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Bloomberg did a feature this week on the long-term outlook on pension funds for several major cities, and found that it is swiftly becoming a fiscal tsunami in several places. Part of this stems from severe under-funding of pension plans over many years, while the other part is accounting tricks.
As Bloomberg notes, “Moody’s, which in 2013 began using a lower rate than governments do to calculate future liabilities, has estimated that the 25 largest U.S. public pensions alone have $2 trillion less than they need.” This rate gimmick ultimately hides the true cost of retirement liabilities in municipalities. Additionally, “officials have been able to lower the size of the liability by counting on investment earnings of more than 7 percent a year, even after they expect to run out of cash. New rules from the Governmental Accounting Standards Board require a lower rate to be used after retirement plans go broke. Many reported shortfalls will grow as a result.”
Already, many U.S. cities each face billions in costs, resulting in trillions of dollars in municipal-bond market deficit. By now, many places have been downgraded — even down to junk — and thus face higher yield demands from investors.
For example:
Cincinnati and Minneapolis have already been lowered. Chicago was already downgraded to junk this past May as a result of a $20 billion pension deficit, and “was forced to pay yields of almost 8 percent on taxable bonds maturing in 2042, about twice what some homeowners can get on a 30-year mortgage.”
Houston was put on notice in early July by Moody’s that their bond rating was lowered to “negative” due to unfunded pensions costs. Houston’s revenue faces limitations from property tax caps, and thus funding the pension promises properly for three pension systems at this point has become increasingly difficult. It faces an unfunded liability of about $3.4 billion.
Likewise, in Dallas, the firefighters and police pension system deficit is poised to triple its shortfall “to $4.7 billion because of the accounting-rule shift.”
Perhaps the most egregious example is the California Public Employees’ Retirement System, the biggest pension system in the United States. They reported this week that “it earned just 2.4 percent last fiscal year, one-third of the annual return it projects. The California State Teachers’ Retirement System, the second-biggest fund, gained 4.5 percent, compared with its 7.5 percent goal.” Years of over-generous promises have resulted in an enormous and unsustainable debt that ultimately taxpayer will have to foot the bill for.
When the public sector and unions signed off on lavish pension provisions for the employee, they hoped there would be enough growth and investment returns to cover it way down the road. There were no provisions made to handle the possibility of a low-interest rate society or a fledgling economy like we’ve experienced the last six years; they took their chances and their fallback was always that they could suck money from the taxpayer by raising taxes to cover budgeting shortfalls. That is reckless and irresponsible.
Years of fiscal mismanagement in the public sector has resulted in this fiscal nightmare. Because the public sector does not have the economic forces of competition to keep compensation levels in check, as the public sector does, it was always incumbent upon public negotiators to manage contracts properly. Failing to properly negotiate, making cozy deals, and maintaining unsustainable defined-benefit plans has created the soaring budget and pension deficits we are experiencing.
And its only going to get worse.
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From CNS News:
“The federal government raked in a record of approximately $2,446,920,000,000 in tax revenues through the first nine months of fiscal 2015 (Oct. 1, 2014 through the end of June), according to the Monthly Treasury Statement released today.
That equaled approximately $16,451 for every person in the country who had either a full-time or part-time job in June.
It is also up about $178,156,270,000 in constant 2015 dollars from the $2,268,763,730,000 in revenue (in inflation-adjusted 2015 dollars) that the Treasury raked in during the first nine months of fiscal 2014.
Despite the record tax revenues of $2,446,920,000,000 in the first nine months of this fiscal year, the government spent $2,760,301,000,000 during those nine months, and, thus, ran up a deficit of $313,381,000,000 during the period.
According to the Bureau of Labor Statistics, total seasonally adjusted employment in the United States in June (including both full and part-time workers) was 148,739,000. That means that the federal tax haul so far this fiscal year has equaled $16,451 for every person in the United States with a job.”
There are three months left of the fiscal year. According to the US Debt Clock, today’s federal debt is is about $18,609,920,535,000. At the end of FY 2015 the total government debt in the United States, including federal, state, and local, is expected to be $21.694 trillion.
