tag:blogger.com,1999:blog-91174756970061611972024-03-13T09:49:07.389-07:00Unfunded Liabilities and the Coming Class WarWhat are Unfunded Liabilities? They are future commitments or entitlements made today with no plan in place to pay for them when they are due. My goal in creating this blog is to deconstruct the myriad unfunded liabilities in our society and show how they could lead us down the path to a class war, a conflict between those members of society with unfunded entitlements and those who will be asked to pay for them.Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-9117475697006161197.post-663446099209357872011-01-01T16:13:00.000-08:002011-01-01T17:47:13.029-08:00Rising Star; Is China the New IMF?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/TR_EpxJVuqI/AAAAAAAAAr8/pERkL7PGTm8/s1600/Chinese%2BFlag.jpg"><img style="float: left; margin: 0pt 10px 10px 0pt; cursor: pointer; width: 141px; height: 94px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/TR_EpxJVuqI/AAAAAAAAAr8/pERkL7PGTm8/s400/Chinese%2BFlag.jpg" alt="" id="BLOGGER_PHOTO_ID_5557376687044672162" border="0" /></a>In November of 2000 the U. S. Treasury and the International Monetary Fund together provided <a href="http://www.brettonwoodsproject.org/art-15310">$18 billion to bail out</a> Argentina. The economy had collapsed and Argentina was on the verge of defaulting on its debt. In exchange the government agreed to austerity measures; spending cuts, deregulation of their pension system and tax hikes. At the time a retired Argentinean was quoted, “We can’t go on living like this. The government promised us change, but all it has done is deepen the problems of those most in need.”<br /><br />By December 2001 Argentina was back. The IMF refused to provide another round of funding and, in 2002 Argentina became the largest default in world history. The renegotiation process extended from the default through 2005 ultimately costing the world <a href="http://www.sonecon.com/docs/studies/argentina_1006.pdf">$137 billion</a>.<br /><br />The Argentinean default was preceded by ten years of lending by U. S. banks and the IMF culminating in the 2000 bailout. Beginning in 1991 re-negotiations followed in 1992, 1996 and 1998. But after failing to get new funding public debt exploded from <a href="http://fpc.state.gov/documents/organization/39301.pdf">63% of GDP to 150%</a> from December 2001 until the 2002 default.<br /><br />For the last century America has used its balance sheet to effect its policies around the world. The Bretton Woods monetary system in 1945 created the IMF dominated by the United States, then the financial powerhouse of the world. The IMF became an extension of the U. S. financial system. In 1971 the United States defaulted on its obligations to the IMF and the world by unilaterally removing the dollar from gold convertibility and establishing the paper dollar as the world reserve currency.<br /><br />American hegemony started under Woodrow Wilson when the New York banks, led by the House of Morgan, financed the allied powers against Germany. It continued into the 21st century to finally be undone by America’s entry into its own financed war with Iraq. That war and the attendant policies of the Federal Reserve and Congress set the stage for the 2008 financial collapse.<br /><br />The irony is the very same banks that launched a century of ever expanding leverage, who were complicit with government in bringing on the 2008 collapse are now the biggest beneficiaries of government policies to assuage the pain.<br /><br />The slow motion unraveling of the European debt crisis looks like a replay of Argentina and a prelude of what could easily occur here in the United States over the next ten years.<br /><br />China has replaced the U. S. as the leading financial power in the world. With a $2.7 trillion International Investment Fund, China's fund dwarfs<a href="http://www.imf.org/External/Pubs/FT/quart/2011fy/073110.pdf"> the balance sheet of the IMF</a> which stands at 240 billion Special Drawing Rights (SDRs), equivalent to approximately $370 billion.<br /><br />And now China has stepped into the <a href="http://www.dailymail.co.uk/news/article-1341110/Fresh-humiliation-euro-zone-China-says-bail-debt-ridden-nations.html">EU crisis</a> with an offer of aid.<br /><br />The United States today looks like a third world country. On October 30, 2010, the end of our fiscal year, total <a href="http://fms.treas.gov/fr/10frusg/10stmt.pdf">debt</a> stood at $13.5 trillion versus a $14.7 trillion GDP. That doesn’t include <a href="http://www.fanniemae.com/ir/pdf/earnings/2010/q32010.pdf">$3.2 trillion</a> owed by Fannie Mae and <a href="http://www.freddiemac.com/investors/er/pdf/10q_3q10.pdf">$2.3 trillion</a> by Freddie Mac.<br /><br />In March 2010 Congressman <a href="http://thehill.com/blogs/on-the-money/banking-financial-institutions/90351-geithner-fannie-freddie-debt-is-not-us-sovereign-debt">Barney Frank claimed</a> the two agencies obligations are not sovereign debt. If not why did Treasury spokeswoman <a href="http://www.businessinsider.com/treasury-restates-support-for-fannie-freddie-2010-3#ixzz19jBeCGQO">Meg Reilly only one month earlier reiterate</a>, "As we said in December, there should be <span style="font-style: italic;">no uncertainty</span> about Treasury's commitment to support Fannie Mae and Freddie Mac as they continue to play a vital role in the housing market."<br /><br />As the Treasury continues to pour hundreds of billions of taxpayer dollars into the two agencies it would be fair to ask, “Is it or isn’t it?” If it is, total sovereign debt guarantees today stand at 130% of <a href="http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm">US GDP</a> growing at over $1 trillion per year.<br /><br />The actual operating deficit in the U. S. for the fiscal year ending in October 2010 was over <a href="http://fms.treas.gov/fr/10frusg/10stmt.pdf">$2 trillion</a>. Inter-agency transfers reduced that number to $1.2 trillion. And none of this recognizes a $30 trillion unfunded liability for the Social Security Trust Fund nor the <a href="http://unfundedliabilitiesandclasswar.blogspot.com/2010/11/health-care-does-anybody-really-care.html">cost of the new health care bill</a>.<br /><br />Over the years each time U. S. banks and the IMF provided funding for a failing government they extracted promises. Those promises uniformly included reduction of public expenditures on entitlements and operating budgets, increases in taxes, requirements to open markets and agreements to stabilize their currencies, usually with some sort of peg. For the lenders, getting paid back in a worthless currency is almost as big a risk as not getting paid back at all.<br /><br />So as China flirts with bailouts for the EU nations it is worth noting the EU is extracting exactly those same commitments from its <a href="http://www.skynews.com.au/businessnews/article.aspx?id=548156&vId=">client states</a>. This sets China up as lender of last resort with the negotiations already done.<br /><br />Shortly the client states of the United States may approach default. California is potentially the largest but an editorial in the Wall Street Journal suggests <a href="http://online.wsj.com/article/SB10001424052748703766704576009540292652556.html">New York might be first</a>. And then there are Illinois, Michigan and New Jersey each on the verge. However it unfolds the Federal Government’s balance sheet is in no shape for bailouts and it is unlikely a Republican congress will take kindly to blue states asking for financial support.<br /><br />As Chairman Bernanke continues to leverage the balance sheet of the Federal Reserve, it will only take a singular moment of fear to lead to panic sending interest rates higher, or a push of the button on a computer keyboard for capital, now leaving the United States at a modest pace, to flee.<br /><br />In a year end interview on Bloomberg Television Bill Gross, head of Pimco <a href="http://online.wsj.com/article/BT-CO-20101231-703628.html">said</a>, “The present is a good time to get out of the dollar and into currencies that hold value going forward…”<br /><br />When the raiders of the currency come over the wall there is no defense but to raise interest rates. And when interest rates rise <a href="http://unfundedliabilitiesandclasswar.blogspot.com/2010/06/debt-and-back-side-of-power-curve-will.html">default is on the doorstep</a>.<br /><br />Then the question becomes what concessions do we make and how much will we have to pay for China’s International Investment Fund to buy our debt.Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-17722918451101139312010-11-30T11:41:00.000-08:002010-12-01T20:34:41.250-08:00Health Care; Does Anybody Really Care?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/TPWLP1F774I/AAAAAAAAAro/o2orWWIE6Eo/s1600/1%2BNancy%2BProctologist.jpg"><img style="float: right; margin: 0pt 0pt 10px 10px; cursor: pointer; width: 268px; height: 400px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/TPWLP1F774I/AAAAAAAAAro/o2orWWIE6Eo/s400/1%2BNancy%2BProctologist.jpg" alt="" id="BLOGGER_PHOTO_ID_5545491620242911106" border="0" /></a>As we say on the farm, “the chickens eventually come home to roost.” So it is with the Obama health care plan. Last November I pointed out in my blog “<a href="http://unfundedliabilitiesandclasswar.blogspot.com/2009/11/health-care-part-ii-would-you-buy.html">Health Care Part II…</a>” that there were two bills introduced by Rep. Nancy Pelosi covering health care.<br /><br />The first was the bill itself which supporters argued would cost no more than $1 trillion. This was made possible by including cuts in payments to physicians and other medical service providers under SGR, the Sustainable Growth Rate provision of Medicare designed to control health care provider compensation costs. The second bill was <a href="http://docs.house.gov/rules/health/111_sgr1.pdf">H.R. 3961</a>, the Medicare Physician Payment Reform Act.<br /><br />In order to hit the President’s target, the first bill included the SGR payment cuts. The cuts under SGR would have taken reimbursement rates back to what they were in 1990. So through sleight of hand H.R. 3961, scored by the CBO at a cost to taxpayers of $200,000,000,000 (yes $200 billion) was also introduced. It reinstated the SGR cuts but was not considered part of health care; pardon me?<br /><br />H.R. 3961 finally passed but by the time it did it had absolutely nothing to do with physician pay. Through the <a href="http://www.govtrack.us/congress/bill.xpd?bill=h111-3961">alchemy</a> of the congressional rules process it became an act to “extend expiring provisions of the USA Patriot Improvement and Reauthorization Act of 2005…” So the funding to offset the SGR cuts was crammed into a Continuing Resolution delaying the 21% scheduled physician pay cut through February 2010.<br /><br />On February 25, 2010 soon to be censured Rep. Charlie Rangel (highlighted in the afore mentioned <a href="http://unfundedliabilitiesandclasswar.blogspot.com/2009/11/health-care-part-ii-would-you-buy.html">blog</a>) introduced another bill delaying the SGR adjustment to November 30, 2010 with a 2.2% increase in payments. The Department of Health & Human Services finally reported the cost of these adjustments for FY 2010 at $11.7 billion or $1 billion per month.<br /><br />Today the can was kicked down the road again but only one month delaying the cuts to December 31, 2010. The leg is getting weak. And according to the recently released <a href="http://www.blogger.com/post-edit.g?blogID=9117475697006161197&postID=1772291845110113931">draft</a> of the President’s Fiscal Commission the fix is now going to cost $276,000,000,000, 38% more than just a year ago.<br /><br />So that we are all clear, the health care bill that was supposed to cost only $900,000,000,000 when it was passed in March is actually going to cost $1,176,000,000,000 at a minimum and that is after only 6 months.<br /><br />Here come the chickens.Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-87314800346436700242010-06-20T17:52:00.000-07:002010-08-16T20:52:32.751-07:00CalPERS Smoothes, Taxpayers and Ratepayers Take the Lumps<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://tultw.com/"><img style="float: left; margin: 0pt 10px 10px 0pt; cursor: pointer; width: 240px; height: 180px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/TB64QSZIicI/AAAAAAAAAqo/kSQkoyJtz2E/s320/dog+and+bugs.jpg" alt="" id="BLOGGER_PHOTO_ID_5485023986138515906" border="0" /></a>Last year the pension funds managed by CalPERS lost 23.5% of their value or $55 billion. At that point the largest fund was only 58.4% funded, well below the threshold of 80% which the CalPERS Board established in 2005 as the minimum level to be considered funded. CalPERS actuaries are taking the position the market sell-off was a onetime event and are amortizing the loss over 30 years.<br /><br />Before his resignation, Dave Gilb, Personnel Administration Director and a CalPERS board member in a letter last June said the State’s contribution for 2010 including amortizing that loss would be $879 million. But in November, the CalPERS Board decided to postpone a decision and by early May of this year had settled on a $600 million increase in the contribution to $3.9 billion. Absent from that increase was the majority of the $879 million. $300 million of the increase is a result of an <a href="http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/bpac/201004/item03b-01.pdf">actuarial update</a> showing a longer average life expectancy of State employees, $50 million is to cover earlier than anticipated retirements and $200 million was already anticipated because of earlier underfunding. ( The fund lost 5.8% between June of 2007 and June of 2008.) Instead,<a href="http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2009/june/adopts-new-process.xml"> using a three year smoothing method</a> that loads the largest contributions into the second and third years, the contribution made towards actually covering that loss will be around $115 million. There was a savings of $50 million from lower than anticipated salaries. Last week the CalPERS committee made it official and sent their recommendation to the board. A chart given to the CalPERS Board last spring showed that after the three year smoothing, contribution rates for most workers are expected to slowly climb for three <span style="font-style: italic;">decades</span>, going from roughly 17 percent of payroll in 2012 to 27 percent by 2042. And the result is that by 2042 the plan <a href="http://www.calpers.ca.gov/eip-docs/about/board-cal-agenda/agendas/bpac/201005/item04d-0.pdf">will only be 76% funded</a>.