefits over the next roughly 50 years - or $12.9 million a year to pay down the debt before workers hit retirement age.

Yet the town, like most, doesn't pre-fund retirement benefits before employees leave, instead choosing a "pay-as-you-go" system. In other words, it sets aside money each year based on how much actually is needed to cover retiree benefits.
 
But a recent change in accounting rules soon will bring every municipal leader face to face with the kind of numbers Manchester is looking at: The long-term, complete price of maintaining a workforce.

And in some cases, that's a figure area officials will be seeing for the first time.

It's not that town officials don't know roughly how much they'll shell out in retiree pensions. For years they've had to account for that amount under rules set by the Government Accounting Standards Board, a Norwalk-based nonprofit that sets accounting standards for states and municipalities.

But the board didn't immediately enact rules pertaining to how towns should account for so-called "other post-employment benefits" - namely, health care and life insurance.

Now, the standards board has set timelines for towns and cities to begin accounting for these other retirement benefit costs.

The board broke municipalities into tiers based on the size of their budgets. The first deadline was Dec. 31, 2007, for towns with annual budgets of more than $100 million that use trust funds to pay retiree obligations.

Those municipalities that spend more than $100 million a year and pay for the obligation in other ways - such as their annual budgets - have until June 30 to report.

In north-central Connecticut, three towns spend more than $100 million a year: Manchester, East Hartford, and Enfield.

Manchester Finance Director Alan J. Desmarais said that while the town's reporting deadline is six months away, it asked its actuarial firm for the $145.56 million estimate to begin the process of complying with the accounting board's mandate.

"Obviously, we want to address this somehow," Desmarais said of funding the obligation.

He explained that during the last several years officials have negotiated into union contracts certain retiree requirements, including years of town service, to hold down spending.

The days of offering full health insurance coverage for a retiree and his or her spouse are gone, he added.

According to Manchester's Comprehensive Annual Finance Report, filed recently in Town Hall, officials face an actuarial accrued liability of $145.56 million. This is the projected cost of retiree health care and life insurance over 40 or 50 years, Desmarais explained.

Keeping up with that obligation would run the town $12.9 million a year, he noted.

But again, most towns pay as they go, funding the price of the obligation based on the cost per fiscal year. In Manchester during 2006-07, about $2.8 million was budgeted for post-employment benefits.

No surprise for EHartford

"East Hartford's number is going to be tens of millions of dollars, probably approaching $100 million," Finance Director Michael P. Walsh said, cautioning, "It's not a liability that's new to the town, it just has not been reported."

That town's Comprehensive Annual Finance Report warns of the reporting deadline, but, like Manchester, East Hartford isn't required to report its obligation until June 30.

Consultants are about a month away from determining an estimate, Walsh said, after conducting a census of employees, including their ages and retirement benefits.

In mid-November, Walsh recommended to Democratic Mayor Melody A. Currey a four-pronged approach to managing the liability. This includes establishing a trust to provide a place to "deposit, invest, pay, and otherwise manage" retiree benefit funds. Currey forwarded the suggestion to the Town Council.

He also has advised the town create an ordinance to formalize the town's Retirement Board, which then would be responsible for managing funds related to the obligation.

Those funds, in part, would come from leftover money at the end of each fiscal year, which generally ranges between $150,000 and $750,000.

The council's ordinance committee is reviewing the suggestions.

Walsh noted the accounting board's requirement is only in reporting the liability, not in actually doing anything about it or pre-funding it in advance of retirements.

However, it's best that municipalities consider doing so,
he said.

When a town determines with Wall Street financial agencies its bond rating prior to issuing bonds for public works or school projects - ratings that influence the interest rate on the bonds - the unfunded retiree obligation will be discussed, Walsh said.

And two to three years from now, the ratings agencies will do more than simply acknowledge the liability, they'll start asking how the municipality is addressing the it, he said.

"Eventually, the communities that distinguish themselves" with a plan to deal with the obligation will maintain or increase their bond ratings, while others could see a negative impact, Walsh said. "It's better to put a few bucks aside now than nothing."

Health care costs on the rise

Enfield Town Manager Matthew W. Coppler said his town was required to file the accounting board's report by Dec. 31, but sought an extension because of difficulties in determining a figure. While he didn't have an estimate on the total obligation, he said he expects it will cost the town about $460,000 annually to whittle it down.

"We've been looking into this over the last couple of years," Coppler said, explaining that union contracts have started to include increased health care contributions for employees to keep costs under control in years to come.

But nationwide the price of health care has risen, he said, and some municipalities, such as Buffalo, N.Y., have seen the price of retiree health care exceed the cost of current employee health care. Consequently, towns have had to face a dilemma: Balancing caring for longtime employees when they leave the workforce with taxpayers' ability to pay for the benefit.

