Showing posts with label pensions. Show all posts
Showing posts with label pensions. Show all posts

Monday, March 12, 2018

Unintended Consequences and the Difficulty in Understanding the United States

State Statistics

Let's take two states. State "LI" has a pro-government spending bias. It spends much more on public welfare and education than conservative State "NT." Like many Southern states, NT has a history of de jure racism ("In 1870 the state Constitution was amended to prohibit interracial marriage.") and defied Brown vs. Board of Education by increasing privatization of education. As of 2008, 17 of its school districts continued to be under a court-supervised desegregation order

LI is the opposite--it was first to ratify the Thirteenth Amendment to the United States Constitution, which abolished slavery nationally. Other than housing laws, it did not participate in expressly racist legislation. A billionaire philanthropist built several prominent institutions, including a top-ranked private university, in the state. The country's first African-American president came from LI in 2008. 

NT also had a private philanthropist build a major private university, but unlike LI, it has no nationally-recognized public universities. In 2016, while LI voted for liberal presidential candidates, NT voted overwhelmingly for conservative candidates. 

As of 2016-2017, NT's per capita personal income was 44,317 USD annually, and LI's per capita personal income was 51,817 USD annually. NT's population was about 74 to 79% white; LI was more diverse, being 62 to 77% white. LI had higher union membership than NT: "In 2017, union members accounted for 15.0 percent of wage and salary workers in [LI], compared with 14.5 percent in 2016." NT, a right to work state, had union membership of around 5.7% in 2016. In 2013, NT spent 8,208 USD annually on primary and secondary school pupils; LI spent 12,288 USD annually.

You might say it's obvious LI is doing better than NT, but you'd be wrong. In 2015, LI had 863 homicides and 1,220 firearm deaths. Its infant mortality rate in 2016 was worse than the average American state, with some counties alarmingly worse. Although NT's infant mortality rate was actually higher than LI's, it had a lower homicide death rate


LI's pension deficit was the largest of all 50 states; in contrast, NT had one of the highest funding ratios. Even on citywide level, LI's Ogacihc was the worst city in terms of underfunding, while NT's Ellivhsan was one of the best (See pp. 22 and 23). 

Homeownership? NT prevails with 67.2% ownership in 2017 vs. LI's 65.4%. 

Don't count out LI, though: 

LI had a higher average ACT score of 20.7 (or 21.4, depending on which data set you use) compared to NT's 19.8. (Counterpoint: the average nationwide score is 21, and after adjusting for random factors, one could argue there's not much difference between the two states.) 

What about interracial marriage? Some NT cities (Agoonattahc) rank the worst/least on this measure, while one large metro in LI ranks among the best/most. 

Passport issuance? In 2017, LI had 791,802 passports (0.0618 rate) while NT had 242,532 (0.0361 rate). 

Except for pollution, most health statistics, including infant mortality, favor LI. 

What's the point of reviewing these statistics? Well, they don't actually show anything useful if you want to relocate. A person looking to buy a home would probably prefer NT's largest metro area over LI's, but someone interested in price appreciation and public transportation might prefer LI. 

Also, NT might have fewer homicides than LI, but what if it's because of underreporting or a corrupt coroner misclassifying deaths? What about police shootings of civilians? Did anyone think to consider divorce rates or the quality of public schools when factoring in local housing prices? How about the number of public parks and/or development-protected areas? 

We have all heard "there are lies, damn lies, and statistics," but it's important to highlight a mathematical aspect of capitalism few people understand: 1) it is much harder to maintain rising wages and disposable income than to control inflation in essential items; and 2) higher populations, especially if including many new entrants, impact data tremendously. Thus, NT might be a much better place to live today because its wages and wage growth are more likely to allow residents to buy a home than in LI, but no solid evidence indicates higher property taxes or corporate closures will make this true 10 to 15 years from now. In addition, if NT has gained thousands of new residents in the last few years, its supply/demand data will be skewed because there is no guarantee of continued inward-migration, and at some point, taxes or expenditures must rise to meet the increased population demand. 


Finally, although the data indicates NT should be less racially-tolerant than LI, a) it depends on which city you visit; and b) NT's general hospitality may trump any of its residents' underlying opinions about groups in general. More below on b): 

"Sure, up there [New York City] black and white work side by side. But at night the black goes home to his ghetto and the white to his suburb. Here in the South we've been living together for 250 years, talking to each other every day. That gives you something solid to build on." -- Mayor Johnny L. Ford [National Geographic (October 1975), pp. 569] 

"It struck me as notably ironic that Southerners could despise blacks so bitterly and yet live comfortably alongside them, while in the North people by and large did not mind blacks, even respected them as humans and wished them every success, just so long as they didn't have to mingle with them too freely." -- Bill Bryson [The Lost Continent, paperback, pp. 63 (1989)]

The lesson? Statistics do not provide useful guidance in evaluating a state because they are not set up to capture direct, honest feedback even at a local level, which means they cannot reliably predict inward or outward migration patterns. Even if one asks the right questions, experiences vary so much across different cities in the same state, it is difficult to get a clear picture on anything meaningful. Never before have we had so much data; never before has such data been so useless. The older I get, the more I realize economics and sociology need to be merged to be a useful discipline. 

Debt, Debt, Baby

Setting aside social and cultural dynamics, modern American capitalism works by capturing platforms and using debt to continue to gain market share. This model works only if interest rates remain low and if banks are willing to roll over maturing debt or if private equity investors are willing to loan/invest more funds. 