<br /><br />The municipalities and agencies participating in CalPERS are a microcosm of the larger fund. The difference is they receive their actuarial adjustments a full year after the State and<a href="http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2009/june/adopts-new-process.xml"> two years after changes in the fund occur</a>. This has the effect of making people like me appear to cry wolf. It gives the municipal managers the ability to claim they are “fully funded” because by the definition of the actuaries at CalPERS they are. In fact they are two years behind.<br /><br /><a href="http://files.e2ma.net/1401763/assets/docs/calpers_chronology.pdf">The chronology of events</a> leading up to this is pretty clear. In 1991 then Governor Pete Wilson signed legislation bringing the analysis and funding of CalPERS under the responsibility of the legislative and executive branches and reducing pension benefits. That was followed quickly in 1992 by a labor sponsored initiative, Proposition 162, approved by 51% of the voters, which returned control of the pension funds to the CalPERS actuaries. In 1999 CalPERS position was further strengthened and retirement benefits increased by SB 400, legislation written and sponsored by CalPERS and signed into law by Governor Grey Davis, which laid the groundwork for the now infamous 3% at 50 for safety employees.<br /><br />Suffering from the collapse of the tech boom, in 2003 CalPERS lowered their assumed rate of return from 8.25% to 7.75% where it stands today but that created a problem. After the typical delays for actuarial calculations, by 2005 plans were underfunded so in 2005 the Board widened the band they consider funded from 90-110% to 80-120% giving cover to the plan managers in professing that their plans are “fully funded”. Today they are amortizing losses over longer periods of time, back loading payments required by their own actuarial assumptions and trying to correct their actuarial miscalculations.<br /><br />For MMWD, and it seems consistent across most of the funds I look at, the elephant in the room is <a href="http://unfundedliabilitiesandclasswar.blogspot.com/2010/02/mmwd-marinites-meet-your-new-master.html">Other Post Employment Benefits or OPEB</a>s, those other than direct pensions. There are two funds for pension liabilities. The first is direct pension payments which is on balance sheet and funded each year by the amount required by CalPERS. This is the contribution we are talking about today. Terry Stigall, the CFO of the MMWD told me last week this year’s contribution to the pension only part of the plan For MMWD will be 13.86% of covered salary or roughly $2.85 million. In addition they will make the entire employee contribution for senior managers of 8% and 3% of the 8% for all other employees bringing the total contribution to roughly 18% of covered payroll. The second fund is OPEBs which in the past was carried off balance sheet. Put in motion by the <a href="http://www.gasb.org/project_pages/gasb_st45_basic_q&a.pdf">Government Accounting Standards Board Statement 45</a>, beginning in 2009 municipal funds had to account for the future liability of OPEBs, something they had been simply funding on a cash basis before. In the Notes section of MMWD’s 2009 audited financials in reference to these liabilities it says, “As of January 1, 2007, the most recent actuarial valuation date, this plan was not funded. The actuarial accrued liability for benefits was $33,973,000, and the actuarial value of assets was $0.” In 2009 contributions to the two plans amounted to $7,408,610 or 39.3% of covered payroll and 12.66% of the total operating budget. This does not include Social Security, Medicare or any other taxes related to employment or any benefits associated with direct employment. Here is the schedule I got directly from MMWD.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/TB695NVexrI/AAAAAAAAAqw/IIo7wdZuz1U/s1600/Funding+Plan+for+OPEBs.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 230px; height: 400px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/TB695NVexrI/AAAAAAAAAqw/IIo7wdZuz1U/s400/Funding+Plan+for+OPEBs.PNG" alt="" id="BLOGGER_PHOTO_ID_5485030186713794226" border="0" /></a> It demonstrates the effects of amortization of liabilities over 30 years. In unadjusted dollars the liability is actually higher after the first ten years than it was at the beginning. The payment for 2007-08 was not required and was not made and there appears to be no prevision for making it. The contribution for 2009-2010 will be $3.728 million. That means total contributions by MMWD for retirement benefits will equal about $7.928 million of a total estimated operating budget of $57 million or 13.9%. What is particularly of concern is that it is 1.2% higher as a percent of the total budget than it was last year and we haven’t even begun to deal with the losses incurred in the funds from the 2008-09 contraction!<br /><br />In April of this year the Stanford Institute for Economic Policy Research published a report entitled, “Going for Broke: Reforming California’s Public Employee Pension Systems.” In it they argued the discount rate used in calculating the funded status of the three main pension funds managed by the public employee pension system is too high and the funds are in significantly worse shape than being reported. The discount rate is one of the inputs actuaries use in determining the funded status of plans. It is the assumed future returns of the plan. While there are a lot of variables; for example length of employment and lifespan of participants and their spouses, which apparently the actuaries have been getting wrong anyway, the two biggest variables are investment returns and inflation. The Stanford brief made the case taxpayers should not be responsible for miscalculations in fund returns or for inflation and therefore the investment rate should be the risk free rate and went so far as to suggest the use of TIPS, Treasury Inflation Protected Securities. In their argument against the assumptions used by the Stanford report CalPERS pointed to their historical returns. In the last 20 years these returns have averaged 7.91% and the number used by the actuaries for future returns is 7.75%.<br /><br />On March 5 of this year an<a href="http://www.orta.org/id470.html"> article </a>appeared in the Wall Street Journal suggesting CalPERS may drop this rate to 6%. The result would cause an increase in unfunded liabilities by at least 15% as we saw in 2005.<br /><br />So it would be reasonable to ask if these returns are achievable. In calculating their returns CalPERS uses 20 years. The only data available on historical fund returns I could find was from the <a href="http://www.calpers.ca.gov/index.jsp?bc=/investments/reports/home.xml">annual reports</a> posted on their web site and they only went back as far as 2002. Over that eight year period the average return was 3.44%. That means the average return for the twelve years leading up to 2002 had to be 15.5%. It also means that to achieve an average return of 7.75% for the period from 2002 to 2022 the next 12 years average also has to be 15.5%. I believe that will be quite a feat.<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/TB6-8ZcU3II/AAAAAAAAAq4/7JlpPhjmryg/s1600/CalPERS+Returns.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 247px; height: 400px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/TB6-8ZcU3II/AAAAAAAAAq4/7JlpPhjmryg/s400/CalPERS+Returns.PNG" alt="" id="BLOGGER_PHOTO_ID_5485031341014965378" border="0" /></a><br />On April 7 they felt pretty good arguing against the Stanford brief. Year to date returns for the fund were 15.53%. However as you can see in the next panel by June 14, 2010 they were down over 4% leaving them with a return to date of 11.61%. And typically the largest returns, particularly in the stock market occur in the first year of recovery from a contraction. The Standard and Poor’s 500 is up 19.5% over that same time period.<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/TB7AmNAF8AI/AAAAAAAAArI/WjPF8OLgy7Y/s1600/Investment+Fund+Value.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 341px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/TB7AmNAF8AI/AAAAAAAAArI/WjPF8OLgy7Y/s400/Investment+Fund+Value.PNG" alt="" id="BLOGGER_PHOTO_ID_5485033158741454850" border="0" /></a><br />I can almost hear the prayers for a quarter end rally before they close their year.<br /><br />I would also put forth the proposition that the kinds of returns they anticipate over the next ten years are unachievable for several reasons.<br /><ul><li>First, during the period from 1990 through 2001 US debt to GDP averaged 62%, the CBO forecasts debt to GDP to average 96% over the next eleven years (the twelfth year is not available but year eleven is the highest at 101% and increasing). The Bank for International Settlements (BIS) which is the international equivalent of the Federal Reserve, released a report in April entitled <a href="http://www.bis.org/publ/othp09.htm">“The Future of Public Debt, Prospects and Implications</a>” in which they make the case that once a country exceeds 90% debt to GDP they can expect GDP to be reduced by approximately 1% from what it might ordinarily be. </li></ul><ul><li>Second, in their book “<a href="http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165">This Time Is Different</a>” Carmen Reinhart and Kenneth Rogoff demonstrate how historically, severe contractions like we experienced in 2008 to 2009 are not easily overcome and the effects are around on average for ten years before reasonable economic growth reignites and that countries such as the US, with its high level of debt to GDP are inevitably forced to default on their debts either by devaluation or inflation before growth resumes.</li></ul><ul><li>Finally the period when CalPERS achieved their superior returns was during a time there were significantly more employees paying in than taking out. Today the inflows are only slightly ahead of outflows and will turn negative before long. This is exactly what happened to the General Motors pension plans and brought <a href="http://unfundedliabilitiesandclasswar.blogspot.com/search?updated-max=2009-09-21T15%3A21%3A00-07%3A00&max-results=7">General Motors</a> down.</li></ul>This brings up the second risk in the actuarial model, inflation. In calculating funding requirements the actuaries use an assumed inflation rate. For CalPERS it has been 3% but they appear to have reduced it recently to 2.5% according to a comment made by Joseph Dear the CalPERS Chief Investment Officer. If that is so they have further improved the calculation for unfunded liabilities because keeping the investment returns the same and reducing the assumed rate of inflation boosts real returns. And while 2.5% may seem high by today’s standards don’t be so sure. Even during the Great Recession the annual inflation rate only dipped below zero in the middle of 2009 and is already back up to 2.2%. Mr. Bernanke is promising us no deflation and if I were to bet on one thing he might get right that would be it.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/TB7A_qDUgpI/AAAAAAAAArQ/robb3mAuxmQ/s1600/CPI.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 395px; height: 400px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/TB7A_qDUgpI/AAAAAAAAArQ/robb3mAuxmQ/s400/CPI.PNG" alt="" id="BLOGGER_PHOTO_ID_5485033596036350610" border="0" /></a><br /><br />So the bottom line to me is this: if CalPERS is so confident they can achieve these returns and they can forecast the risk of inflation along with all the other variables associated with their actuarial shenanigans, why aren’t the public employees willing to take that risk instead of placing it on the backs of the rate payers and the taxpayers? You might agree but again Joseph Dear, the Chief Investment Officer of CalPERS weighs in, “…I might agree with the money managers, who tend to have a short-term investment horizon, that earnings may average 6% in the short term. But CalPERS has <span style="font-style: italic; font-weight: bold;">decades</span> in which to repeat its past investment performance.”<br /><br />Do they?Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-59606441148463326442010-06-04T15:40:00.000-07:002010-08-16T20:59:37.327-07:00Debt and the Back Side of the Power Curve: Will the US Follow Greece?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/TAmMfW7PMAI/AAAAAAAAAqg/Iydj6iI7IVE/s1600/airplane-crash2.jpg"><img style="float: left; margin: 0pt 10px 10px 0pt; cursor: pointer; width: 320px; height: 229px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/TAmMfW7PMAI/AAAAAAAAAqg/Iydj6iI7IVE/s320/airplane-crash2.jpg" alt="" id="BLOGGER_PHOTO_ID_5479064892030791682" border="0" /></a>An airplane accelerating down the runway reaches a critical speed where enough air is forced over the wing to create lift. The airplane rotates and takes off. As long as the speed of the plane stays above that point and power is applied it will accelerate. As it slows it behaves differently. On the graph below is a point called Minimum Power Airspeed. From there on, as the aircraft decelerates more power must be added to maintain altitude. The wing approaches stall, ceases to fly and the only alternative is to push the nose towards the ground. Too close to the ground and the outcome is inevitable. In aviation this is called the back side of the power curve.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/TAmK5vbzC8I/AAAAAAAAApg/27zXQ8czp5g/s1600/Power+Curve.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 259px; height: 233px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/TAmK5vbzC8I/AAAAAAAAApg/27zXQ8czp5g/s400/Power+Curve.PNG" alt="" id="BLOGGER_PHOTO_ID_5479063146263153602" border="0" /></a>There is an economic relationship very similar to the power curve. This is the relationship of debt to GDP and, more precisely, the relationship of debt service to GDP growth.