"The amount of money that we're talking about does limit our ability to do what our citizens want," he said of balancing the costs of health care and municipal services.

Changes in retiree benefits were quick to come in private industry, such as the steel and automotive sectors, namely because of the associated cost, Coppler said. But municipalities were slower to change.

"Now it's starting to, unfortunately, come home to roost," he said, adding that municipalities would be smart to start pre-funding the obligation. "At some point, pay-as-you-go is going to break the bank."

Finance Director A. Lynn Nenni, who recently took her job in Enfield, didn't return calls seeking information about the town's estimated obligation as well as whether the town's extension was granted, and for how long.

Important to bottom line

Windsor Town Manager Peter P. Souza said that while his town doesn't meet reporting criteria until 2009 - its annual budget is $90.25 million - he estimates the unfunded obligation at between $40 million and $45 million, based on estimates from six months ago.

"We're doing some preliminary work on this with our actuarial folks," Souza said, explaining that he's spoken with Town Council members at least once recently to begin policy discussions about funding the benefits.

It's possible, he said, the council will decide to fund some of the obligation while working with employees to inform them about the cost associated with the benefit and ways to curb the price tag. That could include a wellness campaign to work toward better health, coupled
with "balance" in union contracts that have higher health care deductibles to offset long-term costs.

South Windsor Town Manager Matthew B. Galligan said municipal union contracts have been negotiated in recent years to benefit the town, namely by establishing health-savings accounts for current employees, 401k pension plans, and retirement health-savings accounts.

With the latter, he explained, town workers stash away funds from their paychecks to cover health care costs when they're retired.

But it's difficult to estimate what the total unfunded retiree obligation is, as consultants now are working with the Board of Education to determine its retiree benefit practices and its unfunded portion, Galligan said.

With an $88.7 million budget, South Windsor isn't mandated to file the accounting board's report until 2009.

And predicting the number is further hampered because police officers, for instance, only receive retiree health care coverage until they reach 65 years old and Medicare takes over, he added.

"We should have it pretty soon," Galligan said of the estimate. "We're waiting to see what the number is."



Leaders offer an accounting of failed measure
Stamford ADVOCATE
By Brian Lockhart, Staff Writer
Published July 14 2007

Republican Gov. M. Jodi Rell and the General Assembly's Democratic majority abandoned proposed income tax increases this legislative session after learning the state's surplus had reached $1 billion.

But it turns out the state is simultaneously $1 billion in the red.

Connecticut keeps two sets of books - one for budgeting purposes and the other for accounting purposes.

The former practice, called "modified cash budgeting" allows the state to count revenues before they have been realized and delay expenses, resulting in the $1 billion budget surplus touted by Rell and lawmakers from both parties.

"It makes our books look like they're in better shape than they are," said state Comptroller Nancy Wyman, a Democrat. "(It's) a very liberal, loosey-goosey kind of accounting."

But generally accepted accounting practices, known by numbers-crunchers as GAAP, do not allow any gimmicks. Cash is recorded when it comes in and when it is paid out.

The state has a GAAP-calculated, long-term deficit of $1 billion which is reported to bond rating agencies, Wyman said. That deficit lowers Connecticut's bond rating and results in the state paying higher interest rates, which affects taxpayers.

"Quite frankly, if this were a corporation taking this kind of latitude, they would put the management in jail," said state Rep. John Stripp, R-Weston, a bank executive. "It's been going on for decades and decades (under) Republican and Democratic administrations.

"Everybody thinks we should change it but they look at the pain involved and everybody starts to shirk. . . . It creates a deficit you have to make up either by collecting more taxes or significantly cutting spending, both of which are painful to most people in the legislature."

In the early 1990s, as a trade-off for instituting the state income tax, lawmakers required the state to adopt the GAAP budgeting.

"From then on, the legislature and the governor delayed implementation," Wyman said.

That tradition continued a week ago, when Rell vetoed a bill, touted by Wyman and backed by the House of Representatives and Senate, that would have the state phase in GAAP for budgeting purposes.

Under the legislation, Wyman also would have developed a plan for the General Assembly to gradually pay down the $1 billion deficit rather than swallow that bitter pill all at once.

"If they wanted to go into complete GAAP accounting immediately, they'd have to be paying out $100 million every year for the next 10 years to get rid of that deficit," Wyman said.

But with legislators wanting to instead deliver on promised investments in health care and education, Wyman said she offered a system that would have required smaller annual payments of about $50 million.

A key factor in Rell's veto appears to have been a June 15 letter from Robert Desantis. Desantis is the president and chief operating officer of the Financial Accounting Foundation, a Norwalk-based entity which oversees the Governmental Accounting Standards Board, also in Norwalk.

