Have nothing to do with the [evil] things that people do, things that belong to the darkness. Instead, bring them out to the light... [For] when all things are brought out into the light, then their true nature is clearly revealed...

-Ephesians 5:11-13

Tag Archives: Pension

“13th-month” Checks Just One More Indicator of Detroit Corruption

This article was first published at The McAlvany Intelligence Advisor on Friday, September 27th, 2013:

When Kevyn Orr was named Detroit’s interim financial manager by Michigan Governor Rick Snyder back in March, he was picked because he had experience in resurrecting other cities that found themselves in trouble. But it’s doubtful that Orr had any idea of the width, the breadth, and the depth of the corruption and deceit that awaited him when he began.

By June he had a better idea. In announcing that he was going to seek bankruptcy protection he said

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Detroit’s Bankruptcy Hastened by “13th Month” Checks Issued to Pensioners

When Kevyn Orr was appointed as Detroit’s interim financial manager back in March, he launched an investigation into just how deep the city’s financial hole really was. He should have waited until September when,

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First Detroit, Now Chicago?

The unfunded pension liabilities facing Chicago are only the most recent troubles threatening the Windy City, according to the New York Times. The recent credit downgrade of Chicago’s general obligation bonds by Moody’s, Standard and Poor’s and Fitch just brought the matter to the surface. Crime, corruption and a shrinking population also are beginning to make Chicago look like an out-sized version of Detroit.

According to the city, the four pension plans for its police, teachers, firefighters and office staff, are all dreadfully underfunded to the tune of some

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Detroit: the First Domino to Fall

This article was first published at The McAlvany Intelligence Advisor on Monday, July 22nd, 2013:

 

The city of Detroit is living proof that Herb Stein is right: if something cannot go on forever, it will stop. For Detroit, it stopped last week when

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Detroit Bankruptcy: No Winners

When Michigan Governor Rick Snyder announced his approval for Detroit’s emergency manager Kevin Orr to file for a municipal Chapter 9 bankruptcy, he admitted that Detroit’s problems were decades in the making:

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Consumer Confidence Not Matched by Reality

The consumer confidence numbers announced on Tuesday by The Conference Board surprised even the economists who had expected a decline rather than the nearly 10-point increase that the board reported. The index came in at 81.4 compared to economists’ expectations of

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How a Social Security defender defends Social Security

In one of the more remarkable examples of dissembling, Alicia Munnell uses the oldest trick in the book: belittle the accuser while ignoring the facts. The accuser is Prof. Laurence Kotlikoff, a professor at Boston University who is about to issue his 2013 estimate of the unfunded liability facing the US government. Currently it’s

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Detroit Creditors’ haircut: 90 percent!

At the conclusion of Friday’s 2-hour meeting of more than 180 of Detroit’s creditors, unions and pension trustees, Emergency Manager Kevyn Orr’s plan to rescue the city from bankruptcy was met with predictable responses: lawsuits and strikes. It was an altar call to accept reality, but denial, anger and threats were the response of many. One unnamed bond holder said, “It’s just too much. It is an unprecedented amount to ask.” Mike Mulholland, secretary of American Federation of State, County and Municipal Employees (AFSCME) Local # 207, was equally blunt: “When you’re backed into a corner, the only thing you can do is fight and the only way we can fight is to strike.”

Orr was ready for them. In his 134-page proposal, he blamed “financial mismanagement, a shrinking population, [and] a dwindling tax base … over the past 45 years [which] have brought Detroit to the brink of financial and operational ruin.” Indeed, his proposal spelled out the denial of reality that Mayor Dave Bing and his city council had been enjoying for years when it showed that Bing’s people thought that the annual deficit for the city for Fiscal Year 2013 was $47 million when the actual deficit is more than twice that, and for FY 2014 is estimated to approach $200 million. It’s no wonder that Michigan Governor Rick Snyder declared a financial emergency, and appointed bankruptcy attorney Kevyn Orr to take over from the city council in March.