<br /><br />Greece is on the back side of the power curve. What happened?<br /><br />On the surface Greece is not much worse off than the United States. The public debt of <a href="http://www.indexmundi.com/greece/public_debt.html">Greece is 108% of GDP</a>. In the <a href="http://www.treasurydirect.gov/govt/reports/pd/mspd/2010/opds052010.pdf">US it is 90%</a> including intergovernmental holdings of $4.5 trillion made up primarily of borrowings from the Medicare and Social Security trust funds but owed none the less. With an estimated deficit of $1.5 trillion the US deficit to GDP is 10.2%.<br /><br />The crisis in Greece began to unfold in <a href="http://www.reuters.com/article/idUSTRE64I2LW20100519">November of 2009</a> when Prime Minister George Papandreou reported a higher than anticipated budget deficit at 12.7% of GDP. The two-year borrowing cost for Greece was less than 2% the first week of November. By May 7, 2010 it was over 19% and the Greek treasury was out of business.<br /><br /><div style="text-align: center;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/TAmLLE99J8I/AAAAAAAAApw/4s5aAFPn3d0/s1600/Greek+Borrowing+Costs.gif"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 286px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/TAmLLE99J8I/AAAAAAAAApw/4s5aAFPn3d0/s400/Greek+Borrowing+Costs.gif" alt="" id="BLOGGER_PHOTO_ID_5479063444101343170" border="0" /></a><span style="font-weight: bold;">Greek Government 2-Year Borrowing Rate % (Source: Bloomberg)</span><br /><br /></div>Economic growth is the engine that drives a country. Tax revenue is the available power and debt is the drag. What brought Greece to its knees was short term borrowing cost. Greece’s debt distribution is reasonably good. A look at Bloomberg shows only $7.33 billion maturing in 2010 or roughly 2.4% of a total $310 billion. The rest is spread out almost evenly over the next 10 years.<br /><br /><div style="text-align: center;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/TAmLVmPl7VI/AAAAAAAAAp4/H16wrYUR7gY/s1600/Greek+Debt+Distribution.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 268px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/TAmLVmPl7VI/AAAAAAAAAp4/H16wrYUR7gY/s400/Greek+Debt+Distribution.PNG" alt="" id="BLOGGER_PHOTO_ID_5479063624832380242" border="0" /></a><span style="font-weight: bold;">Greek Debt Maturities</span><br /></div><br /><a href="http://en.wikipedia.org/wiki/Bank_for_International_Settlements">The Bank for International Settlements</a> (“BIS”) functions like a federal reserve bank for the federal reserve banks of the world. In March, 2010 it published a working paper entitled, <a href="http://www.bis.org/publ/othp09.htm">“The future of public debt: prospects and implications.”</a> The Abstract of the paper states, “Our projections of public debt ratios (debt to GDP) lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is <span style="font-style: italic; font-weight: bold;">unsustainable</span>.” They could hardly be any clearer. It continues, “So far, at least, investors have continued to view government bonds as relatively safe." The report was released before the Greek meltdown.<br /><br />“But bond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decades. We take a longer and less benign view of current developments, arguing that the aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to boiling point. In the face of rapidly aging populations, for many countries the path of <span style="font-style: italic; font-weight: bold;">pre</span>-crisis (emphasis added) revenues was insufficient to finance promised expenditure.”<br /><br />While the United States is not as sclerotic as Old Europe (graph 1 of the following panel) the promised benefits as a percent of GDP (graph 2) exceed all but Greece.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/TAmLluXeRZI/AAAAAAAAAqA/ABYvzhC8C0c/s1600/Projected+population+and+age-related+spending.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 219px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/TAmLluXeRZI/AAAAAAAAAqA/ABYvzhC8C0c/s400/Projected+population+and+age-related+spending.PNG" alt="" id="BLOGGER_PHOTO_ID_5479063901890823570" border="0" /></a><br />The report continues with a discussion of interest rates and growth rates. “The differential between the real interest rate and real output growth is a critical input parameter in determining the future evolution of public debt. When this differential is positive, so that the interest rate is greater than the growth rate, the debt ratio will <span style="font-style: italic; font-weight: bold;">explode</span> (emphasis added) in the absence of a sufficiently large primary surplus.” And thus when borrowing costs spiked Greece found itself on the back side of the power curve.<br /><br />A rational person would ask the question “Is the US next?”<br /><br /><a href="http://www.treasurydirect.gov/govt/reports/pd/mspd/2010/opds052010.pdf">Total US debt</a> at May 31, 2010 stood at $12.992 trillion and the forecast deficit for FY 2010 is approximately $1.5 trillion. The CBO estimates Nominal GDP at $14.706 trillion which means at the end of the current fiscal year our public debt will stand at $13.6 trillion against a GDP of $14.7 trillion, a ratio of 92%. This does not include $1.65 trillion of Fannie Mae and Freddie Mac notes that, whether explicit or not, now seem to carry the backing of the Federal Government. Next year we will reach 99.7% and the CBO estimates deficits will continue as far as the eye can see growing at a faster pace than GDP until 2013 when GDP is expected to grow by an optimistic 6%. In 2016 deficits again start growing faster than GDP. And this year's $1.5 trillion deficit is 10.2% of GDP. Beginning to sound a lot like Greece.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/TAmLwvHauNI/AAAAAAAAAqI/k1b36yMCCWg/s1600/2011+Budget+Analysis.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 395px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/TAmLwvHauNI/AAAAAAAAAqI/k1b36yMCCWg/s400/2011+Budget+Analysis.PNG" alt="" id="BLOGGER_PHOTO_ID_5479064091070478546" border="0" /></a><br />But what is different is our debt distribution.<br /><br />The Bloomberg graph that follows only picks up publicly traded debt and excludes that $4.5 trillion held in Intergovernmental Accounts, primarily money borrowed from the Medicare and Social Security trust funds. The CBO understates the debt to GDP by excluding this debt from its calculations. It will be depleted over time and replaced by public debt, so in calculating the ratio of maturing debt to total debt I use the total debt number of $12.992 trillion at May 31, 2010. The maturities of the intergovernmental debt are not available. That said the $2.2 trillion in public debt maturing in 2010 represents 17% of total debt. In other words we are far more sensitive to a run on our debt, or simply an increase in rates, than was Greece.<br /><br /><div style="text-align: center;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/TAmL8jjTWsI/AAAAAAAAAqQ/eLr0P_PAKM0/s1600/US+Debt+Distribution.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 260px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/TAmL8jjTWsI/AAAAAAAAAqQ/eLr0P_PAKM0/s400/US+Debt+Distribution.PNG" alt="" id="BLOGGER_PHOTO_ID_5479064294124640962" border="0" /></a><span style="font-weight: bold;">U S Debt Maturities</span><br /></div><br />The President’s budget forecast calls for 2.8% GDP growth in FY 2011. Even a modest increase in short term borrowing costs, say to 3%, runs the significant risk the differential between borrowing costs and GDP growth could easily become positive. <a href="http://www.cbo.gov/ftpdocs/112xx/doc11231/frontmatter.shtml">The CBO’s forecast for 2015 GDP</a> growth is 4.6%. Three month Treasury Bill rates are forecast to be 4.6% and ten year Notes at 5.5%. With 45% of US debt re-pricing between now and 2015 and public debt increasing from the current $8.1 trillion to $14.3 trillion it is only a matter of time until we find ourselves, like Greece, on the back side of the power curve. Then the question is "how far is the ground?"Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-3326099490433737532010-04-10T16:54:00.000-07:002010-04-11T10:15:16.309-07:00Stanford Meets MMWD; Bleeding Red Ink<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/S8ESUXN0gjI/AAAAAAAAAnY/MjqxSXn6c14/s1600/shutterstock_40719715.jpg"><img style="float: left; margin: 0pt 10px 10px 0pt; cursor: pointer; width: 200px; height: 156px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/S8ESUXN0gjI/AAAAAAAAAnY/MjqxSXn6c14/s200/shutterstock_40719715.jpg" alt="" id="BLOGGER_PHOTO_ID_5458664364388418098" border="0" /></a>On April 2, 2010 the Stanford Institute for Economic Policy Research released a policy brief entitled, <a href="http://siepr.stanford.edu/publicationsprofile/2123">“Going For Broke: Reforming California’s Public Employee Pension Systems.”</a> It was an interesting attempt to deconstruct the problems facing the taxpayers of California. It is in stark conflict with the official report.<br /><br />The officially stated unfunded liability of CalPERS at July 1, 2008 was $38.6 billion. Using the methodology of the Stanford graduate students it rises to $239.7 billion. Total pension obligations covered by CalPERS, CalSTRS and UCRS rise to almost $425.2 billion. In July of 2008 things still looked fairly good.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/S8ER1JHSz2I/AAAAAAAAAnQ/YIX-yEnI8JE/s1600/Pension+Shortfall.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 140px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/S8ER1JHSz2I/AAAAAAAAAnQ/YIX-yEnI8JE/s400/Pension+Shortfall.PNG" alt="" id="BLOGGER_PHOTO_ID_5458663828027002722" border="0" /></a><br />To calculate the amount of money necessary to fund a future liability a rate of return or discount rate is required. This is what an investment would expect to return over its lifetime. Using Excel enter a future liability (for example the cost of a child’s college education) enter the years until that obligation is due then guess on what your rate of return on an investment will be. The result is the <a href="http://en.wikipedia.org/wiki/Present_value%20">“present value”</a> of that future liability. By subtracting the money actually available for investment from the present value of the liability the unfunded status is apparent.<br /><br />In calculating a rate of return there are many opportunities. Let’s say you are <a href="http://www.newsweek.com/id/221924%20">John Paulson</a> , you might choose 20% or 100%. If you are the Social Security System you will choose U S Treasuries which return a lot less.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/S8ERANj5vmI/AAAAAAAAAm4/Lb-zEu6fzBk/s1600/250px-Calpersheadquarters.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 250px; height: 185px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/S8ERANj5vmI/AAAAAAAAAm4/Lb-zEu6fzBk/s400/250px-Calpersheadquarters.jpg" alt="" id="BLOGGER_PHOTO_ID_5458662918687669858" border="0" /></a><br />Here is where the mandarins of CalPERS sit while they calculate. They have come to the conclusion they will make 7.75%. Wikipedia points out their assets peaked in October 2007 at $260.6 billion and, as of December 2008, were down 31% to <a href="http://en.wikipedia.org/wiki/CalPERS%20">$179.2 billion</a>. Ooops! <br /><br />What makes the brief from SIEPR important is its reflection on the appropriate assumed rate of return for a publicly funded pension plan. Case law in California establishes the immutable right of the employee to vested benefits. The brief argues that therefore the investment returns should likewise be immutable, in other words without risk of loss. And the place to go for that is U S Treasuries. While the brief was generous by assuming a return of 4.14% at 10 years (the available return at the time in U S 10 year Treasury Notes was 3.625%) it also points out a flaw in its own assumptions. The immutable returns to employees covered by CalPERS are indexed to inflation. As an alternative the Treasury also offers Treasury Inflation Protected Securities or TIPS eliminating inflation risk. On April 5, 2010 the U S Treasury auctioned 9 year 9 month TIPS Notes at a high yield of 1.709%. When calculating unfunded liabilities CalPERS assumes inflation will run 3%. I have suggested to <a href="http://en.wikipedia.org/wiki/Joseph_Nation%20">Joe Nation</a>, the faculty adviser on the paper, a more appropriate rate might be the assumed inflation rate plus the TIPS rate. It still comes up to only 4.709%.<br /><br />The Marin Municipal Water District is a microcosm of the State. As a participant in CalPERS, the value of pension assets rises and falls with the portfolio of CalPERS. In previous blogs I have outlined the problems faced by MMWD and estimated the total unfunded position at over $90,000,000. That number would pale to insignificance at a discount rate of 4.709%.<br /><br />Pension liabilities accrue for a couple of reasons. First there are the promised benefits. Created by <a href="http://info.sen.ca.gov/pub/99-00/bill/sen/sb_0351-0400/sb_400_cfa_19990928_142123_sen_floor.html">legislation</a>, written and sponsored by CalPERS in 1999, the road map was clear. In 1999 you can only imagine the heady feeling among the managers of California’s pensions. Approaching the peak of the tech bubble pension funds were swollen, overfunded to a degree unimaginable only a few years earlier. Contributions by participants were reduced and in some cases returned. It appeared the good times were here to stay and as a reward covered employees were granted extensive retirement benefits. For example the legislation established an accrual and retirement formula of 2% at 55. It means that for each year worked a benefit of 2% of the base, the average of the last three years salary, accrued and was fully vested at age 55. This became the standard for California public employees (other than safety employees who hold a special place in our hearts and received 2.5% at 50) and the assumed rate of return was 8.25%. Amid the economic turmoil of 2003 CalPERS reduced that rate to 7.75% where it stands today.