The independent GASB is the group state and local governments nationwide turn to for establishing their fiscal guidelines. It supports GAAP budgeting.

But Desantis' letter states he fears the wording of Wyman's legislation would give the state comptroller, not GASB, the ability to set his or her own standards apart from GAAP.

"This portion (of Wyman's bill) threatens the integrity and objectivity of the independent standard-setting process and is a step backward for public trust, government accountability and financial transparency and the state's investors," wrote Desantis, who could not be reached for comment.

Rell, in a statement released about her veto, echoed Desantis' concerns.

 
Wyman accused Rell of being swayed by "misinformation, pressure and confusion" but the governor was not the bill's only opponent.

Although the GAAP legislation was passed unanimously by the House of Representatives, 14 senators opposed it, including Bob Duff, D-Norwalk; Judith Freedman, R-Westport; Andrew McDonald, D-Stamford; Senate Minority Leader John McKinney, R-Fairfield; and William Nickerson, R-Greenwich.

"This bill said all the other states will publish reports written by rules of the Financial Accounting Foundation located in Norwalk except for Connecticut, which will publish its own rules as we go along," said Nickerson, ranking Republican on the legislature's Finance Committee. "It was a nutty idea."

Duff said Desantis' points "were well thought out." He said he was not concerned about Wyman, but about how future comptrollers' might interpret the legislation.

Stripp said he had similar concerns, but ultimately voted with his House colleagues for the bill.

"Knowing Nancy for a long time, I was willing to take a chance because it would start to move us in a direction I think we should have moved a long time ago," Stripp said.

Robert Kurtter, managing director in public finance at New York City-based Moody's, one of the state's bond rating agencies, said there was a lot of concern within the industry about Wyman's proposal.

"As we read about it, it was just confusing to us," he said.

But ultimately, Kurtter said, after learning of Desantis' concerns and speaking to Wyman, Moody's was comfortable with the bill.

Kurtter noted there is nothing requiring Connecticut to use GAAP budgeting, and many governmental entities do not.

"The state has a fairly large, GAAP-reported deficit. And the state has not made progress in paying that off," Kurtter said. "It is a factor in the bond rating."

The legislature is in special session and has an opportunity to override Rell's veto. It does not appear the GAAP bill is considered important enough.

"I think it's important but not necessarily urgent," said Senate Majority Leader Martin Looney, D-New Haven.

Wyman said as long as she remains comptroller she will continuing pushing for GAAP budgeting.

"It's honest budgeting," she said. "This is the public's checkbooks. And it should be used the say way we'd be doing with our own checkbooks, with checks and balances. Why should the state be any different than the average taxpayer?"


Caution urged with town's pension funding
Westport NEWS
Paul Schott
Published 3:53 p.m., Thursday, September 6, 2012

After Westport's town employee pension fund posted a modest rate of return in 2011, Board of Finance members indicated Wednesday night that they will likely recommend to First Selectman Gordon Joseloff's administration a cautious funding strategy for those assets.

Westport's pension fund assets, which grew by 1.6 percent last year, totaled approximately $207 million, as of Aug 31, according to a report by the Windsor-based firm Fiduciary Investment Advisors, which advises the town on its pension fund investments.

Fixed income accounted for about $78 million, or approximately 38 percent, of those assets. Domestic equity comprised about $72 million, or about 35 percent, of the town's pension fund.

International equity totaled around $36 million, or 17 percent, of pension assets. Alternative holdings made up about $19 million, or 9 percent, of the town's pension fund. Finally, the town put about $3 million, or 1 percent, of its pension fund in cash.

"Two thousand-eleven, in all frankness, was a very difficult year," said Chris Kachmar, Fiduciary Investment Advisors' chief investment officer. "When you have a market and environment where fundamentals are thrown out the window and you have these very acute and distinct waves into risk, waves out of risk... that's a very difficult environment."

The pension fund functions as one of the town's most important fiscal entities, helping to finance defined-benefit plans received by hundreds of town employees. The town's budget allocates new contributions to the fund each year, based on counsel from the town's actuarial advisers. An investment committee -- which includes the Board of Finance chairman, the town's finance director and the town's comptroller -- reviews pension fund data monthly and meets with Kachmar to review the fund's performance and asset allocations.

FIA has advised the town on its pension fund assets since 2006. It does not manage the fund's holdings, but provides asset allocation guidance and helps to identify and monitor fund managers.

The town also has a much smaller Other Post-Employment Benefits fund, which helps to pay for retired town employees' health-care benefits. That fund, which was set up in 2009 to conform with Government Accounting Standards Board regulations, had assets totaling about $11.9 million, as of Aug. 31.

