Last month, the Securities and Exchange (SEC) took a break from surfing porn and issued a cease and desist order against the state of New Jersey for pension fraud. Apparently, between 2001 and 2007, the state "inflated" the amount of money it contributed to its pension fund. On top of that, investors purchased $26 billion in bonds based on this information.
The missing (or imaginary) pension money is gone and it's not coming back because the state cannot raise taxes any further and have to cut billions in other parts of the government simply to balance the budget. How is this any different from Bernie Madoff's $50 billion fraud?
The New York Times did point out that the problem started when:
"The S.E.C. said the fraud began in 2001, when New Jersey increased retirement benefits for teachers and general state employees. New Jersey did not have the money to put behind the new benefits, but every year after that, the state treasurer certified that the pensions were being funded according to the plan."
Additionally, the article pointed out:
"Actuaries, for instance, have been raising questions about the framework Illinois has laid out for bolstering its pension funds. In New York, California and other places, financial advisers have told lawmakers that benefits could be sweetened at virtually no cost, only to be proved wrong once those benefits were adopted."
The Wall Street Journal also pointed out that the fraud could be widespread across several states and involve giant amounts of money:
"The New Jersey case is the SEC's first-ever fraud charge against a state—amazing when you consider that the market for municipal securities, including bonds issued by states, is now roughly the size of the corporate bond market. It's doubly amazing given that accounting by government issuers is "uniformly dishonest," according to a former senior official at the SEC."
The WSJ also points out that:
"The last two times Congress has legislated heavy new requirements on private companies that participate in the securities markets—the Sarbanes-Oxley Act in 2002 and this year's Dodd-Frank bill—government issuers received a pass."
It appears to me as if we are treating the state pension funds the same way we treated Fannie and Freddie before the mortgage crisis. It looks like another black hole is coming down the road for taxpayers.