<br /><br />Markets rise and fall and by 2006 jubilation once again walked the halls of the Lincoln Plaza Complex at 400 “Q” Street. Buoyed by outsized investment returns and tax inflows from the housing boom, municipalities and agencies around the state upped the ante raising benefits to 2.7% at 55 for non safety employees and 3% at 50 for safety employees. Meanwhile union negotiators whittled away at the calculated base, the average of the last three year’s pay. Adding to the employees good fortune, boards charitably adopted only the <span style="font-style: italic;">last</span> year’s pay as the benefit standard, opening the way for well documented <a href="http://www.amazon.com/Plunder-Employee-Treasuries-Controlling-Bankrupting/dp/0984275207/ref=sr_1_1?ie=UTF8&s=books&qid=1270949981&sr=1-1">abuses</a>. Around the state ratepayers and taxpayers slept.<br /><br />Once benefits are established the driver becomes investment returns. Again we consult with the mandarins, the managers of California’s retirement funds. The question of appropriate rates of return was the focus of a recent <a href="http://www.calpers.ca.gov/eip-docs/member/video/view/health-care-reform-transcript.pdf">interview</a> with CalPERS Chief Investment Officer Joe Dear and Alan Milligan, CalPERS Interim Chief Actuary. Apparently immune from the randomness faced by the rest of the world Alan Milligan weighed in, "…as Actuaries, we need to know not just what’s going to happen in the next ten years, but also what is going to happen in the next 50 years.” In Alan’s world there are no <a href="http://en.wikipedia.org/wiki/Black_swan_theory%20">black swans</a>. And if there are, well the taxpayers and the ratepayers are standing by.<br /><br />I do not have the capacity to calculate the estimate produced by the Stanford graduate students who authored “Going For Broke” but if I apply the same ratio used with CalPERS to MMWD’s unfunded liabilities as they existed at the end of the 2007 fiscal year it looks like this:<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/S8HmTGZ51jI/AAAAAAAAAng/MdkkcaFTmHE/s1600/MMWD+Adjusted.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 359px; height: 76px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/S8HmTGZ51jI/AAAAAAAAAng/MdkkcaFTmHE/s400/MMWD+Adjusted.PNG" alt="" id="BLOGGER_PHOTO_ID_5458897439160915506" border="0" /></a><br />Simply put the bill staring the ratepayers of MMWD in the face could be in the neighborhood of $300,000,000! However it is couched, whether by distributing it over thirty years, manipulating it, or massaging it with actuarial assumptions for investment returns, the ratepayers of MMWD will be facing regular rate increases <span style="font-weight: bold;">forever</span>.<br /><br />For those who feel lost my sympathies are with you; however there is a glimmer of hope. First there is now a lot of attention focused on MMWD and the performance of the board members we have elected to guard our interests. Next, if you travel up 101 north a few miles you will run into the community of Novato and the Novato Sanitary District. I Googled them and the first thing I noticed was their <a href="http://www.novatosan.com/pdfs/OrgChart_8-2009.pdf">organization chart</a>. Unlike MMWD’s which has the Board at the top, sitting above the NSD Board of Directors is a box entitled “NSD Ratepayers”. What a novel concept. I knew their Board, over the strong opposition of the unionized work force, had made the decision to contract the operation of a newly completed water treatment facility to an outside company, a move designed to save the ratepayers $7 million over the life of the <a href="http://www.allbusiness.com/government/government-bodies-offices-regional-local/12605209-1.html">5 year contract</a> . It is not without challenges and the biggest is coming from <a href="http://www.marinij.com/novato/ci_14514878">labor</a>, the root cause of our current problems. But it was a courageous board that voted to eliminate a number of expensive union positions in favor of a lower cost option; outsourcing.<br /><br />But the most impressive moment for me was a conversation I had with Beverly James, the Engineer-Manager of the district. When I pointed out the problems at MMWD with OPEBs (Other than pension Post Employment Benefits) she said her board has been concerned about them for a long time. Contrast that with the MMWD board's view. From Section F8 of <a href="http://www.co.marin.ca.us/depts/GJ/main/cvgrjr/2006gj/responses/Retiree_Costs/response_to_retiree_health_mmwd.pdf"> "Response to Marin County Civil Grand Jury Report on Retire (sic) Health Care"</a> prepared by General Manager Paul Helliker and supported by the current board by a vote of 4-0, "MMWD believes that public agencies should always be prudent when managing public funds. However, MMWD does not think it is beneficial to speculate on what may occur in the future."<br /><br />While Novato Sanitary is under the same accounting rules governing all public entities for reporting unfunded liabilities, they chose a discount rate of 4%, a number even more conservative than was used in the Stanford brief. They have moved to reduce their exposure to OPEBs by going to a two-tiered system for retiree medical benefits adopting a <span style="font-style: italic;">defined contribution</span> plan for employees hired after July 1, 2008. The District contributes 1.5% into a 401a for those employees instead of providing a defined benefit. And when the rest of the State was increasing pension benefits to employees, the Board of the Novato Sanitary District held the line at 2% at 55, still generous by private standards but more manageable than most of California. Engineer/Manager James gave credit for the ratepayer centric focus to board president Mike Di Giorgio. Mike, your performance is a shining light in an otherwise dim landscape and Novato you are very fortunate.<br /><br />So it is clear that competent and responsible individuals exist in the communities they are elected to serve. There are hurdles to overcome. First candidates must be identified, then they must be elected and that seems to be only the beginning as the challenges to the Novato Sanitary District’s board show. But we have been warned ahead of time that <a href="http://freedomkeys.com/vigil.htm">“Eternal vigilance is the price of liberty.”</a><br /><br />The ratepayers of MMWD deserve better governance and the coming election provides the opportunity to claim it.<br />________________________________________________<br /><br />Next: Is the board of MMWD trying to circumvent voters opposed to the desalinization plant with the creation last week of the Marin Municipal Water District Financing Authority?Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com1tag:blogger.com,1999:blog-9117475697006161197.post-81281985362693135002010-03-01T17:54:00.000-08:002010-08-15T11:58:00.298-07:00I Correct a Misstatement; MMWD Kicks the Can Down the Road<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/S42REcRz0HI/AAAAAAAAAmo/K4h4iemVhJI/s1600-h/long-road.jpg"><img style="float: right; margin: 0pt 0pt 10px 10px; 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mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman"; mso-bidi-theme-font:minor-bidi;} </style> <![endif]--> <p class="MsoNormal" style="line-height: normal;"><span style="font-size: 12pt;font-family:";font-size:100%;" >On February 24 I spoke<a name="_ednref1"></a> at the rate hearing for the Marin Municipal Water District.</span><a href="http://unfundedliabilitiesandclasswar.blogspot.com/search/label/MMWD%20Citizens%20night"><span><span><span><span><span><span><span><span><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"></span></span></span></span></span></span></span></span></span></span></a><span><span><span><span><span><span><span><span><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"><a style="" name="_ednref1" title=""><span class="MsoEndnoteReference"><span style=""><span class="MsoEndnoteReference"><span style="line-height: 115%;font-family:";" >[1]</span></span></span></span></a></span></span></span></span></span></span></span></span></span></span><span style="font-size: 12pt;font-family:";font-size:100%;" > At that meeting I referred to the total unfunded retirement benefits and said, "If we had to fund it today it would cost $92,000,000 which is 130% of the entire MMWD annual budget. And there is no plan in place to pay for it!” </span><span style=";font-family:";font-size:12pt;" ><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="font-size: 12pt;font-family:";font-size:100%;" >I was wrong on two counts. First the hole is likely larger, which I will explain in a moment. Second, and of greater significance there <i>is</i> a plan in place. That may be the bad news. The plan is like a game many of us played as kids called kick the can. In this case they just keep kicking it down the road. </span><span style=";font-family:";font-size:12pt;" ><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="font-size: 12pt;font-family:";font-size:100%;" >This is not the plan of Terry Stigall, MMWD’s head of finance or the Board although there appear to be funding choices and MMWD has adopted the most lenient. It is the plan of accountants and actuaries. </span><span style=";font-family:";font-size:12pt;" ><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="font-size: 12pt;font-family:";font-size:100%;" >At January 1, 2007 the Unfunded Actuarial Liability (UAL) for OPEBs (Other Post-retirement Employee Benefits than pensions) was $33,973,000, which is the number I used in my calculations for the rate hearing.</span><a name="_ednref2"></a><span style="font-size: 9.5pt;font-family:";font-size:100%;" > </span><span style="font-size: 12pt;font-family:";font-size:100%;" >The plan to fully fund this, supplied by the actuary, spreads the process over 30 years and assumes the assets of the plan are held in trust and earn 7.75% per year.</span><span><span><span><span><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"><a style="" name="_ednref2" title=""><span class="MsoEndnoteReference"><span style=""><span class="MsoEndnoteReference"><span style="line-height: 115%;font-family:";" >[2]</span></span></span></span></a></span></span></span></span></span></span><span style="font-size: 12pt;font-family:";font-size:100%;" > A contribution of $3,497,000 was to be made at the end of 2008. The estimate for the UAL at that point was $35,177,000 which is $1.2 million more than I said. And the 2008 contribution was not required and was not made. Instead only the actual benefits were paid in the amount of $1,355,893. Until the actuaries speak, which will be at the end of this year or the beginning of next, we will not know where we stand. Medical costs were lower than projected and investment returns, at least for the last 6 months, were higher. That is the good news. The bad news is that over the next 10 years, under the “funding” plan the UAL goes up not down.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/S42PFqCqXrI/AAAAAAAAAmg/c9AK5B4ce4E/s1600-h/Pre-Funding+of+OPEBs.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 418px; height: 278px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/S42PFqCqXrI/AAAAAAAAAmg/c9AK5B4ce4E/s400/Pre-Funding+of+OPEBs.PNG" alt="" id="BLOGGER_PHOTO_ID_5444164851908370098" border="0" /></a></span><span style=";font-family:";font-size:12pt;" ><o:p></o:p></span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><span style="font-size: 12pt;font-family:";font-size:100%;" >From the report, “The Unfunded Actuarial Liability in 10 years is projected to be approximately $38.5 million if the District pre-funds. The difference will be more dramatic after 2016/17, with the projected June 30, 2037 Unfunded Actuarial Liability expected to be $0 under the pre-funding approach (Unfunded Actuarial Liability amortized over 30-year period).” And every two years the actuaries will weigh in with a new estimate, again for 30 years. Will therel be a new 10 year period that looks more or less like this one? Rate payers might reasonably ask, how long is the road ?</span></p><p class="MsoNormal" style="margin-bottom: 0.0001pt; line-height: normal;"><br /><span style="font-size: 12pt;font-family:";font-size:100%;" ></span><span style=";font-family:";font-size:12pt;" ><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="font-size: 12pt;font-family:";font-size:100%;" >Actuarial calculations require many assumptions including the direction of health care costs, an inflation rate, in this case 3% and from CalPERS an investment return of 7.75%. The March 1, 2010 issue of the Wall Street Journal carried an article about CalPERS and their prospective investment returns.<a name="_ednref3"></a> They may soon drop their assumption to 6%.</span><a href="http://online.wsj.com/article/SB10001424052748703316904575092362999067810.html?KEYWORDS=california"><span><span><span><span><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"></span></span></span></span></span></span></a><span><span><span><span><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"><a style="" name="_ednref3" title=""><span class="MsoEndnoteReference"><span style=""><span class="MsoEndnoteReference"><span style="line-height: 115%;font-family:";" >[3]</span></span></span></span></a></span></span></span></span></span></span><span style="font-size: 12pt;font-family:";font-size:100%;" > The impact of that on UALs will be dramatic. At 10 years it will reduce the investment returns by roughly 15% which means a significant boost to required contributions. As we can see from the table above, upward pressure on water rates will continue each year anyway. If the actuaries are forced to lower their investment return assumptions, that upward pressure will increase from rising contributions to both the pension fund and the OPEBs. In 2009 contributions to the two plans amounted to $7,408,610 or 39.3% of covered payroll and 12.66% of the total operating budget.<a name="_ednref4"></a><a href="http://www.marinwater.org/documents/auditedfinancialsjune2009.pdf"><span style="font-size:78%;"></span></a><span style="font-size:78%;"><a><span style=""><span style="color:blue;">[4]</span></span></a></span><span style="font-size:78%;"> </span>This does not include Social Security, Medicare or any other taxes related to employment or any benefits associated with employment. And the costs just keep going up.