Investment rates of return for Westport's pension fund have oscillated dramatically in recent years. The fund posted return rates of about 10 percent in 2006 and 7 percent in 2007. The fund's rate of return then plummeted in 2008 to -21 percent. It recovered with an approximately 18 percent return rate in 2009 and 12 percent rate in 2010. But the pension fund produced a more pedestrian performance in 2011, with a return rate of only 1.6 percent. Those rates beat blended benchmarks every year, except in 2011, when it missed the blended benchmark by 1.3 percentage points.

The town will contribute approximately $9.1 million to its pension fund during the current 2012-2013 fiscal year and about $5.1 million to its OPEB fund.

The Board of Finance is now weighing where to set its recommendation for an expected annual investment return for the town's pension and OPEB funds. That rate will comprise a crucial assumption when the town's actuarial firm, Milliman, calculates Westport's employee pension and OPEB liabilities. Greater pension and OPEB fund investment returns will result in smaller contributions the town has to make to those funds.

Most Board of Finance members appeared to favor recommending an anticipated annual investment return rate between 6 percent and 7 percent for the pension and OPEB funds' assets.

"We're in a situation of violently low returns and increasing volatility," said Brian Stern. "If our objective is to be cautious, we should be even more cautious than we were in prior years."

Tom Lasersohn took a similarly circumspect position, arguing that recommending a return rate of more than 6 percent would be "folly."

Recommending a lower expected rate of return, also known as the discount rate, would help the town to reduce the risk of underfunding its pension and OPEB plans. But higher pension and OPEB fund contributions would also likely require the finance board to further raise the town's property tax rate, an outcome that several board members said they are keen to avoid.

"I feel uncomfortable using such a low number that would immediately create a massive tax increase," said Avi Kaner, the finance board's chairman.

The Board of Finance did not take any action Wednesday on the town's pension and OPEB fund expected investment return rates. It could vote to recommend a new rate to Joseloff's administration at a public workshop with representatives from its actuarial firm, Milliman, on Sept. 24.


Finance board backs strategy to cover employee benefits gap
Westport News
Paul Schott, pschott@bcnnew.com
Updated 05:25 p.m., Thursday, September 22, 2011


Grappling with escalating liability for retired town employees' health-care benefits, the Board of Finance on Wednesday endorsed a plan from First Selectman Gordon Joseloff's administration to fully fund an annual required contribution of $8.2 million this year to the town's Other Post-Employment Benefits fund.

Joseloff's proposal is based on a projected 7.5 percent "discount rate," or rate of return, on assets in the town's OPEB fund, resulting in a $75 million unfunded liability for retiree health-care benefits. Adoption of the 7.5 percent rate, Joseloff said, would require a $1.3 million allotment from the town's cash reserves in addition to other allocations of municipal funds to meet the annual contribution. To partially offset the withdrawal from reserves, the first selectman said he would try to make $500,000 in savings in this year's budget.

"We feel, given our level of reserves, our more-than-anticipated revenues and turnbacks, that this amount can be done without adverse impact to our reserves," Joseloff said. "It will not require going back to taxpayers, and it will maintain a level of reserves that we think is appropriate for this time."

Meeting this year's required contribution to OPEB will mark the beginning of a series of planned policy changes to fund and eventually shrink town employee benefit costs, Joseloff added. His proposals include refinancing to reduce borrowing costs, a hiring freeze for non-

essential town personnel and using third-party consultants to find savings in municipal employee health plans. In the long-term, Joseloff said he envisions that benefits will be reduced for new town employees.

While finance board members expressed support for Joseloff's call to rein in town employee benefit costs, they also voiced doubts about the veracity of the town's new OPEB actuarial report, produced by Pentegra Retirement Services. Following the discovery earlier this year that more than 400 town employees were omitted from a 2008 OPEB report by a firm that was acquired by Pentegra, Board of Finance members have criticized the experience and performance of the White Plains, N.Y.,-based actuary.

"My confidence in this report has decreased the more I look at it," said board member Tom Lasersohn.

Pressure is likely to further mount on Pentegra after a review of the report by the town's internal auditor, Lynn Scully, found that the analysis did not include public school teachers and administrators in its count of town employees. Those education personnel pay for their own health-care benefits when they retire, but the town could still be affected by costs associated with those employees' claims.

While Scully's review did not estimate how the town's OPEB liability would be affected by counting teachers and administrators, it found that OPEB valuations for other towns such as Greenwich, Fairfeld and New Canaan had included such personnel.

The latest OPEB report uses 2009 data, and board members are already seeking a more current actuarial analysis of the town's OPEB obligation. Board member Avi Kaner, who has repeatedly questioned Pentegra's credentials in recent months, on Wednesday called for the town to replace the firm with a new actuary.

"The last (OPEB) analysis is for 2009," he said. "Now we're in the 2012 fiscal year. This is a great opportunity to have a firm that knows what it's doing to come in and tell us where we are now in 2011."