When someone complains Uber or Amazon are not as profitable as other companies, you can safely ignore them on macroeconomic issues--they don't know how the modern economy works. (Even Nokia needed 17 years before it turned a profit on electronics--and that was before any newfangled financial "innovation.") Indeed, most successful American cities have become financially successful because they've carved out some unsustainable federally-linked advantage (security spending, educational loans, ethanol subsidies) or loophole (segregation, lax antitrust enforcement, etc.). Seen this way, "capitalist" America is not much different from "socialist" China, except China's national government has recently become stricter, functioning as a proper check and balance against local corruption--and growth at any cost. 
America or China? From Duncan Clark's Alibaba (2016)

Today, a debt-fueled strategy might be essential in an era where countries from China to Singapore practice a hybrid public-private model, practically picking winners and losers by governmental association. Alibaba infamously transferred Alipay, an online payments business worth at least 1 billion USD into a structure held 100% by a Chinese domestic company "[t]o expedite obtaining an essential regulatory license." [See Duncan Clark's Alibaba (2016), Ch 11.] The payment to international investors was 51 million USD. Alipay--not Alibaba--subsequently "was the first of 27 [Chinese] companies to be issued licenses and was awarded license number 001" by the PBOC. [Id.] 

Seen in a non-ideological light, countries and municipalities that attract capital--especially at lower interest rates--and roll over debt without asset sales will be successful. It has nothing to do with democracy, socialism, or any other "ism." The modern world--from international relations to the smallest city--runs on debt and the perception and confidence such debt will be paid. Public-private partnerships, with their more assured outcomes, are probably the future, and America needs a strategy apart from overspending on military R&D, both domestically and internationally, then trickling down innovations through private companies to the civilian sector. 

In such a convoluted world, numbers and statistics are not as helpful as they should be because every entity, not just ratings agencies, has incentives to optimize the numbers. Given the necessity of a strong banking sector in a debt-fueled economy, America's 2008-2009 banking bailouts should now make sense, except the lack of substantive reform, especially in the "shadow banking" sector, foretells another crisis. Unsurprisingly, debt-fueled economies prioritize economic growth and productivity over all else because growth makes it easier for debts to be paid both directly (newer debtholders maintain the cycle) and indirectly (inflation in assets renders past debts less valuable). It is unclear whether younger generations in developed countries are willing to accept such a paradigm. 
From Marilynne Robinson's What Are We Doing Here? (2018)

More troubling, some states have used lower interest rates and debt to pay off vested interests such as government unions rather than investing in the future. LI's pension issues are one obvious consequence of such an approach as well as an example of unintended consequences. When the Federal Reserve lowered interest rates, making it easier for tech companies to gain national and international market share, it did not intend for some states to handicap future generations by paying off vested or corrupt interests through complex political machinations. It may not have even intended the privatization that eventually came after such methods sapped cash flow from local and state budgets. Regardless of intentions, if growth must be maintained, especially through debt, then we must all "publish or perish," and quality and integrity aren't guaranteed in such single-minded productivity, either in products and people. I have spent much of my life studying numbers only to realize the "optimization bias" I mentioned earlier means any conclusions I've derived from "objective" data is inferior to an in-person daily stroll in an area. 
Jim Rogers, Street Smarts (2013)
What's Next?

If a paradigm deficient in quality or meaningfulness is an unintended economic result, how can we create a better one?  "The fundamental problem [of economics] is not our lack of information but our limited ability to process it." [Ha-Joon Chang, 23 Things They Don't Tell You about Capitalism (2010)] I've traveled extensively for two years and I have processed why developed countries are faltering. Their systems--economic, social, and cultural--no longer prioritize justice. As stated above, they prioritize debt and debt repayment, which require deference to banking and military sectors. Security is good, but it does not make the soup taste better. Let me explain more clearly.

Society 1 is able to have as much as it wants--as long as Societies 2 and 3 buy its loans/debt. Society 1 creates systems based on x, y, and z values--and then builds numerous institutions around those purported values. The problem is that Society 1, flush with almost unlimited possibilities because of its ability to issue debt, eventually forgets to cross-check whether its values--democracy, capitalism, meritocracy--are actually reflected in its institutions. As its institutions become larger and more entrenched, they rely on perception to increase numbers, and it becomes easier to use the media--especially visual images--to convince voters to go along. (
For example, even if Society 1's military has lost every non-Grenadian war since Vietnam, most recently in Syria, producers--financed partly by government money--will greenlight another Churchill or WWII movie.) 

Of course such maneuvering has limits. As it becomes more obvious something is wrong, distractions and misinformation are used to maintain debt aka the status quo. In such a world, having multiple layers of complexity becomes useful to survival even if not a single layer benefits non-insiders. 

Over time, a few people start to realize Society 1's true values aren't whatever it claims, such as freedom--it's the opposite. The inability to do certain things--copying IP, threatening harm, silencing speech, invading a private citizen's privacy, etc.--is a free society's foundation. The trick is achieving a balance where citizens don't rely on insurance companies and their lawyers to receive a fair, predictable result while avoiding a nanny state. As of 2018, the balance in America, er Society 1, had gone so far awry, the following disclaimer would arrive from a public university after having paid 450 USD for event tickets: 

For All Ticket Purchases: The Division of Intercollegiate Athletics of the University of Iowa does not guarantee the availability of tickets, and reserves the right to modify or cancel any of the conditions displayed on this website, including ticket pricing or availability, at its discretion and without prior notice. If the University does not fill a ticket order or request, it will refund the purchase price or credit the customer's charge account, and is not responsible for any other damages or fees which might be incurred. By using this website, you agree that any ticket transactions with the University of Iowa are governed by the laws of the State of Iowa, without regard to conflict of laws principle.