</span><span style=";font-family:";font-size:12pt;" ><o:p></o:p></span></p> <p class="MsoNormal" style="line-height: normal;"><span style="font-size: 12pt;font-family:";font-size:12pt;" >Out-sized benefits are at issue. The rate payers not only fund all these future entitlements for retirement at 55 and early retirement at 50, they also guarantee the investment performance of CalPERS. The average age of MMWD employees is 47. Retirement is in sight and the burden of those retirement benefits will fall squarely on the shoulders of the ratepayers. The Board of MMWD has clearly failed its fiduciary responsibility to the ratepayers it was elected to protect. Unless that changes it will be a long, long road. </span><span style=";font-family:";font-size:12pt;" ><o:p></o:p></span></p> <p class="MsoNormal"><o:p> _____________________________________________________________________</o:p></p> <span><span><span><span><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"><a style="" href="http://unfundedliabilitiesandclasswar.blogspot.com/search/label/MMWD%20Citizens%20night" name="_ednref1" title=""><span class="MsoEndnoteReference"><span style=""><span class="MsoEndnoteReference"><span style="line-height: 115%;font-family:";" >[1] </span></span></span></span></a></span></span></span></span></span></span><span style="font-size:78%;"><a href="http://unfundedliabilitiesandclasswar.blogspot.com/search/label/MMWD%20Citizens%20night">http://unfundedliabilitiesandclasswar.blogspot.com/search/label/MMWD%20Citizens%20night</a></span><p></p><p class="MsoEndnoteText"> </p> <p class="MsoEndnoteText"><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"><a style="" href="http://files.e2ma.net/1401763/assets/docs/other_post_employment_benefits__opeb__valuation_executive_summary_-_6-30-07.pdf" name="_ednref2" title=""><span class="MsoEndnoteReference"><span style=""><span class="MsoEndnoteReference"><span style="line-height: 115%;font-family:";" >[2]</span></span><!--[endif]--></span></span></a></span> </span><span style="font-size:78%;"><a href="http://files.e2ma.net/1401763/assets/docs/other_post_employment_benefits__opeb__valuation_executive_summary_-_6-30-07.pdf">http://files.e2ma.net/1401763/assets/docs/other_post_employment_benefits__opeb__valuation_executive_summary_-_6-30-07.pdf</a></span> <span style="font-size:78%;"> </span></p> <div style="" id="edn2"> </div> <div style="" id="edn3"> <p class="MsoEndnoteText"><span style="font-size:78%;"><a style="" href="http://www.blogger.com/post-create.g?blogID=9117475697006161197#_ednref3" name="_edn3" title=""><span class="MsoEndnoteReference"><span style=""><!--[if !supportFootnotes]--><!--[endif]--></span></span></a></span><a href="http://online.wsj.com/article/SB10001424052748703316904575092362999067810.html?KEYWORDS=california"><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"></span></span></a><span style="line-height: 115%;font-family:";font-size:100%;" ><span style="font-size:78%;"><a style="" href="http://online.wsj.com/article/SB10001424052748703316904575092362999067810.html?KEYWORDS=california" name="_ednref3" title=""><span class="MsoEndnoteReference"><span style=""><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style="line-height: 115%;font-family:";" >[3]</span></span><!--[endif]--></span></span></a></span> </span><span style="font-size:78%;"><a href="http://online.wsj.com/article/SB10001424052748703316904575092362999067810.html?KEYWORDS=california">http://online.wsj.com/article/SB10001424052748703316904575092362999067810.html?KEYWORDS=california</a></span> </p> </div> <div style="" id="edn4"> <p class="MsoEndnoteText"><span style="font-size:78%;"><a style="" name="_edn4" title=""><span class="MsoEndnoteReference"><span style=""><!--[if !supportFootnotes]--></span></span></a></span><span style="line-height: 115%;font-family:";font-size:100%;" ><a style="" href="http://www.blogger.com/post-create.g?blogID=9117475697006161197#_edn4" name="_ednref4" title=""></a><a href="http://www.marinwater.org/documents/auditedfinancialsjune2009.pdf"><span style="font-size:78%;">[4]</span></a></span><a href="http://www.marinwater.org/documents/auditedfinancialsjune2009.pdf"><span style="font-size:78%;"> http://www.marinwater.org/documents/auditedfinancialsjune2009.pdf</span></a></p></div>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com2tag:blogger.com,1999:blog-9117475697006161197.post-32920585213723932722010-02-27T17:30:00.000-08:002010-02-27T20:21:23.954-08:00Citizen's Night at the Marin Municipal Water District<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://en.wikipedia.org/wiki/Liberty_Leading_the_People"><img style="float: left; margin: 0pt 10px 10px 0pt; cursor: pointer; width: 250px; height: 250px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/S4nHiq8pPII/AAAAAAAAAlo/y2AI1al77GY/s400/lady+liberty.jpg" alt="" id="BLOGGER_PHOTO_ID_5443101023112084610" border="0" /></a>In my last blog I “went local”.<span style=""> </span>I didn’t anticipate the ramifications.<span style=""> </span>Going local creates access.<span style=""> </span>My blog readers know me, they know how to reach me, and now I have excited a nerve and it needs to be scratched.<br /><br />After a brief collaboration with friends I was enlisted to make a presentation to the local water district board, MMWD, which I had written about in my previous blog.<span style=""> </span>In preparation I did my due diligence.<span style=""> </span>I met with Paul Helliker, MMWD’s General Manager and Terry Stigell, the CFO.<span style=""> </span>Terry was prepared with copies of my blog in hand appropriately highlighted as only Adobe Acrobat can do.<br /><p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Wednesday, February 24 came too quickly.<span style=""> </span>I spent the previous Sunday, ten hours of it, trying to normalize the rates the various districts charge their customers.<span style="font-size:78%;"><a href="http://files.e2ma.net/1401763/assets/docs/combined_rate_comparison.pdf">[1]</a></span> After making numerous requests to the president of the board for a larger block of time than the allotted three minutes, I was notified I would get the same three minutes as everyone else.<span style=""> </span>How do you compress fifteen complicated minutes into three?<span style=""> </span>It quickly became clear the procedures work to the incumbents’ benefit.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">I rewrote my presentation<span style="font-size:78%;"><a style="" href="http://files.e2ma.net/1401763/assets/docs/mmwd_presentation.pdf" name="_ednref2" title=""><span class="MsoEndnoteReference"><span style=""><!--[if !supportFootnotes]--><span class="MsoEndnoteReference"><span style=";font-family:";" >[2]</span></span><!--[endif]--></span></span></a> </span>into bullet points.<span style=""> </span>I downloaded a stop watch to my desktop and practiced my delivery over and over.<span style=""><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/S4nNubSOUTI/AAAAAAAAAlw/8mg622xVinw/s1600-h/Stopwatch.PNG"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 400px; height: 233px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/S4nNubSOUTI/AAAAAAAAAlw/8mg622xVinw/s400/Stopwatch.PNG" alt="" id="BLOGGER_PHOTO_ID_5443107822135824690" border="0" /></a> </span>No matter how I changed it fifteen seconds before I reached my climatic conclusion the buzzer went off.<span style=""> </span>And no matter how many times it happened the sound of that buzzer was like an electric shock!<span style=""> </span>OK, maybe I can ask for more time.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">I drove to the meeting with my wife, Lorilei, and my good friend Bill Tunney.<span style=""> </span>(I say good friend because who else would endure such an evening?)<span style=""> </span>There was also a cadre of my blog supporters, those who had pressed me into this position.<span style=""> </span>I'd made up a set of presentation materials.<span><span><span><span><span style="font-size:78%;"><a style="" name="_ednref4" title=""><span class="MsoEndnoteReference"><span style=""><span class="MsoEndnoteReference"><span style=";font-family:";" > </span></span></span></span></a><span class="MsoEndnoteReference"><span style=""><span class="MsoEndnoteReference"><span style=";font-family:";" ><a href="http://files.e2ma.net/1401763/assets/docs/combined_presentation.pdf">[3]</a></span></span></span></span></span></span></span></span></span> picked up from Kinko’s only hours before, to pass out to those in the room.<span style="font-size:78%;"><a style="" name="_ednref4" title=""><span class="MsoEndnoteReference"><span style=""><!--[if !supportFootnotes]--><!--[endif]--></span></span></a></span> Tonight’s the night!</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">We arrived early to sign up for public comment.<span style=""> </span>I thought if I got there early enough and signed in I would be high on the agenda.<span style=""> </span>Foolish me.<span style=""> </span>The incumbents are in charge and they deftly moved my card to the position of last speaker.<span style=""> </span>Ah the power of being in charge.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Not knowing this I wait, thinking as each name was read mine would be next.<span style=""> </span>I watch as people leave the room.<span style=""> </span>Apparently the reporter from the Marin Independent Journal was one of the first because his <a href="http://www.marinij.com/marinnews/ci_14472251">write-up</a> of the meeting was both inaccurate and incomplete.<span style=""> </span>What hope do we have when we can’t even count on the fourth estate?</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">It’s now my time to present.<span style=""> </span>I know my talk is three minutes and fifteen seconds, my internet timer told me so. <span style=""> </span>The chair has been lenient and if I could just explain some of my slides a bit more they would have context.<span style=""> </span></p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">I am at two minutes and fifty seconds and “Recommendations to the Board”. <a href="http://files.e2ma.net/1401763/assets/docs/recomendations_to_the_board.pdf"><span style="font-size:78%;">[4]</span></a><span style=""> </span>I only have eight but it will take at least forty five seconds.<span style=""> </span>I begin to realize I have lost to the incumbents.<span style=""> </span>At number three the gavel sounds.<span style=""> </span>Like the bell that went off on my internet timer it is like a shot of electricity.<span style=""> </span>Doesn’t the board want to hear my recommendations?<span style=""> </span>Aren’t they truly interested in the issues at hand?<span style=""> </span>I look towards the sound of the gavel and see Jack Gibson.<span style=""> </span>Flash back to fifth grade and a bully who wanted to control the playground.<span style=""> </span>He has no interest in what I have to say.<span style=""> </span>To him I am just one more rant he has to endure to advance whatever it is he has in mind. <span style=""> </span>“What do we have to do to get him out of here,” says Jack.<span style=""> </span>“Just listen to what I, a citizen and rate payer have as recommendations to you,” I think but don’t say.<span style=""> </span>Instead I keep reading from my list.<span style=""> </span>The gavel bangs again and there are shouts from the crowd.<span style=""> </span>Are they for me or against me, I don’t know but finally I stop, bullied into silence by the gavel and unsure of the crowd.<span style=""> </span>I walk back to my seat and the crowd erupts in a standing ovation. <span style=""> </span>Twice I rise in acknowledgment embarrassed by the whole thing and wishing for the moment I could return to the anonymity of my blog.<span style=""> </span>And then it is suddenly clear; there are three men present, one calling in by phone and a woman sick at home; they are the board and they are in control and there is nothing we or anyone else can do about it.</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">Nothing, that is, until the next election?</p> <p class="MsoNormal"><o:p> </o:p></p> <p class="MsoNormal">In my next blog I will apologize and explain why I was wrong about something I said regarding MMWD's unfunded liabilities.<span style=""> </span>It turns out it may be worse.</p> <div style=""><!--[if !supportEndnotes]--> <hr width="33%" align="left" style="font-size:78%;"> <!--[endif]--> <div style="" id="edn1"> <p class="MsoEndnoteText"><span style="font-size:78%;"><a style="" href="http://www.blogger.com/post-create.g?blogID=9117475697006161197#_ednref1" name="_edn1" title=""><span class="MsoEndnoteReference"><span style=""><!--[if !supportFootnotes]--><!--[endif]--></span></span></a>[1] <a href="http://files.e2ma.net/1401763/assets/docs/combined_rate_comparison.pdf">http://files.e2ma.net/1401763/assets/docs/combined_rate_comparison.pdf<br /></a></span></p><p class="MsoEndnoteText"><span style="font-size:78%;">[2] <a href="http://files.e2ma.net/1401763/assets/docs/mmwd_presentation.pdf">http://files.e2ma.net/1401763/assets/docs/mmwd_presentation.pdf<br /></a></span></p> </div> <div style="" id="edn2"><span style="font-size:78%;">[3]</span> <span><span><span><span><span style="font-size:78%;"><a style="" name="_ednref4" title=""></a></span></span></span></span></span><span style="font-size:78%;"><a href="http://files.e2ma.net/1401763/assets/docs/combined_presentation.pdf">http://files.e2ma.net/1401763/assets/docs/combined_presentation.pdf</a></span><span style="font-size:78%;"><br /><br />[4] <a href="http://files.e2ma.net/1401763/assets/docs/recomendations_to_the_board.pdf"> http://files.e2ma.net/1401763/assets/docs/recomendations_to_the_board.pdf</a><br /></span></div><div style="" id="edn4"> </div> </div>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com1tag:blogger.com,1999:blog-9117475697006161197.post-31553449603926587022010-02-03T17:23:00.000-08:002010-02-27T07:59:07.659-08:00MMWD; Marinites Meet Your Master<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/S2ojSAzCU4I/AAAAAAAAAlI/56Tt30XZjlA/s1600-h/poseidon.jpg"><img style="margin: 0pt 0pt 10px 10px; float: right; cursor: pointer; width: 250px; height: 400px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/S2ojSAzCU4I/AAAAAAAAAlI/56Tt30XZjlA/s400/poseidon.jpg" alt="" id="BLOGGER_PHOTO_ID_5434194692734604162" border="0" /></a><br />“Tip” O’Neill once said “All politics are local.” I have reported in the past on national and state issues. When I received a notice in the mail of a proposed increase in my water rates I decided to do some research at the local level. If you are a regular reader of this blog you will not be surprised at what I found.