Board of Finance members also pressed Joseloff to reform the town's fiscal management apparatus.

"We need to formalize internal controls," said board member Brian Stern. "The quality of data on OPEB ... has been substandard. We've found errors, we get information at the last minute, and information that quite frankly is confusing."

Joseloff said that he took "full responsibility for what has occurred." He added that the town will set up a committee composed of "knowledgeable professionals" and hired consultants to scrutinize OPEB data before it is sent off for actuarial analysis.

The town's OPEB liability and fiscal management will likely figure prominently on the campaign trail ahead of the Nov. 8 municipal election. Several Board of Finance and Representative Town Meeting candidates attended the Wednesday meeting.

"The average Westport taxpayer is absolutely shocked. Their confidence is shaken," said Michael Rea, who chairs the RTM's Finance Committee and is a Republican nominee for the Board of Finance. "Let's not forget that people are asking how this happened in the first place. What are you going to do to prevent it from happening again?"

Along with members of the public, the finance board weighed whether to back Joseloff's recommended 7.5 percent discount rate or to support using a more conservative 6 percent rate of return that would have yielded a $9.5 million annual required contribution and unfunded liability of $93 million. While no formal vote was taken, a majority of board members eventually settled on the 7.5 percent rate. They indicated, however, that they may seek to augment the $8.2 million ARC with additional funding later this year for the OPEB fund.

"I think the consensus is that if we have more money, we should put more money in," Board of Finance Chairwoman Helen Garten told the Westport News after the meeting. "It doesn't do any harm to put more money in. Essentially, we'll start to get this funded, because we are definitely behind in the funding of it."


Finance Board Agrees to Fully Fund OPEB
WestportNow
By James Lomuscio
Thursday, September 22, 2011

At a special three-hour meeting Wednesday night, Westport’s Board of Finance agreed that the town would fully fund its OPEB (other post employment benefits) obligations beginning with $8.23 million this year, and perhaps raise it to more than $9 million if town expenses allow.

First Selectman Gordon Joseloff and Finance Director John Kondub had recommended the $8.23 million annual required contribution (ARC) for the anticipated retiree employee medical costs based on a 7.5 percent discount rate for a fully funded plan projected to have a liability of $77.1 million over 30 years.  Under that plan, each household would pay an extra $250 a year. The discount rate is the projected annual rate of return for the OPEB funds invested.

It was the least expensive of three possibilities that the town’s actuary Pentegra Retirement Services had detailed in a 32-page report two weeks ago.  The other discount rates were: a 4.5 percent for an unfunded plan, with a 30-year total liability projected at $122 million and 6 percent for a partially funded plan with a liability of $95.7 million.

Helen Garten, board chairman, and board members Avi Kaner and Kenneth Wirfel favored the 7.5 percent rate.  Board members Ed Iannone, Brian Stern, Thomas Lasersohn and Allyson Stollenwerck, however, all suggested funding OPEB using a 6 percent discount rate.

Lasersohn, for one, said that 7.5 percent would offer a false sense of security, pushing the problem off to the future.  At the meeting’s conclusion, however, the board reached a consensus that in an uncertain economy the town should begin with an $8.23 million annual ARC, and to add to it if finances allowed.

“We have a great town, it is thriving, it’s not broke and we have time to put a plan in place,” said Stern. “The root problem is that we have these rich employee contracts.

“We have to stop hiring as many people as we do,” he added. “After they retire they wind up costing the town $100,000, and that’s a recipe for bankruptcy.”

For months, OPEB has been the 800-pound gorilla in the room, a worry compounded by the fact that the actuaries had been using the wrong numbers. The firm listed 452 participants as opposed to more than 900 current and former employees.  The error stemmed from the fact that the previous actuarial firm that Pentegra later acquired had only included municipal employees, failing to include Board of Education and the Westport Public Library employees.

“I take full responsibility for what has occurred,” said Joseloff. “To quote Harry Truman, the buck stops at my desk,”

For the 2011-12 fiscal year, Westport budgeted only $6.2 million, $2 million less for the ARC. To make up the difference, Joseloff said he would ask the finance board to allocate another $1.3 million from its reserves.

To lessen that cost, Joseloff said he would trim $500,000 from the current budget and for the future look to hiring freezes “except for essential personnel,” and for defined contributions from non-union employees. He said he would also seek to reduce employee benefits when contracts come up for renewal.  At the meeting’s start Kaner questioned the veracity of the latest Pentegra report, noting that the town’s auditor Lynn Scully had discovered that actuaries had not included certified teachers and administrators.