Why bother having a website selling tickets if there's no guarantee you'll get the ticket you paid for? The Iowa, er, Awoi, lawyer did a good job for his/her client, but a terrible job for society and America's citizens. Historians will ask whether Americans forgot that all three branches of government, along with the fourth pillar of media, were required for a functioning government. Debt makes a leading appearance here, too, because new lawyers with 100,000 USD in student loans will need to pay off the loans before valuing justice and fairness above personal preservation. Lawyers are fond of saying the law doesn't create justice, only a chance at justice. Yet, as legal fees, one-sided agreements, and complexity (look at the indemnification clause in any online agreement) increase, one can argue such chances have disappeared for most people. 

Without all branches fulfilling their roles, some Americans saw decline as early as 2009: 

“We are watching the decline and fall of the United States as an economic power — not hypothetically, but as we speak,” said Craig R. Barrett, the chairman of Intel.

While traveling, I have wondered what America will leave behind as its economic empire declines, and until now, I have omitted an important detail. China will indeed become the world's economic superpower, but it does not seem able to replicate the ideals America brought the world in just 55 years. A country that jails Liu Xiaobo--author of the words below--will never be admired except grudgingly, even if Xiaobo is clearly a deluded, Western-backed warmonger. 

Throughout all these years that I have lived without freedom, our love was full of bitterness imposed by outside circumstances, but as I savor its aftertaste, it remains boundless. I am serving my sentence in a tangible prison, while you wait in the intangible prison of the heart. Your love is the sunlight that leaps over high walls and penetrates the iron bars of my prison window, stroking every inch of my skin, warming every cell of my body, allowing me to always keep peace, openness, and brightness in my heart, and filling every minute of my time in prison with meaning. My love for you, on the other hand, is so full of remorse and regret that it at times makes me stagger under its weight. I am an insensate stone in the wilderness, whipped by fierce wind and torrential rain, so cold that no one dares touch me. But my love is solid and sharp, capable of piercing through any obstacle. Even if I were crushed into powder, I would still use my ashes to embrace you.

Even Singapore, a healthy blend of American and Chinese influence, jails Jehovah's Witnesses and bans their literature. For all its practicality, Singapore's Chinese elite cannot bring themselves to make an exception to military conscription for a well-established religion--an issue America resolved in 1943: "Those who begin coercive elimination of dissent soon find themselves exterminating dissenters. Compulsory unification of opinion achieves only the unanimity of the graveyard." (Supreme Court Justice Robert Jackson)

It is true that America jailed Martin Luther King, Jr. and spies on its own people with the same fervor as East Germany's Stasi, but MLK was released and Snowden is still alive. The perpetrators of Abu Ghraib may not all have gone to jail, nor received appropriately lengthy sentences when convicted, but because of American media (and the delightful Errol Morris), no decent person hears the names Lynndie England, Charles Graner, or Megan M. Ambuhl without feeling pity and outrage. 

You see, every country is the same in the sense all of them lurch towards entropy, with the rate of decline contingent on its people's ability to reverse poor decisions and--apologies for the colloquialism--prevent "full-retard." It's not coincidental that America's decline and China's rise occurred when decisions post-9/11 were not reversed in a timely manner. Even before Abu Ghraib; the overbroad Patriot Act; Guantanamo Bay's murky legal status; and the trillion-dollar illegal invasion of a former allied country, America's failure to ensure a match between its institutions and purported values led to a mishmash of unmanageable fiefdoms, none of which were truly free, and--more importantly--none of which could be shut down quickly if maintaining harmful trajectories (such as the cementing of the military-industrial complex). From The Atlantic (September 2016), by Steven Brill

DHS--which has had seven undersecretaries or acting undersecretaries for management--has perennially been on the GAO’s list of agencies whose overall management is considered “at risk.” From the beginning, the agencies thrown into the new superagency fought to keep their turf, often calling on congressional allies to help. “At one meeting early on, I mumbled something about why should the Coast Guard and Customs each have their own helicopters and planes,” [DHS's] Tom Ridge recalls. “Why couldn’t they combine to purchase the same stuff? Within a few days, we had calls from Capitol Hill warning us not to mess with the Coast Guard’s or Customs’ procurements.” (The two agencies still have their own air forces.)


In hindsight, the failure of America's lawyers and journalists to expeditiously reverse the mistakes of the executive and legislative branches was the beginning of the end of America's reputation. No nation can withstand hypocrisy for long; humanity's DNA rejects it like a lethal virus. But--and there was always going to be a "but"--at least America, in purporting to adhere to certain values, gave room for its idealists to reach for them. 