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During oral arguments of the Burwell v Obamacare case before the Supreme Court, the U.S. Solicitor General Donald Verrilli made the case that the “court should defer to the interpretation of the Internal Revenue Service, which said the tax credits apply nationwide.” When the Obamacare decision was announced, it is clear that SCOTUS did apply deference, which was absolutely the worst possible solution.
The idea of “deference” refers “ to “Chevron deference,” “a doctrine mostly unknown beyond the halls of the Capitol and the corridors of the Supreme Court. It refers to a 1984 decision, Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., and it is one of the most widely cited cases in law. Boiled down, it says that when a law is ambiguous, judges should defer to the agency designated to implement it so long as the agency’s decision is reasonable.”
Given the current catastrophic state of the IRS, SCOTUS should have run from this idea as quickly as possible. The IRS has proven overwhelmingly in the last few years that no decision it makes is “reasonable” and therefore cannot be trusted as an unbiased, independent agency capable of carrying out a professional opinion on this or virtually any manner.
Even more unfortunately, not only did SCOTUS apply deference, which allowed the IRS rule to stand, it did so by taking expanding the concept of “Chevron Deference” even further in order to validate its decision. George Will, in a column written just after the Obamacare ruling was handed down, described how the decision now allows the executive branch to apply deference in situations that are not just ambiguous, but also “inconvenient for the smooth operation of something Congress created.” This is not interpreting law — this is legislating.
Therefore, the actions of the IRS — that is, willy-nilly creating rules which expanded the scope of Obamacare beyond its text — were indeed endorsed and given political cover by Roberts and his majority as they applied Chevron Deference. Instead of sending Obamacare back to the legislature for clarification, the judicial branch decided to step in and interpret the law for the sake of alleviating “inconvenience”. But this is wrong. Convenience, ease, and expediency should never be a rationale for the judicial branch to go beyond the scope of deciding whether or not a law is constitutional, as they did here.
The judicial branch, with this decision, seemed to act more in harmony with the legislative and executive one, instead of serving as a check against the others. What’s more, “besides violating the separation of powers, this approach raises serious issues about whether litigants before the courts are receiving the process that is due to them under the Constitution. It would result if its branches behaved as partners in harness rather than as wary, balancing rivals maintaining constitutional equipoise.”
Will summed up the damage Roberts has done, which is likely to have lasting effects in the courts for years to come. Roberts goes “beyond “understanding” the plan; he adopts a legislator’s role in order to rescue the legislature’s plan from the consequences of the legislature’s dubious decisions. By blurring, to the point of erasure, constitutional boundaries, he damages all institutions, not least his court.”
How the Supreme Court uses and applies Chevron Deference in the coming years, in the way they did with this decision, will be especially interesting, given the expanded roles of many government agencies such as the EPA and FCC.
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Dear Governor Rauner,
You have an enormous task before you in trying to navigate pension reform. Through political duplicity, the state legislature in cahoots with the public service unions have fashioned for themselves retirement benefits far in excess of any reasonable amount. The Courts, appointed by the same players, have determined that it is not even legal to revisit the magnitude of these retirement benefits. It must be difficult to draw up a plan when your hands are legally tied from being able to make actual changes to the pension system in order to alleviate the $100 billion in debt. As such, I propose an alternative solution:
Since the courts refuse to allow you to negotiate with the workers for lower pension benefits, then take the negotiations to the worker’s base pay. Simply take the costs of the excessive retirement benefits for each employee and subtract it from the worker’s base pay in determining the new base pay under the new contract. The Courts may not allow a reduction in retirement benefits, but there is certainly no Constitutional provision preventing the negotiating of a lower base salary.
There is no rule that someone must be paid the same base pay amount as last year. If you are constrained from the pension end of the contract, then you ought to change their next offer and reduce their overall compensation from the base pay end, thereby restricting compensation and benefits to amounts no greater than what those skills would command and be realistically afforded in the private sector.