“My confidence in this report has decreased the more I look at it,” said Lasersohn. “I can’t believe we excluded employees again. If we set the ARC, we don’t want to be back here in five years and say, ‘Oh, we made a mistake.’ “

Garten, however, said that those employees being excluded would have a minimal impact on the ARC, and that it was necessary for the town to begin fully funding its OPEB liabilities.  Schools Superintendent Elliott Landon later allayed any of those fears, noting that all of the certified teachers and administrators participate in a state plan.

“Therefore, there is no cost to local taxpayers for administrators and teachers,” he said.

Among the members of the public who spoke were two Republicans running for the Democratic majority finance board: Michael Rea and John Pincavage.

“People are asking, ‘How did this happen in the first place, and what can we do to make sure it doesn’t happen again?’ ” said Rea.

“This is a great opportunity for the board to talk to the administration to put in a screening process for the next finance director.”

Finance Director Kondub is scheduled to retire in February.

Resident Ed Devlin praised the town for facing the OPEB conundrum head on.

“This town and this government are going to face this issue and get it fixed,” he said.

Devlin also took the opportunity to say that Westport’s retirement and healthcare contract provisions historically have been too rich compared to those in the private sector.  He called the benefits provided by towns, states and federal government “obscene.”

“They don’t exist in the private sector,” he said.


Questions haunt possible benefits miscount that could cost Westport millions
Westport News
Paul Schott, pschott@bcnnew.com
Updated 12:01 p.m., Tuesday, June 14, 2011

As town officials continue to investigate whether a 2008 actuarial report on town employee benefit costs accidentally omitted more than 500 municipal retirees from its calculations, Westport's fiscal future remains uncertain.

First Selectman Gordon Joseloff said Monday in an email to the Westport News that officials "continue to look into why some employees were not included in the calculations." He did not, however, provide any explanation of the potential miscount.

Doubts about the accuracy of the report have lingered since a tense meeting last week between the Board of Finance and representatives from the town's actuarial firm, Pentegra Retirement Services. At that meeting, Finance Director John Kondub and Chief Actuary Jeff Kissel said they discovered a possible oversight in late February as they reviewed the town's fiscal commitment to its Other Post-Employment Benefits (OPEB) fund, which pays for retired town employee medical costs not covered by Medicare. Kissel said that while the town had approximately 1,070 active and retired employees enrolled in pension plans as of June 30, 2010, only about 550 individuals were factored into 2008 OPEB cost projections done by the actuarial firm Retirement Services Group. Pentegra acquired RSG in August 2008, several months after RSG had completed its OPEB report.

The town's 2010 comprehensive annual financial report shows a similar discrepancy. It reports that a total of approximately 1,070 active and retired employees were enrolled in the town's pension plans, but only about 450 were covered by its OPEB plan.

"Nobody really looked at the difference between those two," Kondub said of the pension and OPEB plan totals. "My signature's on there, and I take responsibility."

The possible miscount further complicates the Board of Finance's decision on a new tax rate. Originally scheduled to set a new rate May 18, the board has twice deferred a vote as it awaits new valuations from Pentegra of the town's benefits obligations.

During the last few months, finance board members have said repeatedly that they intend to tie the new tax rate to Pentegra's calculation of a new annual required contribution (ARC) to the town's OPEB fund. The current required contribution to OPEB is approximately $4.5 million, but Kissel said last week that a new ARC will not be available for several weeks.

The finance board, however, plans to set a new tax rate Wednesday to be reflected in the first round of 2011-12 tax bills, which will be sent out in July. The meeting starts at 8 p.m. in Town Hall.

"We want to cover our obligations but be fair to current taxpayers," Board of Finance Chairwoman Helen Garten said in an email. "People can differ as to whether we should be funding the full ARC or only a portion, but it is hard to reach a conclusion without knowing what the ARC is."

If employees were accidentally omitted from the 2008 actuarial report, that error could have a dramatic impact on Westport's finances. As of July 1, 2007, the town had an estimated unfunded liability of $50 million to future retirees' medical claims, according to the 2008 RSG report. Factoring in more employees into the OPEB liability could raise the town's obligation significantly. Kissel last week declined to estimate how much a miscount could increase the town's OPEB liability.

To pay a higher ARC for the OPEB fund, board members have indicated they may set a substantially higher tax rate Wednesday. Westport's current tax rate is 14.85 mills, or $14.85 for every $1,000 of assessed real estate.

"There's a general sense on the entire Board of Finance of the desire to fully fund our required contribution to this unfunded liability," board member Avi Kaner said. "If we under-tax, it'll just catch up with us and create an even larger burden next year."

In addition to an unknown OPEB liability, town officials are grappling with other unresolved questions related to the possible benefits miscount. Work papers, a de facto employee roster, that were submitted to the town's actuaries may confirm whether education employees comprise a majority of personnel left out of the 2008 actuarial report. But Kondub said last week that he had not yet located work papers. The Board of Education also does not have such documentation, Assistant Superintendent for Business Nancy Harris said Friday.