Interestingly, as of 2018, China also prioritizes economic success and uses debt to turbocharge its economy, but as the creditor of over one trillion USD, its export-driven economy has unique advantages as well as risks (currency devaluation, tariffs, etc.). If it does not continue to create jobs, why should anyone with an independent streak stay if they can leave? Countries like the UAE do not do well on the "daily stroll" test despite financial prosperity because they have not assimilated their best talent. Similarly, China's behavior towards nonconformists will rob them of the privilege of being emulated, which will limit its ability to keep its best people. There is a reason a young Jack Ma (Ma Yun) learned more in Australia than in China and does not trust people from Shanghai, Taiwan, or Hong Kong. 
From Clark's Alibaba (2016)

In almost every country, the best residents are from somewhere else or have developed their ideas elsewhere, and in any time period, it will always be much easier to steal talent than to create it. Consequently, nations that do not provide the appropriate balance of security and freedom lose automatically because they do not promulgate values to be emulated as long as they silence critical or nonconformist voices. The act of silencing people who think differently repels the most talented, who are often outsiders. No amount of prosperity can resolve the hypocrisy of telling others they know what is best for them while expelling people who question the status quo. 

America may be in decline, it may have the world's highest incarceration rates, but it continues to uphold values other than financial prosperity. Such values, even if allegedly secondary, allow nonconformists to prosper, who then contribute to art, literature, sports, movies, and other distractions that may eventually provide non-obvious opportunities for cohesion, innovation, or collaboration. China may be on the rise, but as long as it chills nonconformity, it will lose talent to other countries, giving competitors the upper hand. 

One Big Family: Stupidity, Insanity, & Idealism

"I never dreamt that I would get to be / The creature that I always meant to be." -- Pet Shop Boys, "Being Boring." 

I've said before Trump was elected because American voters rightfully realized if choosing between stupidity and insanity, at least insanity can provide advantages. (Had Bernie Sanders been the Democratic nominee, the election would have been a fair fight.) The difficulty in understanding the United States is that while it will make mistakes, including incredibly stupid ones, idealism and insanity are fraternal twins. It takes some level of delusion to think you can change the world, to ignore the vested interests already at the door ready to block your efforts. Weak countries tend to see one of the twins and not the other. They cannot see that by censoring one twin, they cause the other--and perhaps a level-headed cousin or two--to flee or opt out of public affairs, leaving a space that will be occupied by authoritarians who do not believe the purpose of security is to create diverse meritocracies with opportunities for all citizens. Humanity never knows in the present tense which fraternal twin it is dealing with, nor which extended family members will make positive contributions, but we do know America has benefitted the most from the world's migration in the 21st century, a migration that would not have occurred without purporting to stand for certain values. In the end, America's lasting contribution to the annals of knowledge might be far more than the fact that meritocracies are aided by "uninhibited, robust, and wide-open [public debate that] may well include vehement, caustic, and sometimes unpleasantly sharp attacks on government and public officials." It might be that without such an approach, the best migrants will not come, or if they come, will not assimilate. 

Any man more right than his neighbors should not constitute a majority in his neighborhood only if he lives by himself in the woods. 

Conclusion

Will Trump's insanity be better than Hillary's stupidity? As long as residents lack free mobility, which requires legal reciprocity, it doesn't matter. "Voting with one's feet" is not possible until immigration laws worldwide are modified, and even then, any reform will be based on subjective factors, an imperfect endeavor. Countries claiming to value human beings must work together to increase mobility, the ultimate check and balance on power's tendency to make mistakes. In the end, one cannot favor freedom without giving credit to its midwife, mobility, and the world's failure to properly resettle refugees makes me pessimistic for the future of freedom and justice. 

I also wanted to share what I've learned from my travels, but as usual, I've wandered far astray. I really only have three lessons: 

1. Living with a member of the opposite gender, even only for one week, changes your body's chemistry. 

2. There is no ideal place. Everywhere has tradeoffs, and the act of traveling makes it easier to determine what you really value. For example, I've known I value clean air since I traveled to India in 2010

3.  Living close to farmers means everything you eat tastes delicious--and is often cheaper because third-party transportation costs are absent. 

My travels are not over. I enjoyed Mexico City 
and Guanajuato city and will be visiting Houston tomorrow, then Iowa City in April. I look forward to touring several Iowa cities (believe it or not, Iowa has one of America's oldest surviving mosques), and I'm interested in seeing how the generally conservative state will respond to my penchant for stirring the pot. That's my way of saying if Terry Brands punches me at the Wrestling World Cup, I probably deserved it. I'm still going to yell "Alireza Dabir" if I run into him. I want to see how Middle America treats its dissidents. 

© Matthew Mehdi Rafat (2018)

Update on April 11, 2018: I saw one of the Brands brothers in Iowa City, and only then did I realize a flaw in my plan: Tom and Terry are twins, and I can't tell them apart. 

Update on April 18, 2018: According to Leila Fadel in the May 2018 edition of National Geographic, "The first mosque was in North Dakota. Iowa is home to the oldest surviving place of worship built for Muslims in 1924, with an immigration act that barred people from Asia." 

Update on August 14, 2020: Though Liu Xiaobo was awarded the Nobel Peace Prize, in fact he has consistently supported American wars. According to The Guardian's Barry Sautman and Yan Hairong, Liu "has endorsed the invasions of Iraq and Afghanistan, and he applauded the Vietnam and Korean wars retrospectively in a 2001 essay." Nevertheless, the authors write, "Imprisoning Liu was entirely unnecessary." 

Tuesday, September 12, 2017

The Only Legitimate Civil War is against the Establishment

The only legitimate cause of internal social strife is the old versus the young, or change against the established ways. Once a society moves into any other kind of conflict, decay is inevitable.