<br /><br />The Marin Municipal Water District (“MMWD”) recently issued a public notice for a proposed increase of 9.8% in the average water rate and service charge to go into effect March 1, 2010.<a href="http://www.marinwater.org/documents/Rate_Increase_Mailing_Notice_Dec_2009.pdf"><span style="font-size:78%;">[1]</span></a> The previous increases in 2008 of 9.7% and 2009 of 7.3% were effective May 1 of their respective years, not in the following fiscal year.<a href="http://www.marinwater.org/controller?action=opennews&id=171"><span style="font-size:78%;">[2]</span></a> MMWD’s fiscal year ends on June 30. The effect of this is to accelerate revenue from the rate increase into the ending year increasing revenue that was not budgeted. The process is gathering speed. This proposed increase reduces the interval between rate raises to less than twelve months (in this case from the earlier implementation date of May 1 to a new date of March 1 so on an annual basis the magnitude of last year’s increase is misrepresented. In this case the increase implemented for FY 2009 actually becomes 8.93% [(12x7.3+2x9.8)/12=8.93]. If MMWD returns to an annual cycle and there is not another increase prior to May 1, 2011 (I wouldn’t bank on it) this is an average increase of 9.5% per year. Over this same time the annual increase in the Consumer Price Index has been 1.47%.<span style="font-size:78%;"><a href="http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&[4]%20series_id=CUUR0000SA0&output_view=pct_1mth">[3]</a><br /></span><br />In calling for the increase the first reason cited was increased cost of purchased water, increased cost of treatment chemicals and new capital projects to increase supply.<a href="http://www.marinwater.org/documents/Rate_Increase_Mailing_Notice_Dec_2009.pdf"><span style="font-size:78%;">[4]</span></a><br /><br />In the next paragraph the letter reads, “Water consumption continues to drop. While this decrease helps our supply picture, it hurts our financial picture. We had planned for a 5% reduction in water use due to conservation, but water use dropped 8.5% in fiscal year 2008-09, resulting in inadequate revenue to cover operating expenses. To complicate matters, most of the costs of providing water are fixed and do not fluctuate with the sale of water. Even so, we cut operating expenses by $5.3 million in 2009-10 and will eliminate at least $2 million in 2010-11.”<br /><br />In the Preliminary Budget for 2009-11 actual 2008 operating expenses were $60,583,391 and the revised (upwards) operating expenses forecast for 2009 are $70,754,312, an increase of 16.7%. The preliminary budget for 2010 is up 1.97% at $70,768,416 and increases in 2011 by 5.15% to $74,414,772.<a href="http://www.marinwater.org/documents/MMWD_Budget_2009_11_compressed.pdf"><span style="font-size:78%;">[5]</span></a> I am struggling to find the $5.3 million cut in operating expenses and taking $2 million out of 2011 still increases the budget by 3.4%. If “most of the costs of providing water are fixed” why do our bills keep going up even as water sales revenue continues to increase?<br /><br /><div style="text-align: center;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/S2o4L3rpVsI/AAAAAAAAAlQ/2jU_F8dyEjc/s1600-h/Water+vs+CPI.jpg"><img style="cursor: pointer; width: 400px; height: 225px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/S2o4L3rpVsI/AAAAAAAAAlQ/2jU_F8dyEjc/s400/Water+vs+CPI.jpg" alt="" id="BLOGGER_PHOTO_ID_5434217676952655554" border="0" /></a><br /><br /><div style="text-align: left;">Here’s one reason. On August 8, 2005 the Government Accounting Standards Board (“GASB”) published its Implementation Guide to Statements 43 and 45 on Post Employment Benefits Other Than Pensions.<span style="font-size:78%;"><a href="http://www.gasb.org/news/nr080805.html">[6]</a></span> GASB establishes accounting standards for the preparation of audited financials for government entities. The implications of changes in accounting standards can be quite profound as in the example of <a href="http://unfundedliabilitiesandclasswar.blogspot.com/2009/09/general-motors.html">General Motors</a> seen in an earlier blog. These changes are designed to better inform management and stakeholders of their future liabilities and the funding status of those liabilities. In this particular case it is to clarify the obligations made by MMWD to its employees for retirement benefits not included in their pension plan also known as Other Post Employment Benefits (“OPEB”). For MMWD it required an increase of almost $2.3 million or 167% in the line item “Retiree Benefits”. Note 10 of the audited financials, which discusses OPEB at MMWD, is worth a read. In part it states, “As of January 1, 2007, the most recent actuarial valuation date, the plan was not funded. The actuarial accrued liability for benefits was $33,973,000, and the actuarial value of assets was $0. The covered payroll (annual payroll of active employees covered by the plan) was $18,850,000, and the ratio of the Unfunded Actuarial Accrued Liability (“UAAL”) to the covered payroll was 180%.” 2009 is the first year in which a contribution to this UAAL was ever made.<br /><br />While this may come as a surprise to its customers, the MMWD Board was well informed. In a Grand Jury report entitled, “Retiree Health Care Costs, I Think I’m Gonna Be Sick” released March 19, 2007 finding F8 states, “Unless government employers prudently manage the liability for retiree health care benefits, they will be forced to cut services, reduce benefits, and/or raise taxes to satisfy credit agencies.”<br /><br />To which MMWD responded, “MMWD believes that public agencies should always be prudent when managing public funds. However, MMWD does not think it is beneficial to <span style="font-style: italic;">speculate on what might occur in the future</span> (emphasis added).”<span style="font-size:78%;"><a href="http://www.co.marin.ca.us/depts/GJ/main/cvgrjr/2006gj/responses/Retiree_Costs/response_to_retiree_health_mmwd.pdf">[7]</a></span> We are now clear on what that future holds.<br /><br />But this is only the tip of the iceberg. Note 8 of these same audited financials discusses the contributions made to the employee pension plan. Like most public plans this is a defined benefits plan, meaning that no matter what the performance of the assets of the plan or the contributions made by the plan sponsor, that plan sponsor is on the hook for the promised benefits. Like the OPEB this plan is managed by CalPERS. The actuarial methods and assumptions used are those adopted by the CalPERS Board of Administration. Employees are required to pay 8% of their covered salary into the Plan. Beginning January 1, 1999 the District began paying 1.5% of the covered salary for all employees and at January 1, 2001 an additional 1.5% bringing the total to 3% of covered salary. Employees now only pay 5%. The District pays the entire 8% requirement for senior managers. CalPERS assumes they will earn 7.75% on contributed funds. What unfolds next is not a pretty picture.<br /><br />At the end of the financials under the title of “Required Supplementary Information” is the unaudited “Funded Status of Plan” or what I would re-title the “Unfunded Status of Plan”. At the end of FY 2008 the Actuarial Value of the Plan was $116,111,118 with an Actuarial Accrued Liability of $133,294,684 leaving an unfunded liability of $17,183,556 and a funded ratio of 87.1%. It is interesting to note that over the reported five years, a period when all investments were making superior returns, the funded ratio remained roughly the same. Of greater concern, the Unfunded Liability as a Percentage of Payroll grew. In other words those taking out are beginning to overwhelm those paying in.<br /></div><br /><div style="text-align: center;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/S2o5weIdebI/AAAAAAAAAlY/fRs9W9_A9Bg/s1600-h/Funded+Status+of+Plan.jpg"><img style="cursor: pointer; width: 400px; height: 269px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/S2o5weIdebI/AAAAAAAAAlY/fRs9W9_A9Bg/s400/Funded+Status+of+Plan.jpg" alt="" id="BLOGGER_PHOTO_ID_5434219405260978610" border="0" /></a><br /><br /><div style="text-align: left;">And it gets worse. Between June 30, 2008 and June 30, 2009 CalPERS lost 23.4%<span style="font-size:78%;"><a href="http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2009/july/2008-09-fiscal-performance.xml">[8]</a></span> of the value of its co-mingled portfolio. According to the MMWD 2009 financials the Covered Payroll for the plan was $20,400,000. There is no valuation yet for the fund at June 30, 2009 but if we apply the known percentage loss to the 2008 balance and assume the contributions made in 2008-09 neither lost nor gained we can come up with a rough approximation. The results of these calculations appear below.<br /></div><br /><div style="text-align: center;"><insert water="" sales=""><insert unfunded="" from="" supplement=""><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/S2o6RLd-EnI/AAAAAAAAAlg/9SeybihZgVQ/s1600-h/UNfunded+status.jpg"><img style="cursor: pointer; width: 400px; height: 112px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/S2o6RLd-EnI/AAAAAAAAAlg/9SeybihZgVQ/s400/UNfunded+status.jpg" alt="" id="BLOGGER_PHOTO_ID_5434219967186604658" border="0" /></a></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert></div><insert water="" sales=""><insert unfunded="" from="" supplement=""><br /></insert></insert><div style="text-align: left;"><insert water="" sales=""><insert unfunded="" from="" supplement="">With an unfunded liability between the defined benefit pension plan and other post employment benefits standing at an estimated $92,000,000 or 450% of covered payroll and 131% of the entire operating budget is there any hope?</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">On September 24, 2009 the Marin Managers Association released Draft Version #7 of a report with the "Subject: Proposal for Regional City and County Pension Standard".<span style="font-size:78%;"><a href="http://www.docstoc.com/docs/12736953/MMA-Draft-Proposal-for-Marin-Pensions-v7-clean">[9]</a></span> It highlights the chronic problem with funding defined benefit plans, explaining why they are becoming increasingly rare in the private sector. It goes on to say “There exists an increasing opinion amongst the public at large, and opinion leaders, that State and local government workers should be forced solely into defined contribution plans.</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">“We feel this would be mistaken for several reasons. First and foremost, defined benefit plans have proven to be more efficient than defined contribution plans for delivering pension benefits…” It goes on to describe all the benefits paid by defined benefit plans and concludes… “Defined benefit plans are funded from three sources. (First) employees are required under law to contribute rates established for each plan tier…The second level of funding comes from investment returns. These are established by the MCERA and CalPERS Boards, with extensive input from actuarial firms. These investment rates have always taken a long view-and are currently expected to generate 7.75% to 8.0% annual rates of return. To the extent these rates are not achieved, the final funding comes into play - employer contributions.” Please read “TAXPAYER CONTRIBUTIONS”</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">It is easy to see why recipients would like defined benefits. It is much more difficult to understand why taxpayers would tolerate them. But if the taxpayers are willing to assume this liability, what exactly are these benefits?</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">Let’s start with the General Manager. His monthly salary is $15,813.<span style="font-size:78%;"><a href="http://www.marinwater.org/documents/Managers_Web.pdf#Top">[10]</a></span> This doesn’t include perks. As a member of the California Public Employees Retirement System (CalPERS) the program is mandatory for all full-time employees. The current retirement formula is 2.7% at 55. What this means is for each year of service the employee vests 2.7% of salary and at 55 with 37 years of service he/she would receive 100% of ending salary for life adjusted for inflation. The employee contribution rate is 8% of monthly salary but for all Senior Managers the District makes the entire contribution. Early retirement is possible at age 50 if an individual has five years’ service credit in CalPERS.<span style="font-size:78%;"><a href="http://www.marinwater.org/documents/Senior_Managers_Summary_Update.pdf">[11] </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">What about mid level managers? The current retirement formula is the same, 2.7% at 55. The employee’s contribution rate is 8% of monthly salary. District employees currently pay 5% on a pre-tax basis and the District contributes 3%. Early retirement is possible at age 50 if an individual has five years of service credit in CalPERS, credit that can come from any other agency that is enrolled with CalPERS.<span style="font-size:78%;"><a href="http://www.marinwater.org/documents/Mid_ManagersSummary.pdf">[12]</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">All of the remaining full time employees at MMWD are members of the Service Employee’s International Union (“SEIU”). The pension benefits afforded to these employees are identical to those of mid level managers.