"I don't keep records about [benefit plan] participation," she said. "If any of our employees have questions about that, we send them to the town to talk about it."

Harris added that management of education employees' benefits is essentially a town responsibility, with the education board administration only carrying out the "pass-through" function of transferring pension and OPEB plan contributions from education workers' paychecks to the town.

The credentials of Pentegra and its predecessor, RSG, have also come under increased scrutiny. Westport was the only municipality for which RSG did OPEB actuarial analysis, while Pentegra also does not serve as the OPEB actuary to any other towns or cities.

"I'm skeptical about the ability of this actuarial firm to accurately figure out what our liability is," Kaner said of Pentegra. "Discovering that this firm has no municipal experience raises all kinds of red flags."

Neither Joseloff nor Kondub could be reached for comment on the experience of Pentegra or RSG by press time.  Other elected officials have asked whether the town could have required Pentegra to review the analysis of the 2008 RSG actuarial report.

"It's like when a waiter comes up to a table and asks you what you'd like on the menu," said Michael Rea, chairman of the Representative Town Meeting's Finance Committee. "I think it's up to the person sitting in the chair ordering -- being the town, the finance director and the first selectman -- to make the request and make it part of what the actuaries do."

Further inquiry into the possible miscount is likely. Rea added that the RTM Finance Committee plans to meet in the near future with Joseloff and Kondub to discuss the matter.

"We need to investigate and find out what the impact is, so that we understand what's wrong with our system," Rea said. "There is something very definitely wrong."


Round Two: Board of Finance Approves 4.98% Tax Increase
WestportNow.com
Posted 06/17 at 12:42 AM


Acting on a request by Westport First Selectman Gordon F. Joseloff, the Board of Finance early today voted to rescind its earlier 7 percent tax increase for the next fiscal year and instead set a mill rate that would raise taxes by 4.98 percent.

On a 4-3 vote, with the three Republican members opposed, the board set a mill rate of 14.41 for the fiscal year beginning July 1, up from a 13.73 rate for the current year. The Republicans wanted a 4.72 percent mill rate increase.

The board had voted for the 7 percent increase on May 21 with only two days notice of an accounting standards change involving funding escalating future costs of retiree health care benefits. (See WestportNow May 21, 2008)

At the start of Monday night’s meeting, Joseloff proposed a 5.25 percent tax increase while devoting $2.4 million to fully fund for the retiree account in the first year. 

He listed a number of capital items that he said could be deferred and said there was additional revenue from the conveyance tax which the state legislature voted last week to extend for two more years.

He also suggested taking $2.5 million out of the town’s reserves, up from his original proposal of $1.5 million.

Republican members said the town did not need to fully fund the retiree obligation in the first year, as other towns had done, and said by doing so, the town could hold down the mill rate increase.

Shortly before midnight, Joseloff suggested a compromise—that the board approve a tax increase midway between his figure of 5.25 percent and the Republican-backed 4.72 percent.

He said he still felt it important to fully fund the town’s retirement obligations in the first year and as a result he recommended taking $2.9 million out of the reserve fund instead of $2.5 million.

At the same time, Joseloff pledged to try to further reduce spending on the already approved budget so the reserve level ultimately would be impacted as little as possible.

During the board discussion, representatives of the town’s actuary firm as well as a representative of its auditing firm answered questions about the town’s retirement obligations under the accounting standards rule change.

Westport mill rate set at 14.41
By STEVE KOBAK, Hour Staff Writer
June 18, 2008

Westporters can breathe a sigh of relief now that the Board of Finance voted to raise taxes by 4.98 percent at its Monday meeting, rescinding the 7 percent tax increase it had previously decided upon during its May 21 meeting.

The board also set a mill rate of 14.41, higher than the previous year's rate of 13.73 but slightly lower than the 14.70 mill rate set at the May 21 meeting.

A mill represents $1 for every $1,000 of assessed property. With the new mill rates, a Westporter who owns a $500,000 home will pay $7,205 in taxes for the 2008-09 fiscal year. Last fiscal year, the same Westporter would have paid $6,865.

The board was able to reconsider its previous tax increase because First Selectman Gordon Joseloff held off on reporting the mill rate to Hartford and printing the tax bill.

"That gave us the breathing room we needed to investigate further," said Finance Board Chairman Jeffrey Mayer.

To lower the 7 percent increase the board had decided upon at its May 21 meeting, Joseloff proposed a 5.25-percent increase, and said the town would contribute $2.5 million from the general fund in order to lower taxes.

Republicans suggested raising taxes by 4.72 percent, an increase that is equal to the 2008-09 budget increase, according to Republican board member Avi Kaner. The board eventually decided to split the difference between Jose-loff's and the Republican's proposal and raise taxes by 4.98 percent, Mayer said.