If you see your media, intellectuals, or government focus on minorities without political power or some other domestic threat, you must learn from history. They are trying to distract you from their own incompetence.

BonusOld versus the young, it's the same old story, played differently and with greater amplification because of the way modern debt can be structured. https://www.hvst.com/posts/the-pension-storm-is-coming-to-europe-it-may-be-the-end-of-europe-as-we-know-it-Nwb82MQo

Tuesday, March 15, 2011

Will Government Pensions Need Bailouts?

According to PLI's news capsules,

State pensions are recovering as the stock market improves, but they still have a long road to financial health, says a recent report. State pension systems had a funding ratio of about 69% for fiscal 2010, an increase from the previous year's ratio of 65%, reports Wilshire Associates. Still, that's not near 2007's estimated average funding ratio of 95%. "The trajectory is up, albeit it's up off a pretty low base," said Steven Foresti, managing director at Wilshire. (From WSJ, March 7, 2011, by Jeannette Neumann)

Here's what really interesting: "Over the next decade, Wilshire projects public pension plans will have a median annual return on their assets of 6.5%." If major pension/hedge funds are predicting just 6.5%, it will be interesting to see the average return for non-institutional investors. Remember: to the extent these government pension funds fail to fully fund themselves, the taxpayer is on the hook for all payouts.

Thursday, January 6, 2011

Pensions, New Jersey Corruption Style

I can't believe I didn't see this article when it first came out:

http://redtape.msnbc.com/2010/11/the-secret-sauce-behind-bloated-state-pensions.html#posts

Anyone who wants to defend pensions for public employees needs to click on the link above. Remember: government unions tend to have major pull with legislatures, because in some cities, the union machine puts a candidate ahead by 20% to 30% immediately. That's what happens when only about 50 to 60% of eligible voters show up on election days.

I feel sorry for New Jersey taxpayers and wish Governor Christopher Christie well.

Saturday, May 29, 2010

David Einhorn on Keynesian Economics

In "Easy Money, Hard Truths" (5/26/10), David Einhorn--in the NY Times--delivers some interesting facts:


Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.

Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.

Modern Keynesianism works great until it doesn’t. No one really knows where the line is.


So much wisdom in one article. I recommend you read the entire article by clicking on the link above.

Tuesday, May 25, 2010

Links for Interesting Reading


1. NYT, "Can States Fix Their Pension Problems?"

http://roomfordebate.blogs.nytimes.com/2010/05/20/can-states-fix-their-pension-problems/

"Gov. Arnold Schwarzenegger’s pension adviser, David Crane, recently told a state Senate hearing on pension reform, “One cannot both be a progressive and be opposed to pension reform. The math is irrefutable that the losers from excessive and unfunded pensions are precisely the programs progressive Democrats tend to applaud. Those programs are being driven out of existence by rising pension costs.”

2. 9th Circuit decision (Harper v. Poway, 445 F.3d 1166 (2005)) on academic free speech--no longer citable, but the dissent is worth reading:

http://ftp.resource.org/courts.gov/c/F3/445/445.F3d.1166.html

Judge Kosinski: "Tolerance is a civic virtue, but not one practiced by all members of our society toward all others. This may be unfortunate, but it is a reality we must accept in a pluralistic society."

Judge Kosinski: "We are taught to take pride in who we are; it is, in a sense, the American way. It seems particularly chilling to free expression to restrain speech that expresses pride in one's own religion, ethnicity, sexual orientation, etc."

"[The government] has no such authority to license one side of a debate to fight freestyle, while requiring the other to follow Marquis of Queensberry rules." -- See R.A.V. v. City of Saint Paul, 505 U.S. 377, 392 (1992)

Note: the picture above is of Judge Kosinski and I.  

Wednesday, April 28, 2010

Pension Promises Bankrupting California?

Interesting article (April 12, 2010, Sac Bee, Phillip Reese) on public pensions and their effect on California cities and counties:

http://www.sacbee.com/2010/04/11/2670020/pension-promises-threaten-california.html

"The old joke is that General Motors is just a health insurance company that makes cars on the side," San Luis Obispo County Supervisor Adam Hill said during a pension presentation at a recent board meeting. "My concern is that the county government is becoming a pension provider that provides government services on the side."

The legacy of Gray Davis: blackouts and unsustainable pension promises?

Monday, January 4, 2010

San Jose Public Pensions

Here's a lovely Monday starter for you: "An audit has found some retired city employees in San Jose are receiving higher pension payments than they are entitled to, an error that would cost the city over a million dollars." For more, see HERE.

How the heck did this happen in the first place?

Monday, October 12, 2009

Government Workers Double-Dipping

The LA Times' Patrick McGreevy exposes public sector double-dipping here.

David Turner retired as a state fire chief in 2004, went back to work for the state firefighting agency two days later and is still employed there. He collected $65,229 in salary in the last fiscal year in addition to a state pension of $105,000.

Paul W. Anderson is a psychiatrist at Napa State Hospital who retired two years ago from the state Department of Mental Health. His pension is $117,840. He also received $104,200 in state wages in the last fiscal year.

"Public service" work now allows some people to earn almost a quarter of a million dollars a year. Astounding, isn't it?

Thursday, June 25, 2009

Finally! Public Pensions Exposed

Thank you, Craig Karmin, for your June 24, 2009 WSJ article, "Group Shines Light on Hefty Government Pensions."

http://online.wsj.com/article/SB124580096328044597.html

Pension funds provide guaranteed payouts, so even though public funds lost a collective $1 trillion last year, their retirees' monthly checks are unchanged. And the funds' solvency is ultimately backed by taxpayers.