Overhauling the contract process from this end will provide an opportunity for fiscal reform. This will ensure that, going forward, no worker be paid more in any new contract then what can be actually afforded, without regard to what the prior contract provided. Once a current contract ends, there is nothing on the table; nothing prevents any new contract from offering less that the prior contract, especially where pay and benefits of the prior contract are out of line and hamstrung by ironclad guarantees.
The people of Illinois realized when they elected you, that decades of fiscal mismanagement needed to end in order to ensure that Illinois has a chance. Even though it may be politically difficult and unpalatable, anybody representing the taxpayers has an obligation to those taxpayers. Budget reform and deficit reduction will naturally follow once compensation levels have been stabilized and brought in line with realistic affordability. Contract negotiations must happen in order for long term sustainability to be achieved.
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On Monday, the Department of Education announced student loan debt forgiveness for students at the now-closed Corinthian College system in California. At the end of April, the Department of Education slapped the for-profit college group with $30 million in fines for allegedly misrepresenting post-graduation job prospects and/or placement rates to some 900 students in 12 schools since 2007. Read the letter here.
Never mind that in 2010 (a year for which I have numbers), 110,000 students were enrolled in 100 schools in their system. That means the total transgressions represent less than 1% of the entire school population. And yet, the DoE decided that 40,000 students in the shuttered college system were eligible for immediate loan forgiveness for Corinthian’s misdeeds; all the students need to do is fill out a form, and their loan will be covered. By taxpayers, to the tune of an estimated $500 million dollars.
But why? That’s where it gets interesting.
Enter Kamala Harris. She’s the current Attorney General in California and she’s running for retiring Senator Barbara Boxer’s seat. Harris worked in conjunction with the Department of Education specifically targeting the Corinthian College system. According to the Wall Street Journal, “Last summer the Education Department began to drive Corinthian out of business by choking off federal student aid for supposedly stonewalling exhaustive document requests. The Department claimed to be investigating whether Corinthian misrepresented job placement rates as California Attorney General Kamala Harris alleged in a lawsuit.”
Corinthian agreed to turn over their education centers to other non-profits, but Kamala Harris refused to release any buyer of potential future liability, meaning anyone purchasing would be under constant threat of a lawsuit. Last November, “the nonprofit Education Credit Management Corporation (ECMC) “agreed to buy more than 50 Corinthian campuses for $24 million plus $17.25 million in protection money to the feds for a release from liability. But ECMC passed up Corinthian’s 23 schools in California because Ms. Harris wouldn’t quit.” The alternative to having no buyer for these particular schools would ultimately be to shut them down.
It was in April 2015 that Corinthian was slapped with the $30 million fine, which effectively drove the final nail in the coffin of the remaining schools because no one in their right mind would shoulder the liability. As for the hefty penalty, “The Department assessed the maximum fine of $35,000 per regulatory violation, which its bureaucrats count as each student that was improperly counted.” By the end of the month, all the rest of the schools indeed closed, throwing out of employment and school, thousands of people.
For those affected, “to mitigate the political damage, DoE [deputized] financial aid counselors to help Corinthian’s student refugees. Yet most community colleges don’t offer Corinthian’s vocational programs and flexible schedules, and many for-profits don’t accept Corinthian’s credits. Ms. Harris and the feds have also made clear they intend to continue their persecution of for-profits, so students could enroll in another political target.” How generous of them.
What makes this whole affair particularly odious is that that “the federal government doesn’t specify how for-profits calculate their job placement rates. States and accrediting agencies have disparate and often vague rules, which notably don’t apply to nonprofit and public colleges.” Thus, Corinthian Colleges was really just a part of the larger assault on for-profit colleges by the Obama Administration, all tied to his new “Gainful Employment” rules. You can read the regulations released last October.
Part of this new regulation change deals with colleges and federal aid. “In particular, Obama intends to change the parameters of what’s known as the “90-10 Rule”—a federal law that bars these schools from receiving more than 90 percent of their revenues through federal student aid, including loans and grants.” The affect of these changes on the for-profit college system has been noted by Forbes. Though the regulations don’t actually take affect until July 1, 2015, it appears Corinthian was a ripe target. What’s more, the Department of Education found a ready and willing partner in Kamala Harris, who just happens to be running for a very important Senate seat in California.