<span style="font-size:78%;"><a href="http://www.marinwater.org/documents/SEIU_Summary_Update.pdf">[13] </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">And what about the unfunded OPEB? The District provides medical and dental benefits to employees if they retire from the District on or after age 50. The medical benefits cover the employee and their one dependent from retirement date for life. Medicare Supplemental insurance coverage is used when a plan participant reaches age 65. The employee and their one dependent receive dental coverage from retirement until the employee reaches age 65. Employees are not obligated to contribute unless plan costs exceed the District’s maximum contribution. For dental coverage, the District pays the entire cost of the dental insurance until the retiree reaches age 65. The retiree at age 65 may elect to continue coverage for themselves plus a dependent at their own cost.</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">In exchange for this lavish retirement package, particularly when most American’s are working longer, in many cases extending retirement well past 65, and often struggling with medical bills and simply forgoing dental care, are the employees somehow giving up something along the way? Far, far from it.</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">Salaries are at or above comparable private sector jobs with the security of union termination policies. And the list of perks is extensive at an average cost to taxpayers of over $30,000 per employee per year.<span style="font-size:78%;"><a href="http://www.marinwater.org/documents/MMWD_Budget_2009_11_compressed.pdf">[14]</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">In addition to retirement benefits they include<span style="font-size:78%;"><a href="http://www.marinwater.org/controller?action=menuclick&id=498">[15]</a></span> :</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert></div><ul style="text-align: left;"><li><insert water="" sales=""><insert unfunded="" from="" supplement="">Vacation of 80 hours after 6 months employment rising incrementally to 200 hours after 20 years (assuming an 8 hour day, that equates to two weeks, increasing to five weeks) </insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">13 paid holidays</insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">15 days annual sick leave (which can be accumulated and sold back at retirement) </insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">Health insurance</insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">Family dental insurance including orthodontia</insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">Group life insurance</insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">Long term disability insurance</insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">Vision care</insert></insert></li><li><insert water="" sales=""><insert unfunded="" from="" supplement="">Tuition reimbursement</insert></insert></li></ul><div style="text-align: left;"><insert water="" sales=""><insert unfunded="" from="" supplement="">But is there just a glimmer of hope? On June 24, 2009 the MMWD Board approved a "Proposal for Classification and Compensation Study Contract".<span style="font-size:78%;"><a href="http://www.marinwater.org/documents/Item_06_Board_Report_re_Class_Study_0617.pdf">[16]</a></span> The contract was awarded to Koff & Assoc. The list of Koff’s clients reads like a who’s who of municipal districts. Absent were the rest of us who are neither represented by unions nor have taxpayers to fall back on when revenue projections fall short. By establishing job classifications and compensation levels within only the heavily unionized public sector, where unions hold a monopoly on the labor force, control will move farther and farther away from those who will pay; the taxpayers, who these public servants are supposed to serve.</insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">MMWD is looking more and more like a benefits plan funded by a water district. Bottled water anyone?</insert></insert><br />___________________________________<br />Suggested reading:<br />Dick Spotswood: The Militant Centrist <a href="http://blogs.marinij.com/spotswood/">http://blogs.marinij.com/spotswood/</a><br />Steven Greenhut; <a href="http://www.amazon.com/Plunder-Employee-Treasuries-Controlling-Bankrupting/dp/0984275207">Plunder: How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation</a><br /><br /><insert water="" sales=""><insert unfunded="" from="" supplement="">___________________________________<br /></insert></insert><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[1] <a href="http://www.marinwater.org/documents/Rate_Increase_Mailing_Notice_Dec_2009.pdf">http://www.marinwater.org/documents/Rate_Increase_Mailing_Notice_Dec_2009.pdf </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[2] <a href="http://www.marinwater.org/controller?action=opennews&id=171">http://www.marinwater.org/controller?action=opennews&id=171</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[3] <a href="http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&[4]%20series_id=CUUR0000SA0&output_view=pct_1mth">http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&[4] series_id=CUUR0000SA0&output_view=pct_1mth </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[4] <a href="http://www.marinwater.org/documents/Rate_Increase_Mailing_Notice_Dec_2009.pdf">http://www.marinwater.org/documents/Rate_Increase_Mailing_Notice_Dec_2009.pdf </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[5]<a href="http://www.marinwater.org/documents/MMWD_Budget_2009_11_compressed.pdf"> http://www.marinwater.org/documents/MMWD_Budget_2009_11_compressed.pdf </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[6] <a href="http://www.gasb.org/news/nr080805.html">http://www.gasb.org/news/nr080805.html</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[7] <a href="http://www.co.marin.ca.us/depts/GJ/main/cvgrjr/2006gj/responses/Retiree_Costs/response_to_retiree_health_mmwd.pdf">http://www.co.marin.ca.us/depts/GJ/main/cvgrjr/2006gj/responses/Retiree_Costs/response_to_retiree_health_mmwd.pdf </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[8]<a href="http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2009/july/2008-09-fiscal-performance.xml"> http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2009/july/2008-09-fiscal-performance.xml </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[9] <a href="http://www.docstoc.com/docs/12736953/MMA-Draft-Proposal-for-Marin-Pensions-v7-clean">http://www.docstoc.com/docs/12736953/MMA-Draft-Proposal-for-Marin-Pensions-v7-clean</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[10] <a href="http://www.marinwater.org/documents/Managers_Web.pdf#Top">http://www.marinwater.org/documents/Managers_Web.pdf#Top</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[11] <a href="http://www.marinwater.org/documents/Senior_Managers_Summary_Update.pdf">http://www.marinwater.org/documents/Senior_Managers_Summary_Update.pdf</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[12] <a href="http://www.marinwater.org/documents/Mid_ManagersSummary.pdf">http://www.marinwater.org/documents/Mid_ManagersSummary.pdf </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[13] <a href="http://www.marinwater.org/documents/SEIU_Summary_Update.pdf">http://www.marinwater.org/documents/SEIU_Summary_Update.pdf</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[14] <a href="http://www.marinwater.org/documents/MMWD_Budget_2009_11_compressed.pdf">http://www.marinwater.org/documents/MMWD_Budget_2009_11_compressed.pdf</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[15] <a href="http://www.marinwater.org/controller?action=menuclick&id=498">http://www.marinwater.org/controller?action=menuclick&id=498 </a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""><span style="font-size:85%;">[16] <a href="http://www.marinwater.org/documents/Item_06_Board_Report_re_Class_Study_0617.pdf">http://www.marinwater.org/documents/Item_06_Board_Report_re_Class_Study_0617.pdf</a></span></insert></insert><br /><insert water="" sales=""><insert unfunded="" from="" supplement=""></insert></insert></div><insert water="" sales=""><insert unfunded="" from="" supplement=""><br /></insert></insert></div></div>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com2tag:blogger.com,1999:blog-9117475697006161197.post-47458070175773978002010-01-17T17:47:00.000-08:002010-01-17T18:43:58.026-08:00The Coming Class War; an Essay<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/S1PD6EE5HdI/AAAAAAAAAkQ/TuwgRAZJwMw/s1600-h/classwar.jpg"><img style="margin: 0pt 0pt 10px 10px; float: right; cursor: pointer; width: 320px; height: 240px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/S1PD6EE5HdI/AAAAAAAAAkQ/TuwgRAZJwMw/s320/classwar.jpg" alt="" id="BLOGGER_PHOTO_ID_5427897378205670866" border="0" /></a><br />Over the last few months my blog has focused on unfunded liabilities and how government creates them, often with the complicity of unions. On Wednesday January 13, a shot was fired by President Obama in the coming class war. The looming battle between the members of society who benefit from unfunded entitlements and those who will be expected to pay for them is escalating.<br /><br />“Many originally feared that most of the $700 billion in TARP money would be lost. But because of the management of this program by Secretary Geithner and my economic team, we’ve now recovered the majority of the funds provided to banks.<br /><br />“As far as I’m concerned, however, that’s not good enough. My commitment is to the taxpayer. My commitment is to recover every single dime the American people are owed.”<br /><br />“We want our money back, and we’re going to get it. And that’s why I’m proposing a Financial Crisis Responsibility Fee to be imposed on major financial firms until the American people are fully compensated for the extraordinary assistance they provided to Wall Street. If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers.”<br /><br />President Obama continued, “Now, our estimate is that the TARP program will end up costing taxpayers around $117 billion -- obviously a lot less than the $700 billion that people had feared, but still a lot of money. The fee will be in place for 10 years, or as long as it takes to raise the full amount necessary to cover all taxpayer losses.”<a href="http://www.ft.com/cms/s/0/70884e62-014c-11df-8c54-00144feabdc0.html"><span style="font-size:78%;">1</span></a><br /><br />A quick examination of the latest TARP Transaction History updated on January 13, 2010<a href="http://www.financialstability.gov/latest/reportsanddocs.html"><span style="font-size:78%;">2</span></a> shows that most of the banks subjected to President Obama’s diatribe have already returned the money lent them with interest. A notable exception is CitiBank. In that case the Treasury decided not to include its stock, (preferred stock that has been converted to common by Secretary Geithner), in a secondary offering by the bank but rather chose to speculate on the future price of Citi shares and sell them at a later time. (A side question is who votes those shares, Mr. Obama?). In the mean time the Treasury has become the majority shareholder in the automobile industry’s major financing arm, GMAC, taking on an additional $3.8 billion in an announcement on December 30, 2009.<a href="http://www.treas.gov/press/releases/tg501.htm"><span style="font-size:78%;">3</span></a> GMAC can now be added to Fannie, Freddie and the FHA as government owned banking businesses.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/S1PDiy1fIrI/AAAAAAAAAkI/wy6hLy_H774/s1600-h/GMAC_Investment.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 217px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/S1PDiy1fIrI/AAAAAAAAAkI/wy6hLy_H774/s400/GMAC_Investment.png" alt="" id="BLOGGER_PHOTO_ID_5427896978440659634" border="0" /></a><br />So the banking industry, which has returned its bailout funds is now responsible for paying back all of TARP. Absent from the discussion was the TARP money that has not been paid back owed by the two auto companies, General Motors and Chrysler; their combined financing subsidiary, GMAC; or by AIG. Nor was there a discussion of the open ended spigots at Fannie Mae and Freddie Mac and the bailout of underwater and overleveraged homeowners to the tune of $23.5 billion, many of whom defrauded their respective lenders on their loan applications.<br /><br />Bank shareholders have suffered mightily in the dilution that has occurred in their banks, all of whom issued common stock to repay the TARP as did the shareholders in General Motors, Chrysler and GMAC. But in the case of the employees of the banks, now lambasted for the bonuses they have received, and the union employees of the auto companies who scored a major victory on Thursday in the health care debate by preventing taxation of their Cadillac health plans, and the employees at AIG; someone else is picking up the tab. Each case is different but they are all benefiting from a single government policy and most notably the banks. The enormous profits the banks are reporting today are in large part due to the zero federal funds rate imposed on the market by the Federal Reserve. “Even bankers can make money borrowing at zero and lending at 3 ½%.”<br /><br />So who does pay? Savers. If you worked all your life and set aside savings to take care of yourself in your retirement you are the one paying for the miscreants in government and business who precipitated this crisis. Not only are you going to pay increased taxes on the meager returns you might squeeze out of a 1.25% CD, the artificial rate the banks (and, for that matter all borrowers) are paying is subsidizing their bottom line at your expense. So, on the one hand as Obama gesticulates against the banks for taking risk, his sidekick Ben Bernanke is forcing those who saved, didn’t over-leverage and invested prudently, now anticipating a decent return on that savings, to move out the speculation curve and take enormous risk to generate any income so the profligate can recover and prosper. The fees the banks pay will be socialized, spread across all of banking’s customers, and will mean virtually nothing to the banks’ bottom lines, passed on to their customers who are expected to be mollified by the tongue lashing meted out in their public scolding.<br /><br />What is now clearer is the dividing line in the class war. As the Obama administration moves its pro union agenda forward it needs the help of the banking system. In this Faustian bargain he will continue to pursue his dance with the financiers who borrow at zero from the Fed to float record federal deficits lending those funds back to the government to finance its social experiment. Every dollar of deficit is a dollar redistributed as it will be paid back only by those who pay taxes, a shrinking percentage of the earning population.