By the way, apparently, the California School Employees Association, a union, represents 230,000 public employees. And that's just one union. No wonder public sector unions have so much power in Sacramento.

Tuesday, March 17, 2009

Public Pensions Bills to Surge, Taxpayers on the Hook

The WSJ's Craig Karmin has an interesting article on pensions ("Pension Bills to Surge"):

http://online.wsj.com/article/SB123716064273635495.html

Everyone acknowledges we have to hire good teachers, police officers, and firefighters; however, to prevent the public sector unions from taking more taxpayer funds than necessary, taxpayers need to be ever-vigilant. After all, that's our money and our children's money they're investing and taking.

Public pensions are an especially difficult issue to resolve, because they represent a long-term taxpayer liability. Thus, taxes and services do not need to be immediately raised or cut even if a pension's actuarial projections are incorrect. This absence of a short-term trigger makes it harder to alert taxpayers to the slowly ticking time bomb of pension liabilities.

California's problems are acute because even if pension assets decline substantially, payouts do not change. For example: if a California public pension loses 20% of its assets in one year, retirees still get paid the same amount, even though the pension has to dip into its assets to make the payouts. Why is this a problem? Dipping into a pension's assets usually means the pension is underfunded and will need higher-than-normal returns or more taxes to keep paying retirees. So either taxpayers are on the hook for ever-expanding retiree benefits, GM-style, or pension funds have to take risky investing strategies to bridge the gap between payouts and assets. No incentive exists for prudence. It doesn't have to be this way.

Wisconsin has a prudent policy "of adjusting the amount of benefits paid based on the pension fund's performance." Although this policy causes to retirees receive a benefit reduction, it also creates incentives for conservative investments and fewer tax hikes. If a pension doesn't do well, at least retirees will complain and hopefully cause some changes to be made to sustain the pension without a call for higher taxes (yes, this is partly wishful thinking, but at least someone becomes accountable more immediately). The WSJ also points out that some state employees could be switched to 401k plans, which is something I've advocated in the past. (See here.)

No matter what the solution is to the pension liability problem, action needs to be taken. More of the same isn't acceptable.

Bonus: Shelby Steele writes a very interesting article on Republicans and race:

http://online.wsj.com/article/SB123716282469235861.html

Saturday, January 17, 2009

Out of the Fire and Into the Frying Pan?

The WSJ's Greg Hitt reports that the stimulus plan isn't really going to taxpayers--much of it is going right into the hands of government workers. See January 13, 2009 article, "Stimulus Proposal Aims to Aid State, Local Governments."

In a nutshell, President-elect Obama has asked Congress to give him more taxpayer money--more than the $700 billion already printed. Purportedly, this new money would be used to stimulate an economic recovery. The problem is, much of it will go to a new "education stabilization fund," or into the pockets of government workers. Under the proposed plan, $80 billion would go towards programs benefiting teachers' unions.

Is this change, or just maintaining the status quo?

Tuesday, January 13, 2009

Public Pensions: Rotting from Within


With all the talk about earnings per share and future profits, it's easy to forget that a country's stock market won't experience a bull market if the country spends more than it collects. This is the basic law of business, and it doesn't change just because government is involved. One area that needs a closer look is public pensions.

Pension Tsunami is a website about public pensions, and it's definitely worth a look. Here is one recent article on San Jose public pensions, focusing on police officers and firefighters. (The San Jose Mercury article contains the chart posted above.)

Most people respect police officers and other public safety workers, but there is no reason for any public worker to receive more benefits and a higher salary than the average private sector worker. When government employees receive higher salaries and benefits than private sector employees, private citizens end up protecting and serving the government--an odd reversal. This is because private sector taxes and IOUs (bonds) are used to finance government expenditures, and those monies come from the private sector. If there is an imbalance, government will have to run up deficits to keep paying itself, creating an imbalance that will devalue the currency (due to the need to print more money to pay for the higher-than-normal benefits) or cause inflation. Thus, whenever the people work to serve the government instead of the other way around, fiscal responsibility will not exist.

There's also the small matter that America was created so private citizens would not have to kowtow to kings or an insulated, domineering government. In short, American government was designed to serve non-government citizens. America's founders would probably disapprove of a political system where people work primarily to serve and pay their government.

Even though the evidence favors treating government workers no better than private workers, it will take a massive paradigm shift to educate the public about the danger of excessive government spending/benefits.

First, television glorifies police officers, D.A.s, and other government workers, while accountants and small businesses don't get any airtime. I still remember my CHiPs costume when I was a kid--but I don't remember seeing any bank teller or taxi driver costumes on Halloween. When the average American watches hours of television, public sector workers have an advantage because they are portrayed as more important than private sector workers--even though it's the private sector workers who are footing the bill.

Second, most of the people teaching our children are government workers. As a result, most students spend eighteen years in a system that has no incentive to educate them about the true costs of excessive government spending and exclusive government benefits. This systemic education failure not only aggrandizes teachers' unions, who have no incentive to reform themselves, but also creates a class divide. Rich people tend to send their children to private schools rather than public schools. In addition, many top government workers, including President-Elect Obama, send their children to private schools. When the children of the middle class and poor spend eighteen years in a different system than the children of the rich, class conflict is virtually guaranteed.