On can debate the merits of the for-profit college system, but that would be fodder for another post. The fact remains that certainly, the generous student loan forgiveness/bailout will resonate with these 40,000 young, impressionable voters who suddenly got their college costs covered by someone else, even if they weren’t an actual victim of alleged “misrepresentation”. Will there soon be another for-profit college chain shut down and subsequent loan bailout by the Feds in another important election state?
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I came across this little piece in the NYPost discussing the sluggish economy and the arbitrary numbers that come out of the Labor Department. It starts off discussing the 1st Quarter GDP contraction, which stumped many “economists”, and even went so far as to possibly blame the algorithms themselves by which the government analyzes 1st Quarter numbers. Because it certainly couldn’t be domestic policies, could it?
This writer posits that we could indeed be on the bring of a recession, the definition of which is 2 straight quarters of economic contraction, and points out something fairly obvious. People just don’t have a lot of money to spend. I concur this is a major part of assessing the health of an economy, although I would argue that investment spending spurs economic growth even more than consumptive spending, which is this writers argument. Putting that aside, however, he does a decent job pointing out the concerns about the economy that we should all be paying attention to. Here’s the article and food for thought below:
“Anyone with even a quarter of a brain now understands that the US economy got off to a bad start this year.
There was an economic contraction in the first three months — when the nation’s gross domestic product fell at an annualized rate of 0.7 percent — that some quarter-brainers are still blaming on the cold weather, strikes at ports, the strong dollar, solar flares, Martian landings and (insert your own poor excuse here).
The truth: Most of these excuses are part of the problem, although I didn’t personally see or not see the Martians.
But the biggest part is that people don’t have enough money to spend. Interest from savings is down to zero, people don’t liquidate stock gains to make purchases, and job and income growth has been sketchy.
The economy isn’t doing much better in the current quarter either. The Federal Reserve Bank of Atlanta, an independent observer if ever there was one, measures growth so far in the second quarter at an annual rate of just 1.1 percent. That means growth — un-annualized — is a paltry 0.275 percent with less than four weeks left in the quarter.
It’s quite possible that we will eventually be told, after all revisions are made, that the economy met the official definition of a recession in the first half of 2015, which is two straight quarters of contractions.
But the quarter-brainers will probably get something to cheer about when Friday’s employment numbers come out. And, if they don’t strain their quarter-brains looking too deeply into the numbers, they could come away with a smile that can only happen because ignorance is bliss.
Wall Street expects the Labor Department to report that 235,000 new jobs were created in May. That would be higher than the 223,000 new jobs that — before any revisions are made — were created in April.
I’ve written before about the so-called birth/death model, which is the government’s fist-on-the-scale way of adding jobs they assume but can’t prove exist when new companies suddenly come into business in springtime.
The only problem is, entrepreneurs — especially those just starting out and risking their own capital — aren’t very daring when it’s clear to everyone that the economy isn’t doing well. So maybe, just maybe, there are more companies dying this spring than being born.
Labor must be having some second thoughts about the validity of that model since it guessed that only 213,000 phantom jobs were created by newly born companies in April. That’s way down from the 263,000-phantom-job guesstimate in April 2014.
The guesstimate for May should still be substantial. In May of 2014, Labor’s phantom jobs guesstimate added 204,000 jobs. Even if that’s been adjusted downward, this will still give a nice boost to the job growth that will be reported Friday.
There’s no guarantee, of course, that Friday’s number will be good. Any number of things could go wrong. Seasonal adjustments could hurt Friday’s number. And, of course, companies could have actually cut jobs in April. There were plenty of announcements of such cuts.
So, will Wall Street get the 235,000-job growth it expects? I say there’s a 60 percent chance Friday’s number meets or exceeds that guess.
But even if you guess right on Friday’s jobs figure, the prize could be elusive. Most folks don’t know how Wall Street will react to a better-than-expected number. If the figure is too strong, it’ll causes interest rates to rise and bond prices to fall in anticipation that the Federal Reserve’s interest rate hike is back on the table. If the number is weaker than expected, even the quarter-brainers will start worrying the economy is tanking.”