The board took $2.9 million from the town's reserves to offset the tax increase.

Kaner said the money taken from the reserve will not affect the town's AAA bond rating.

"Our reserves have historically been at a level that's above what rating agencies look for," Kaner said.

The mill rate was previously raised so that the town could conform to Governmental Accounting Standards Board Statement 45 (GASB45), an accounting principle that requires municipalities to financially plan for post-employment benefits of its workers.

"We started this process getting a bombshell when we heard the magnitude
of the GASB liabilities," said Mayer. "We did the
conservative thing at the time and we fully funded them."

GASB is a nongovernmental organization that sets accounting standards. Disobedience of GASB standards could negatively affect the town's bond rating, according to board members.

Mayer said the town will still be able to fulfill its GASB45 requirements while keeping the tax raise at a reasonable amount. The town will administer a phased-in approach to meet the GASB requirements, Kaner said.

"We managed to simultaneously lower the tax raise and at the same time fully fund our retiree health benefits," said Mayer.

"That's huge, and I think that's a testament to the hard work the board has been doing with the first selectman over the past few weeks," he said.


Westport's tax rate going up 7 percent
By STEVE KOBAK, Hour Staff Writer
May 23, 2008

A new national accounting principle and the need to protect the town's AAA bond rating forced the Board of Finance to increase the mill rate at its meeting Wednesday.

The board raised taxes by 7 percent, increasing by 0.97 mills the current rate of 13.73 mills to 14.70 for the 2008-09 tax season.

"I don't think any of us are happy with the fact that we have to increase the mill rate as much as we did," said Democratic board member Kenneth Wirfel.

A mill represents $1 for every $1,000 of assessed property. With the new mill rates, a Westporter who owns a $500,000 home will pay $7,350 in taxes for the 2008-09 fiscal year. Last fiscal year, the same Westporter would have paid $6,865.

"Let's not make any bones about it," said Board of Finance Chairman Jeffrey Mayer, a Democrat. "It's a significant increase to the average taxpayer."

The mill rate was raised so that the town could conform to Governmental Accounting Standards Board Statement 45 (GASB45), an accounting principle that requires municipalities to financially plan for post-employment benefits of its workers.

GASB is a non-governmental organization that sets accounting standards. Disobedience of GASB standards could negatively affect the town's bond rating, according to board members.

"What we're doing here is safeguarding our AAA rating," said Mayer. "I'm not about to jeopardize that rating on my watch."

Previously, Westport funded retirement benefits for municipal employees on a pay-as-you-go basis, budgeting some money for imminent retirees. Now, the Board of Finance must pre-figure retirement benefits for each employee into its operating budget.

"This decision will now have a ripple effect on our budget for years to come," said Republican board member Avi Kaner. "For every year now, we'll have this additional amount that we have to fund out of the budget."

The town must set aside $44 million over the next 30 years, or $4 million per year, to meet its GASB45 obligation.

"We were aware of the GASB issue but we did not expect the number that we would be obliged to commit to would be as large as it was this year," Wirfel said.

Board members said, only 48 hours prior to the meeting, actuary advisors informed them about the amount they needed to set aside to meet the town's GASB45 requirements.

"We were blindsided by it," Kaner said.

Had they received the quotes sooner, they could have slightly offset the mill rate increase by modifying the budget, according to board members.

On May 7, the board approved a $168.7-million budget for 2008-09, a 4.72- percent increase from the 2007-08 budget. Without the GASB45 funding, board members said the mill rate increase still would have been 5 percent due to the budget increase.

"Gordon Joseloff had made significant efforts to restrain all but the fixed increases," said Wirfel. "I know that the Board of Education had made some very careful decisions to keep apace with other school systems."

Before receiving the actuary quote, the town had already figured $1.7 million for retiree benefits in the 2008-09 budget. To fund the GASB45 obligation, the board had to take $1.5 from its reserve fund and add $2.4 million to the mill rate.

Mayer and Republican board member Charles Haberstroh said the board did not take more money out of the reserve because they felt it might hurt the town's bond rating.

The mill rate passed 5-1, with the one dissenter being Haberstroh, who wanted to increase the town's reserve fund by raising the mill rate.

"I was concerned that, given the disarray in the financial markets, rating firms were going to be tougher on the AAA rating," he said.

First Selectman Gordon Joseloff said he was "disappointed" in the mill rate increase. He had calculated a 3.93-percent tax increase prior to the release of the actuary quotes but said the Board of Finance had to raise the mill rate to protect the town's AAA bond rating.

"It's unfortunate," he said. "I'm not so concerned about whether I look good, but the fact is that it could impact our residents."