The task facing Orr is horrifying. Faced with more than $18 billion in debts and just $68 million in the bank, Orr started off the meeting by announcing that the city would not make a $40 million payment due that day on a $2.5 billion certificate of participation (COP). He announced further that the city wouldn’t be making $104 million in pension contributions that are currently due either. In addition, retirees hoping that the city would be providing them with health care and full payouts of their pension benefits also received the bad news: they too would be forced to rely on the state’s insurance exchanges to obtain health coverage under Obamacare or Medicare, and could expect significant reductions in their retirement checks as well, approaching $800 a month in many cases.

Orr’s report was equally blunt for those hoping for a miracle: “The City is Insolvent” (Page 7): “the city is not paying its bills,” the city’s infrastructure is deteriorating, “costs associated with unoccupied property” continues to mount, the city’s credit ratings were borderline “bankrupt” by all three agencies, and “Priority One” police response times had increased in just one year from 30 minutes in 2012 to 58 minutes in 2013. In 2012 Detroit “had the highest rate of violent crime of any U.S. city having a population over 200,000 [Detroit’s population is just over 700,000, 40 percent of what it was 1950], five times the national average.”

There are “approximately 78,000 abandoned and blighted structures in the City, nearly half of which are considered ‘dangerous’ [while there are] 66,000 blighted and vacant lots within the City limits.” There are between 11,000 and 12,000 fires in Detroit every year, most of them occurring in those blighted and abandoned buildings.

Orr’s plan, on the surface, is elegant simplicity: if the creditors – pension trustees, unions, bond holders and retirees – will sit still for these massive haircuts, then the city can, under a newly created facility, borrow $2 billion to pay off the $11 billion in unsecured creditors. Orr said that translates, after other demands on that new money, to about 10 cents on every dollar owed. Secured creditors will be better off but they will be asked to take a haircut as well. If the proposal is accepted, lawsuits and strikes notwithstanding, then Orr can take this to court as a pre-packaged bankruptcy, giving him the power to enforce the agreement.

On the other hand, if his proposal can’t get sufficient agreement in the next 30 days from all interested (and now properly chastened) creditors, then he’ll ask the court to grant Detroit bankruptcy protection with himself as trustee. In essence, Orr is dealing from strength: go along with me now and get the best deal possible, or push me and you’ll get less, it’ll cost more and it’ll take longer.  Said Orr: “I have a very powerful statute. I have an even more powerful Chapter 9. I don’t want to use it, but I am going to accomplish this job. That will happen.”

There’s a constitutional issue here as well. Under the Tenth Amendment, “powers not delegated to the federal government by the Constitution … are reserved to the states,” which means that guarantees in Michigan’s state constitution that protect pension and retirement benefits from federal bankruptcy rulings could be put at risk in a court battle. If a high court rules that federal bankruptcy laws override state protections, then every pension plan in the country thinking it has state protection will be affected negatively, with national and perhaps even international ramifications. The municipal bond market is nearly $4 trillion in size, and such a ruling could, at the very last, unnerve that market, raising the cost of borrowing significantly, forcing other cities bordering on bankruptcy over the edge.

Michael Sweet, an attorney at Fox Rothschild who helped the city of Redmond, California restructure its finances in order to avoid bankruptcy, noted: “The last thing [union pension funds] may want is for a judge to rule on that … because if the judge ruled on that against them, it would open the floodgates” for similar cases.

 

The Clock is Ticking on Illinois Pension Reform

Two competing bills for pension reform have just passed the Illinois legislature with hopes that one of them will be passed before it adjourns for the summer on May 31st. One of them has the blessing of the teachers’ union and Democrat John Cullerton, president of the state senate. The other passed the House, and neither

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The Modern German Economic Model is a Myth – revised and updated

Dessau, a small and steadily shrinking town in the German state of Saxony-Anhalt in what used to be East Germany, is doing the best it can. Ten years after the fall of the Berlin Wall the anticipated “miracle” enjoyed by West Germany following World War II failed to materialize for Dessau and so it is in the process of demolishing some 10,000 empty homes and

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The Modern German Economic Model is a Myth

Dessau, a small and steadily shrinking town in the German state of Saxony-Anhalt in what used to be East Germany, is doing the best it can. Ten years after the fall of the Berlin Wall the anticipated “miracle” enjoyed by West Germany following World War II failed to materialize for Dessau and so it is in the process of

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Cyprus daylight robbery puts the whole European Union at risk