This is why allowing parents to have the option of charter schools is so important. With charter schools, public schools have competition--which usually improves performance--and public schools no longer have a monopoly on education. In general, the public opposes monopolies, knowing they typically produce less innovation and high performance; however, when it comes to charter schools, much of the public is against them. This is surprising, because vouchers are the easiest way the middle-class and poor can escape the monopoly of public schools. When the public views teachers' unions as the Microsofts of education and charter schools as the Googles of education, change will happen.

There are simple ways to resolve the problem of entrenched government. One, require all government workers to have medical and retirement benefits only available to private workers. If a 401(k) is good enough for private sector doctors and lawyers, why do D.A.s and teacher get better retirement benefits in the form of guaranteed pensions? If the average private sector worker doesn't get lifetime medical benefits, why should government workers get such an expensive benefit? (By the way, if we actually equalized medical benefits, all Americans would probably get subsidized healthcare coverage.) When government workers have to use the same services as the public, they have more information about how the average person lives and more of an incentive to fix problems.

Two, institute term limits for all government workers. If we have term limits for the president and other representatives, why allow lifetime jobs for other government workers? A reasonable term limit would be 10 to 15 years. After this time period, a government worker could not go into any other government position and would have to earn his keep in the private sector. The knowledge that a government job is not a lifetime position would incentivize the government worker to improve his/her skills for the inevitable day when s/he applies for a non-taxpayer-subsidized position.

In addition, the turnover would be beneficial to the younger population, who could learn significant job skills through government work and then use those skills in the private sector. It would be like having a government-funded apprenticeship, where future leaders would be trained by experienced government workers to serve the public. Experienced government workers would begin training the new crop of workers from Year 13 to Year 15.

Doing it this way, government would be a non-fossilized place. This moderate turnover (as opposed to almost non-existent turnover) would allow new ideas to flourish in government. It is true we would lose skilled government workers to the private sector, but the key is to train newer workers to ensure a consistent stream of skilled government workers.

In the end, if America wants another bull market, it needs to return to budget surpluses. Demanding that our government not spend more than it collects is one way Americans can help get our country back on track.

More on public pensions here.

Tuesday, November 18, 2008

Steve Malanga on State Governments

Steve Malanga, senior editor of the Manhattan Institute's City Journal, is my new favorite writer. The WSJ included an opinion piece by him in today's paper:

http://s.wsj.net/article/SB122697315476635963.html

A study...by the Employee Benefit Research Institute estimated that the average public sector worker earns 46% more in total compensation than his counterpart in the private sector, largely because government employers spend 60% more per worker on benefits than counterparts in the private sector. States have collectively ranked up some $731 billion in unfunded liabilities for pensions and other retirement benefits, according to a study...by the Pew Charitable Trusts' Center on the States...


California state and local governments are paying some $12.8 billion a year to finance public employee pensions, up form $4.8 billion in 1999.

You know who's on the hook for all those benefits, don't you? We, the taxpayers, and our children. What is the reason government employees, on average, receive more benefits than private sector workers? It is becoming increasingly apparent that our elected representatives believe that we should work for them, instead of the other way around.

The next time you vote to give more money to government programs, just remember what we were told as kids: "Money doesn't grow on trees." Perhaps these days, it should read, "Money may not grow on trees, but what's wrong with getting money through bond sales?" Well, remember OCM--Other Countries' Money? Other countries are and have been the major buyers of our bonds, meaning they have become American Express, while we have become debt-holders, working each month to pay them off. I guess our own government is selling us out to other countries. Who can blame them? Other countries are the ones effectively paying for their benefits and for their inefficient programs (Bridge to Nowhere, etc.) through the purchase of municipal and Treasury bond sales. Although I am opposed to unnecessary regulation of private citizens, that doesn't mean an irresponsible government doesn't deserve to be regulated. Maybe we should require all public sector bond sales to have at least 51% American citizen ownership before being offered to other countries--once Americans realize we don't have the money to buy back our own debt, much less our future debt, we might become more frugal.

Friday, February 29, 2008

Warren Buffett's Letter to BRK Shareholders and Government Liabilities

Each year, Warren Buffett publishes a letter to Berkshire shareholders that is both informative and humorous. This year, Buffett discussed an issue that gets far too little press: pension plan liabilities and actual costs of future benefits, which are notoriously difficult to calculate:

"Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed. Promises involving very early retirement – sometimes to those in their low 40s – and generous cost-of-living adjustments are easy for these officials to make. In a world where people are living longer and inflation is certain, those promises will be anything but easy to keep."

I am happy to say I sounded the horn on this issue before Mr. Buffett, at least in print. On or around December 2007, The Metro published a letter from me discussing the government's pension plan liabilities. In the letter, I sound quite Ron-Paul-ish, probably more than I actually am, but I have revised the letter and included it below:

America was founded to ensure that private citizens had freedom. To that end, the Constitution provided for a limited federal government, recognizing that large, non-transparent governments and freedom are incompatible. Indeed, any government salary (or new law, for that matter) saps resources from private citizens that could be spent on innovation and other, more productive activities, while also increasing a government official’s power to exert influence and control over private lives. High government salaries are particularly problematic, because they are a form of fraud on the public, i.e. the taking of more funds than necessary from dispersed private citizens to support unionized government members. Here, our local government wanted to hide how much its members were making, which prevents the discovery of corruption and fraud in the form of higher-than-normal salaries. Yet, almost any county position could be filled with qualified individuals even if the county reduced its salaries significantly, recognizing that a pension and the possibility of lifetime medical benefits are more than enough to attract qualified workers. In fact, almost no one in the private sector receives pensions or lifetime medical benefits, and all the private companies that used to offer such benefits, such as General Motors and Ford, are changing their policies. There is a lesson there for private citizens, who may eventually be forced to pay higher taxes to support the unusually generous benefits the government keeps giving itself.