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I have no particular favorite right now in the GOP nomination fight. As a CPA, I pay close attention to the economic policies of the various candidates.
Carly Fiorina spoke to New Hampshire Republican Party’s First in the Nation leadership summit in Nashua, N.H on the subject of small business. Being the former CEO of Former Hewlett-Packard, Fiorina offered a decent perspective, which hasn’t really been discussed at length so far by many of the other candidates.
“The heroes of the American economy are small businesses and family-owned businesses”
“For the first time in U.S. history, we are destroying more businesses than we are creating”
“All of the things they are doing up there are landing on us down here. The weight of the government is literally crushing the potential of the people of this nation”
I don’t particularly think that Fiorina has the ability to be much of a viable candidate, especially considering her failed Senate campaign against Barbara Boxer in California. I do appreciate her calling out the government’s anti-business policies, something about which I have written extensively.
Whoever becomes the Republican nominee needs to be able to speak clearly and definitively about economic issues and call out the failed government policies of higher taxes, increased regulation, and minimum wage nonsense. Small businesses have borne the brunt of Obama’s heavy-handedness, and our economy has failed to recover adequately because of it.
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As I read this recent article in the Wall Street Journal, “Sluggish Productivity Hampers Wage Gains” I mulled as to whether or not the Wall Street Journal had started a new satire section — but then it occurred to me that the author’s analysis of the current market was completely serious. Is he so clueless that he actually does not understand why there is “tepid productivity”?
The author, Greg Ip, cites 1) Faulty data may be partly to blame, 2) the severity of the financial crisis and recession and 3) weak business investment, but completely misses the elephant in the room: the meddling, anti-business policies of the current administration.
This administration has been exceedingly heavy-handed in its efforts to demonize businesses, while promising that businesses will be highly taxed and regulated. Whether it is labor regulation by the NRLB or environmental regulation by the EPA, government interference has been overreaching and restrictive.
Additionally, there have been huge increases in both criminal rules and regulations about what businesses are allowed and not allowed to do — from nitpicky labor rules, to dictating employee minutiae, to minimum wage requirements, all which restrict business hiring.
More unfortunately, Obama has provided the background for a litigation-friendly environment. If a larger, more financially stable company wants to steal something from a smaller company, they can sue them or just threaten with a costly legal battle. Likewise, “disparate impact” and IRS asset forfeiture are two practices which demonize business owners by merely suggesting wrongdoing — and put the burden of the business owners to prove their innocence.
And recently, the Obama Administration has decided to wage war on business inversions, by declaring companies who wish to move their headquarters abroad in order to stay competitive, to be “unpatriotic”, and “tax dodgers”, calling the perfectly legal process of inversion to be a “loophole”. Couple that with the fact that we have the highest corporate tax rate in the world and it’s no wonder that businesses struggle to survive.
Usually the Wall Street Journal is fairly en pointe. It’s hard to believe any editor would have let this article be published while utterly ignoring Obama’s detrimental business policies that have plagued the economy over the last 6 years — which is why something needed to be said.
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Bernie Sanders recently advocated for President Obama to raise $100 billion in taxes by the old “closing corporate loopholes” schtick. The difference this time, is that Obama is actively exploring his abilities to do so via Executive Order. Townhall has the scoop:
“White House Press Secretary Josh Earnest confirmed Monday that President Obama is “very interested” in the idea of raising taxes through unitlateral executive action.
“The president certainly has not indicated any reticence in using his executive authority to try and advance an agenda that benefits middle class Americans,” Earnest said in response to a question about Sen. Bernie Sanders (I-VT) calling on Obama to raise more than $100 billion in taxes through IRS executive action.
“Now I don’t want to leave you with the impression that there is some imminent announcement, there is not, at least that I know of,” Earnest continued. “But the president has asked his team to examine the array of executive authorities that are available to him to try to make progress on his goals. So I am not in a position to talk in any detail at this point, but the president is very interested in this avenue generally,” Earnest finished.