At least that’s the hope of Ambrose Evans-Pritchard, a quasi-liberal writing for a clearly liberal British newspaper, the Telegraph. He called the stunt that was tried and failed, at least for the time being, of robbing people point-blank in daylight, saying that

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Illinois Pension Plan Fraud on a Massive Scale

This is how the game is played: promise the rubes anything but reserve the right to break the promise. If you get caught, cover it up, admit nothing, and keep on with it. When the Securities and Exchange Commission discovered that the state of Illinois had been playing that game with its pension plan promises

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Moody’s Downgrades Britain’s Credit, Expects Little Improvement for Years

Last Friday Moody’s Investors Service announced its downgrade of the United Kingdom’s government bond ratings by one notch, from AAA to Aa1, a move that was anticipated a year ago when the credit rating agency moved its rating on UK bonds from

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New York Times Attempts to Sell the Boston Globe, Again

The New York Times announced on Wednesday that it will attempt to sell its New England Media Group for the second time in four years.

The Times bought the subsidiary which includes the Boston Globe and the Worcester Telegram & Gazette along with BostonGlobe.com, Boston.com, Telegram.com and GlobeDirect, the Globe’s direct mail marketing company, for $1.1 billion in 1993 and if it’s able to find a buyer it will be lucky to get

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Reality Check from Cook County, Illinois: “You will lose your homes.”

No wonder the media tries to hide reality from the taxpayers. It’s too hard to take. It’s better to ignore it.

But in Cook County, Illinois, the reality can’t be ignored any more. The taxpayers are waking up to tax bills showing increases they weren’t expecting, and are flooding the treasurer’s office with complaints. Why anyone would want to be Cook County Treasurer is beyond me, but here she is: Maria Pappas. In at interview with Larry Bell, she said:

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Another Progressive myth exploded

In general Progressives like to extract data that supports further government intervention. One such myth (or trope) is that “the middle class is stagnating, and something must be done!” As two of my favorite economists, Mark Perry and Donald Boudreaux, wrote in the Wall Street Journal,

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Retirees in Illinois: you’re out of luck

Mish Shedlock has an excellent article on what’s happening to pension plans in Illinois: they’re going broke. He quotes extensively from a note he received from Jonathan Ingram at the Illinois Policy Institute about the situation there. Basically it comes down to politicians’ unwillingness to face reality, as well as

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More of America’s National Debt Being Bought by Foreign Governments

On Monday, December 17th, the US Treasury Department announced that China and Japan have increased their purchases of United States government securities despite concerns over the continuing negotiations about the fiscal cliff. Foreign holdings rose to $5.5 trillion in October, or about one-third of the country’s $16 trillion national debt. The increased interest in owning US government debt by foreign governments is welcome as the government’s monthly deficits continue growing at about $150 million every month. 

Although China is often referred to as the primary financier of America’s continuing profligacy, that country’s total holdings, some $1.16 trillion, represents just a little over 7 percent of the US’s national debt. Japan comes in at second place, owning $1.13 trillion, with Brazil holding $255 billion.

In contrast, two-thirds of the country’s national debt is owed by individual American investors and by Social Security and civil service and military pension plans. The balance of $1.6 trillion is owned by the Federal Reserve.

How much longer can such profligacy with its resulting trillion-dollar annual deficits continue? Back in 1995, Harry Figgie wrote Bankruptcy 1995 and predicted the end would occur within five years:

The good news and the bad is that neither we nor any other nation can continue the sin of deficit spending indefinitely. The laws of economics eventually exact their punishment, and we are dangerously close to getting ours.

Just as interest compounds in a savings account, it compounds on our debt. The $4 trillion debt we owed in 1992 becomes $6.56 trillion in 1995 and $13 trillion by the year 2000 just from the accumulation of deficits and interest alone.

Only a fool would contend that this insanity doesn’t have to end.

That was 13 years ago and yet that “day of reckoning” hasn’t arrived. Part of the reason is those “laws of economics” that resulted when interest rates were forced down by the Federal Reserve following the bursting of the dot.com bubble and have remained historically low ever since. That brought the cost of borrowing to record lows as well. For instance, the percentage of taxes that were devoted to interest payments on the national debt in 1991 was nearly 20%, but by 2003, it had declined to just over 8 percent. When compared to the country’s gross domestic product, interest was eating up just 1.4% of it. As Bill Sardi noted, “America was saved by cheap money.”