As an attorney, I have litigated against several government agencies and have been shocked at how power individual citizens have granted to unqualified government members. In one case, the DFEH brought an action in a separate tribunal set up exclusively for employment claims, in front of an unelected judge who used to work for the DFEH. The DFEH’s client was awarded no money in the case, but my client had to pay thousands of dollars in attorneys’ fees for a case that almost no one in the private sector would have touched. Yet, we are all paying for a tribunal (the FEHC) with the power to award 150,000 dollars against any small business or individual.

This government excess is not limited to legal tribunals. San Jose’s independent police auditor is having to fight to get a small measure of authority to review taser deaths caused by San Jose police. To get an idea of what happens when government workers are strongly unionized and do not have to fear discipline, read the case of Grassilli v. Barr (2006).

California's own government is so large, I was shocked the first time I saw a list of just the state agencies. Take a look at this link–it does not include city or county governments and yet shows a massive, sprawling government:

http://www.ca.gov/About/Government/agencyindex.html

Someone must pay for all of these employees and their pensions, sabbaticals, and health care. Teachers’ unions usually ask for more money, but the California State Teachers Retirement System is already worth around $125 billion.* It has around 750,000 members and is the third largest public retirement fund in the country. Yet, after health care, education reform remains crucial, and the CTA continues to ask for more money.

As a result of government salaries and benefits spiraling out of control, California’s bond ratings have gone from AAA to single A and are approaching status that is slightly above junk (see http://www.treasurer.ca.gov/ratings/current.asp). The high salaries and unusual benefits of local government workers are just one small part of major fiscal problems that will not get better on their own. The lack of transparency in local government salaries has been remedied somewhat, but many other issues remain. I pray that this country’s citizens will read its history and think harder about current Constitutional issues; otherwise, we will be seeing a great power slowly but inexorably degenerate into a bloated, inefficient police state.

*My figure placed the value of the CTA pension plan at $125 billion. It is actually $131.2 billion, according to the Wall Street Journal's February 28, 2008 article, "Dear Crunch," C1. But what is problematic is that the CTA pension plan is underfunded by 19.6 billion dollars, all of which eventually has to be paid by California taxpayers. This means that the current debt calls for paying retired California teachers 19.6 billion dollars, and the pension plan doesn't have that money now and is hoping to get it in the future (stock market gains, more dues, higher taxes, etc.). To get an overall picture of the financial liabilities we face, the WSJ states that we--that includes you, if you pay taxes in the U.S.--owe our government $440 billion dollars, all of which will be put into the pockets of government workers. In a sign that the purse is already appearing shallow, the WSJ said that the city of Vallejo, CA is considering filing for bankruptcy. Its local government granted itself so much in benefits and salaries that the police and fire department's "salaries and benefits account for 80% of budget costs." Again, if you look at my letter to The Metro, the unstated premise is that without oversight, government will enrich itself at the expense of private citizens, especially in the areas of police power. The City of Vallejo, with almost all the taxpayer revenue going to police/fire union members, proves my point. Yet, even recent front page news stories about how the San Francisco mayor's office increased the salaries of close associates, or how various government departments are paying so much in overtime that correctional guards regularly exceed 100,000 dollars per year in compensation, is not causing any alarm bells to go off (This in a country that now has 1% of its adult population behind bars and will probably need more correctional officers in the future). When front-page news does not shock the public into demanding reform, we need to re-examine how we grant benefits and salaries to government members, perhaps even having referendums or some opt-in voting measure to establish reasonable salaries and benefits. Otherwise, every government employee will be functioning in a pyramid scheme where actual future costs of benefits, especially health care, remain undisclosed and incalculable. Such a situation is not good for taxpayers or our government members. Government, like private industry, benefits when new and highly performing members are attracted to jobs and bring with them fresh ideas. At this rate, government agencies will not be able to hire new employees, and private citizens will not benefit from a fiscally-healthy, secure government.

One of the links in my letter led to bond ratings for all the states. As of today, it shows that California's bond rating is the second worst in the nation, leading to higher borrowing costs and difficulty with improving our infrastructure. Who has the worst bond rating? Louisiana, which was battered by Hurricane Katrina and is still feeling its effects economically. It should be shocking that the sixth or seventh largest economy in the world has the second worst bond rating in the U.S., above only a hurricane-ravaged state, but so far, there are no protests in the streets, no condemnation of government expenditures by citizens, and no cries of unjust takings from our grandchildren. Our founders would be stunned at our utter complacency, but perhaps also proud of the prosperity we have achieved in such a short time. With that in mind, it would be a shame if future generations were unable to see America's promise of prosperity because government members and unions were enriching themselves at our expense or refusing to accept pay cuts, even as tax revenue decreases.

Original letter here: http://www.metroactive.com/metro/12.26.07/letters-0752.html

Update on January 13, 2009: here's a great website on public pensions:

http://www.pensiontsunami.com/