Sanders sent a letter to Treasury Secretary Jack Lew Friday identifying a number of executive actions he believes the IRS could take, without any input from Congress, that would close loopholes currently used by corporations. In the past, IRS lawyers have been hesitant to use executive actions to raise significant amounts of revenue, but that same calculation has change in other federal agencies since Obama became president.
Obama’s preferred option would be for Congress to pass a corporate tax hike that would fund liberal infrastructure projects like mass transit. But if Congress fails to do as Obama wishes, just as Congress has failed to pass the immigration reforms that Obama prefers, Obama could take actions unilaterally instead. This past November, for example, Obama gave work permits, Social Security Numbers, and drivers licenses to approximately 4 million illegal immigrants.
Those immigration actions, according to the Congressional Budget Office, will raise federal deficits by $8.8 billion over the next ten years.”
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Obama’s budget for FY2016 claimed $1.8 trillion in deficit savings over a ten year period, 2016-2025. He used PAYGO (pay-as-you-go) rules to determine this figure, which basically means paring tax increases and spending reductions on one side to pay for new spending programs and tax credits on the other side, with anything left over going to the deficit.
However, his numbers for overall deficit reduction appear to be overstated, according to an analysis by the Committee For a Responsible Federal Budget (CRFB), by “using a baseline which effectively ignores the costs of extending or repealing certain policies and assuming a large increase in spending in the future to claim savings from extending spending limits after 2021.”
The Chicago Sun-Times did a decent summary of the CRFB report. Essentially, Obama makes a series of assumptions about future budget items to achieve his number for deficit reduction ($1.8 trillion), so that it comes close to the amount of tax hikes in the budget ($2 trillion), making it somewhat politically palatable — at least for his side. Here are the major points:
“MANDATORY AUTOMATIC CUTS
In the budget table summarizing the $1.8 trillion in deficit cuts, there’s a line that adds back funds to replace the automatic, across-the-board cuts to a variety of mandatory programs, including a 2 percentage point cut in payments to doctors who treat Medicare patients.
That’s a major assumption on Obama’s part about the fate of the automatic cuts, part of the deal he struck with Congress in August 2011.
Cost: $185 billion over 10 years.
MEDICARE FEES
There’s a proposal to permanently fix a flawed Medicare formula that threatens doctors with an even bigger 21 percent fee cut. Lawmakers typically “patch” the formula for a year or two but hope for a long-term solution this year.
Cost: $108 billion.
REFUNDABLE TAX CREDITS
A set of refundable tax credits — tax refunds that go out to low-income people who don’t owe federal income tax — expire in 2017. So does a maximum $2,500 tax credit for the cost of college. Obama’s budget simply assumes they get extended.
Cost: $166 billion.
INFLATED SPENDING BASELINE
This one’s tricky and requires background. Under budget rules, official scorekeepers at the Congressional Budget Office are supposed to set an arbitrary baseline for annual agency budgets passed by Congress each year that rises each year with inflation at a relatively generous pace.
The 2011 Budget Control Act slashed this spending increase by $900 billion by setting spending “caps” well below this baseline. Well, the caps are lifted after 2021, but Obama’s 10-year budget covers four more years. The White House assumes the baseline would jump to inflated levels that pretend the 2011 law never happened. Then it claims huge savings when cutting them back in 2022-25 to more realistic levels.
Questionable savings: about $310 billion.
DEBT SERVICE
Additional debt would have to be issued to cover the above policies, and interest costs on that debt are considerable. Cost: about $105 billion
GRAND TOTAL: $874 BILLION
In summary, Obama’s budget claims $1.809 trillion in deficit savings. Take away $874 billion accruing from accounting tricks and there’s about $935 billion left.”
There you have it. $935 billion is vastly different than $1.8 trillion — essentially saving only half of what Obama claims. For those who want to get into the nitty-gritty, you can read the full CRFB analysis here.
The government is always playing around with numbers and accounting tricks. Here are past examples of fuzzy math for Social Security gimmicks, Obamacare deficit scoring, and boosting Obamacare enrollment numbers. So this latest one is anything but surprising.