But with interest rates at near zero, how much longer will investors, foreign and domestic, continue to put up with such low returns in the face of an ever-increasing risk of default? Following the debt ceiling crisis during the summer of 2011, the rating agency Standard and Poor’s downgraded its rating on U.S. Government debt for the first time in history. And unless something positive comes out of the fiscal cliff negotiations, Fitch Ratings is likely to follow.

The Tax Policy Center, using rosy economic assumptions, projected that deficits would continue at least out to the year 2017, and would average $700 billion a year. As Sardi noted, “There is no substantiation for this scenario.” And so something’s got to give.

Indeed, if the average monthly deficits of $150 billion were simply extended in a straight line into the future, deficits over the next five years would add $9 trillion to the national debt, bringing the total to over $24 trillion by 2017.

There are several reasons why that “day of reckoning” may in fact be years away. For one thing, where else would China and Japan invest their surpluses? Name one country that boasts, at least on paper, a better credit rating than the US. With Germany and Japan in recession, and the Eurozone countries struggling to stay afloat, options for “safe” places to invest are limited.

Second, because at present the US dollar is the world’s reserve currency, there continues to be a demand for them no matter what they might be worth. Since Saudi Arabia must deal in dollars when selling the West their oil, there is a floor under that demand. And the recent drop in the price of oil shows, for the moment at least, that Saudi Arabia is happy with the arrangement.

And then there’s the Federal Reserve offering itself as the lender of last resort, announcing last week that it will continue to buy at least half of the government’s deficit for the foreseeable future.

The “day of reckoning” may instead occur in baby steps as the value of the American dollar continues its slow decay in purchasing power.

Despite the cries of worthies like Figgie and Sardi that the end is near, it may not be. The cross-currents of forces demanding further deficit spending are increasingly being met by demands for fiscal sanity will likely put off that “day of reckoning” for a long time, perhaps years into the future. That may indeed be enough time for those demands for sanity to be heard by enough in Washington to begin the sensible rebuilding of the country’s fiscal integrity, in which case the “day of reckoning” would happily never arrive.

 

 

 

 

Public Pension Plans are desperately underfunded

John Mauldin is another of my favorite economists. He excels in bringing in other smart people to write for his Outside the Box commentary, and today is a perfect example. Ed Easterling of Crestmont Research has connected the dots: because of bad assumptions, public pension plans are continuing to be underfunded. Most people know that. What they don’t know is how desperately underfunded they are, and what the implications are for the taxpayers who ultimately back up those failed assumptions.

He summarizes how pension plans work:

Pension plans are simple programs. They are set up to receive contributions from employers and employees to be distributed later back to the employees as retirement benefits.

But the plans expect to distribute more than the contributions that go in—and they almost always can. Down in the basement, the pension plans invest the contribution money over many years to produce a return. The return and the contributions combine to meet the obligations promised to the workers upon retirement.

However, if that combination of funds is insufficient, then the taxpayers are expected to make up the shortfall.

It’s the taxpayers. It’s always and forever the taxpayers.

The key assumptions are how much the plans will have to pay out. That’s pretty easy to calculate. The next is how much will be contributed to the plans by the employees and by their employers (the state and local governments).

It’s the third assumption that can jump up and bite you: how much do those contributions earn before they must be paid out?

It’s complicated so I’ll cut to the chase: current assumptions are that the plans will earn 8 percent, perhaps a little less. That means that one dollar today will grow to $30 in 30 years. So most of the heavy lifting will be the earnings on the contributions and not the contributions themselves. It’s the “eighth wonder of the world” – so proclaimed by Albert Einstein – and its critical to whether those plans will have the money in 30 years to pay out the income promised to the plans’ beneficiaries.

Easterling then does the unthinkable. He asks: “What if those plans don’t earn 8 percent? What if they only earn 4 percent?” Answer: one dollar grows to $3.20 in 30 years. That is a 70 percent shortfall! 

And guess who gets to pick up the tab for that?

 

Many of the articles on Light from the Right first appeared on either The New American or the McAlvany Intelligence Advisor.

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