Boston Transit Authority Pension Study

Based on audited financials, The Boston Transit Authority (“MBTA”) pension plan’s assets are officially only 29% of its liabilities, an underfunding of approximately $470 million. 

That's HUGE underfunding.

Harry Markopolos is the investigator who exposed the Bernie Madoff Ponzi scheme.

He's uncovered a new fraud:

 -- He claims the MBTA pension fund is $500 million more underfunded than previously thought -- he claims the actual number is closer to $1 billion.

The huge gap is due to overstating asset values and returns, underestimating employee’s life expectancies, and using an unrealistic discount rate to calculate future returns on investments.

MBTA’s problems are endemic among similar pension funds.

The unfunded status of a pension fund is the market value of the assets minus the present value of future liabilities, discounted at an actuarially determined interest rate. 

For almost all public pension plans the number is negative = underfunded.

Markopolos said the $500 million additional funding gap is due to bad investments, fraudulent accounting and unrealistic actuarial assumptions.

Northfield Information Service is a provider of advanced analytics to institutional investment managers and wealth managers. 

Its CEO, Dan diBartolomeo, worked with Markopolos in the Madoff investigation, and also helped him with the MBTA case.

“No good outcomes result when you mix politics and money,” Markopolos said.

Examples of the problems:

Fletcher  Asset  Management

MBTA troubles began in 2012, when it was revealed that it had lost $25 million in an investment in Fletcher Asset Management, a hedge fund run by Alphonse “Buddy” Fletcher. 

The MBTA had been hiding this loss until it was exposed by an investigative reporter from The Boston Globe.

Fletcher promised guaranteed returns of 12%, similar to Madoff’s sales pitch. 

It was nothing more than a Ponzi scheme. 

Three Louisiana pension funds lost $100 million in the scheme.

Fletcher's chief investment officer Karl White had been the executive director of the MBTA pension fund. 

One year after leaving the MBTA, he convinced it to fund Fletcher.

Fletcher used the money it raised to invest in a movie, Violet and Daisy, which his brother was making and in a “penny stock” called ANTS.

The Fletcher irregularities went unnoticed by the MBTA’s board, which  consisted of mostly non-college graduates – union members who worked on or operated the city’s busses and subways. 

Neither the MBTA’s auditor, KPMG, nor Marco Consulting, its pension consultant, reported any problems with the Fletcher investment.

Neither State Street Bank, the MBTA’s custodian, nor Buck Consultants, the plan’s actuarial consultant, warned of any problems.

KPMG accountants should have found the discrepancies -- Markopolos said auditors are typically “22-year olds who catch more colds than frauds.”

Weston Capital

The MBTA invested approximately $10 million in Weston Capital, a hedge fund run by Jason Galanis, whose father had run a big Ponzi scheme in the 1970s, stealing $400 million mostly from Hollywood investors.

Markopolos said in 2007 that Galanis bought shares in Penthouse magazine, filed a false 10Q with forged signature, and had caused its auditor, Deloitte, to resign. 

All this happened before the MBTA made its investment in 2009.

By the end of 2013, the MBTA had written off the value of its Weston investment.

The MBTA's pension fund is “one bear market away from disaster,” Markopolos said.

The investigation is ongoing as to how the MBTA was able to report spectacular investment results that never happened -- most likely due to accounting manipulations. 

The MBTA used actuarial tables from 1994 to determine the expected lifetimes of its employees. 

This resulted in shorter lifetimes than the rest of the pension industry, which was using tables from 2000. 

Markopolos called out the 8% discount rate to calculate the present value of its liabilities, saying an economically appropriate discount rate should be about 4.5%.

The MBTA is a multi-employer public pension plan -- one of about 6,000 small state-run plans that have about $3 trillion in assets -- roughly 30% of the total assets in all public pension plans). 

Markopolos said there are “plenty of other plans in Massachusetts with similar problems.”