<a href="http://www.urban.org/UploadedPDF/1001289_who_pays.pdf"><span style="font-size:78%;">4</span></a><br />____________________________________________________________________<br /><br /><span style="font-size:85%;">1. <a href="http://www.ft.com/cms/s/0/70884e62-014c-11df-8c54-00144feabdc0.html">http://www.ft.com/cms/s/0/70884e62-014c-11df-8c54-00144feabdc0.html</a><br />2. <a href="http://www.financialstability.gov/latest/reportsanddocs.html">http://www.financialstability.gov/latest/reportsanddocs.html</a><br />3. <a href="http://www.treas.gov/press/releases/tg501.htm">http://www.treas.gov/press/releases/tg501.htm</a><br />4. <a href="http://www.urban.org/UploadedPDF/1001289_who_pays.pdf">http://www.urban.org/UploadedPDF/1001289_who_pays.pdf</a><br /></span>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-51327676007211994782009-12-19T13:53:00.001-08:002009-12-26T16:13:15.872-08:00Health Care III, A Christmas Present?<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/Sy6XeKJ4VuI/AAAAAAAAAjw/aohzoFYVb5k/s1600-h/Male+Proctologist.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer; width: 213px; height: 320px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/Sy6XeKJ4VuI/AAAAAAAAAjw/aohzoFYVb5k/s320/Male+Proctologist.jpg" alt="" id="BLOGGER_PHOTO_ID_5417433946150950626" border="0" /></a>On Saturday, December 19 Senator Harry Reid released legislative language for the Patient Protection and Affordable Care Act (PPACA) as Senate Amendment 2786. These are the changes proposed by the Senate to H.R. 3592. It is expected to pass in the Senate before Christmas. Included in the amended bill is a brand new government sponsored health insurance program that provides a perfect example of how Congress creates unfunded liabilities.<br /><br />Introduced in March of 2009 by Senator Ted Kennedy it is known as the CLASS Act (Community Living Assistance Services and Supports Act)<a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SN00697:"><span style="font-size:78%;">[1]</span></a> and is designed to provide insurance for long term care. This program creates a new government entitlement supported by a brand new trust fund. In the beginning there are more people paying in than taking out but as more participants vest and begin receiving benefits, payments increase and eventually swamp the income. If it sounds familiar it’s because it is very similar to the scheme that bankrupted Bernie Madoff and General Motors and it operates just like Social Security, Medicare and the entitlement programs of the State of California. Consider this, an individual pays an average premium of about $65 per month for five years (a total of $3,900) and then becomes eligible for benefits. Participants are eligible for $50 per day towards their long term care or ten times the rate at which they paid in. That is $1,500 per month as long as they are alive! For the first five years there will be no beneficiaries only premium payers. Early in the program as the beneficiaries come on line there is still positive cash flow because there are more payers than recipients but eventually beneficiaries exceed the payers, the trust fund is exhausted and the program will begin contributing to the deficit. We know this today! Yet Senator Reid would have us believe that this program will contribute $72 billion towards “paying for health care.” Here are the Congressional Budget Office (CBO) figures.<br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/Sy7ARC26WGI/AAAAAAAAAj4/HrwOxM-_CTg/s1600-h/2009-12-20_1150.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 138px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/Sy7ARC26WGI/AAAAAAAAAj4/HrwOxM-_CTg/s400/2009-12-20_1150.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5417478800830781538" /></a><br />This program’s contribution to paying for health care peaks in 2015 and begins declining as payments out begin to exceed premiums in. The CBO’s scoring of Senate Amendment 2786 states, “As noted earlier, the CLASS program included in the bill would generate net receipts for the government in the initial years when total premiums would exceed total benefit payments, but it would eventually lead to net outlays when benefits exceed premiums…in the decade following 2029, the CLASS program would begin to increase budget deficits.” Zingo, a brand new unfunded liability.<br /><br />This sums up the problem with government, it is accounted for like a classic Ponzi scheme<a href="http://en.wikipedia.org/wiki/Ponzi_scheme"><span style="font-size:78%;">[3]</span></a>, in other words on a cash basis. Corporations are not allowed to use this accounting method. Unlike corporations which have to bring future liabilities onto their balance sheets our government is presumed to be perpetual and simply reports cash in and cash out. If accounted for on a GAAP basis (“Generally Accepted Accounting Principles”)<a href="http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles"><span style="font-size:78%;">[4]</span></a> one analysis puts the real 2008 federal budget deficit at a staggering $5.1 trillion<a href="http://www.wnd.com/index.php?fa=PAGE.view&pageId=113366"><span style="font-size:78%;">[5]</span></a>, not the $455 billion reported by the Congressional Budget Office.<br /><br />Now let’s look at the rest of the CBO’s scorecard on the Senate amendment.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/Sy6Ph528qUI/AAAAAAAAAjo/_YAgguZPhDw/s1600-h/2009-12-20_1203.png"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 168px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/Sy6Ph528qUI/AAAAAAAAAjo/_YAgguZPhDw/s400/2009-12-20_1203.png" alt="" id="BLOGGER_PHOTO_ID_5417425214403029314" border="0" /></a><br />The total cost of the program has increased 20% from the Chairman’s Mark discussed in an earlier blog<a href="http://2.bp.blogspot.com/_y3c1XyakSC0/StvBOIfkWyI/AAAAAAAAAfg/IEZ_KkZ0Bj0/s1600-h/Chairman%27s+Mark+chart8.jpg"><span style="font-size:78%;">[6]</span></a> or $100 billion above previous estimates. So again we ask, “How does this contribute to reducing the deficit?”<br /><br />The single biggest savings comes from reductions in Medicare, Medicaid, and other programs in the amount of $483 billion. They are:<br /><ul><li>Permanent reductions in Medicare payment rates in the fee-for-service sector saving $186 billion</li></ul><ul><li>Adjustments to the Medicare Advantage program saving $118 billion</li></ul><ul><li>Reducing Medicaid and Medicare payments to hospitals serving large populations of low-income patients by about $43 billion</li></ul><ul><li>$28 billion comes from reductions in subsidies for non-Medicare Advantage plans and changes to payment rates recommended by an Independent Payment Advisory Board established by the legislation. These recommendations are non-binding.</li></ul><ul><li>CLASS (our afore mentioned Ponzi scheme) for $72 billion.</li></ul><ul><li>Improvements in disbursements by adopting and regularly updating standards for electronic administrative transactions which enable electronic funds transfers saving $11 billion.</li></ul>The CBO offers this caveat, “These longer-term calculations assume that the provisions are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments, and legislation to do so again is currently under consideration in the Congress.” Readers will recall this as H.R. 3961, the Medicare Physician Payment Reform Act that reverses reductions in payments established by SGR. CBO estimates the cost of H. R. 3961 at $210 billion over the next 10 years<a href="http://www.cbo.gov/ftpdocs/107xx/doc10732/HR3961_HonRyan.pdf"><span style="font-size:78%;">[7]</span></a> and this is not considered in the national debate as part of the cost of health care.<br /><br /><span style="font-style: italic;">Hot off the press</span>, the CBO today released a correction to the score it published on December 19 to wit, “Correcting that error has no impact on the estimated effects of the legislation during the 2010–2019 period. However, the correction reduces the degree to which the legislation would lower federal deficits in the decade after 2019.”<a href="http://www.cbo.gov/ftpdocs/108xx/doc10870/12-20-Reid_Letter_Managers_Correction1.pdf"><span style="font-size:78%;">[8]</span></a> Oooops!<br /><br />Have a Merry Christmas and caveat emptor.<br />_____________________________________________________<br /><span style="font-size:78%;">[1]<span style="font-size:85%;"> </span></span><a href="http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SN00697:"><span style="font-size:85%;">http://thomas.loc.gov/cgi-bin/bdquery/z?d111:SN00697:</span></a><br /><span style="font-size:78%;">[2]</span> <a href="http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers.pdf"><span style="font-size:85%;">http://www.cbo.gov/ftpdocs/108xx/doc10868/12-19-Reid_Letter_Managers.pdf </span></a><br /><span style="font-size:78%;">[3]<span style="font-size:85%;"> </span></span><a href="http://en.wikipedia.org/wiki/Ponzi_scheme"><span style="font-size:85%;">http://en.wikipedia.org/wiki/Ponzi_scheme</span></a><br /><span style="font-size:78%;">[4]<span style="font-size:85%;"> </span></span><a href="http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles"><span style="font-size:85%;">http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles</span></a><br /><span style="font-size:78%;">[5]</span> <a href="http://www.wnd.com/index.php?fa=PAGE.view&pageId=113366"><span style="font-size:85%;">http://www.wnd.com/index.php?fa=PAGE.view&pageId=113366 </span></a><a href="http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles"><span style="font-size:85%;"> </span></a><br /><span style="font-size:78%;">[6]</span> <a href="http://2.bp.blogspot.com/_y3c1XyakSC0/StvBOIfkWyI/AAAAAAAAAfg/IEZ_KkZ0Bj0/s1600-h/Chairman%27s+Mark+chart8.jpg"><span style="font-size:85%;">http://2.bp.blogspot.com/_y3c1XyakSC0/StvBOIfkWyI/AAAAAAAAAfg/IEZ_KkZ0Bj0/s1600-h/Chairman%27s+Mark+chart8.jpg</span></a><br /><span style="font-size:78%;">[7]</span> <a href="http://www.cbo.gov/ftpdocs/107xx/doc10732/HR3961_HonRyan.pdf"><span style="font-size:85%;">http://www.cbo.gov/ftpdocs/107xx/doc10732/HR3961_HonRyan.pdf </span></a><br /><span style="font-size:78%;">[8]</span> <a href="http://www.cbo.gov/ftpdocs/108xx/doc10870/12-20-Reid_Letter_Managers_Correction1.pdf"><span style="font-size:85%;">http://www.cbo.gov/ftpdocs/108xx/doc10870/12-20-Reid_Letter_Managers_Correction1.pdf<br /></span></a>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-51185798313420970242009-11-22T16:45:00.000-08:002009-11-22T17:44:33.150-08:00The California Debt Crisis, Sinking in Quicksand<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/SwnfnVjCLoI/AAAAAAAAAho/FVjQBc4ZZRc/s1600/34776777_quicksand1.jpg"><img style="margin: 0pt 0pt 10px 10px; float: right; cursor: pointer; width: 320px; height: 225px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/SwnfnVjCLoI/AAAAAAAAAho/FVjQBc4ZZRc/s320/34776777_quicksand1.jpg" alt="" id="BLOGGER_PHOTO_ID_5407098694526971522" border="0" /></a><br />As California seemingly sinks deeper and deeper into debt we have to ask the question, “How did we get here and can we fix it?” What follows is a discussion on the symbiotic relationship between elected government officials and public employee unions.<br /><br />On May 23, 2008 the City of Vallejo filed a case seeking bankruptcy protection under Chapter 9 of the United States Bankruptcy Code.<span style="font-size:78%;">[1]</span> In its filing it disclosed that the cost of public safety salaries represented 74% of its $80 million budget.<span style="font-size:78%;">[2]</span> The average fireman in Vallejo takes home $170,000 while City Manager Joseph Tanner’s total annual compensation is more than $400,000.<span style="font-size:78%;">[3]</span> And the response is to cut services not salaries.<br /><br />Not far behind is the city of Bakersfield with its “3 at 50” retirement benefit. In 2001 Bakersfield’s city council voted to allow police officers and firefighters retirement pay equal to 3 percent of their best year’s salary for every year they worked, to a maximum of 90 percent. Their retirement eligibility begins at age 50.<span style="font-size:78%;">[4]</span><br /><br />In 1999, in the transition between governors Pete Wilson and Gray Davis, California SB 400 was passed. Sponsored by the California Public Employees Retirement System and proposed by the Senate Public Employees and Retirement Committee it cleared that committee by a vote of 4-0. It cleared the Senate Appropriations Committee 11-0 and passed on the Senate floor 35-0. In the Assembly it garnered only 7 nays to pass and become law on September 10, 1999 by a vote of 70 ayes to 7 nays. This bill established a new level of survivor benefits for state and school employee participants comparable with Social Security and made significant increases to the benefits of state and school employees. Among others it provided for retirement at age 50 and cost of living adjustments. Benefits were increased even more for “safety” employees, that is state police and firefighters.<span style="font-size:78%;">[5]</span> It became a mammoth unfunded liability and the model for municipalities around the state.<br /><br />Hit by the twin financial downturns caused by the dot-com bust and 9/11, Governor Gray Davis struggled with mounting deficits and a dysfunctional budgetary system. Finally, blamed for the electricity crisis that hit California, Davis was recalled in 2003. He was replaced by Arnold Schwarzenegger who ran on a campaign of fiscal responsibility. When the state legislature rejected his spending limit proposal a compromise was struck and Proposition 58 requiring a balanced budget appeared on the March 2004 primary ballot and was approved by the voters. Still the deficits persisted and the pessimistic forecasts became reality.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/SwndhkxTuCI/AAAAAAAAAhY/Pj5--A4avOA/s1600/Shortfall+for+forseeable+future.jpg"><img style="cursor: pointer; width: 400px; height: 251px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/SwndhkxTuCI/AAAAAAAAAhY/Pj5--A4avOA/s400/Shortfall+for+forseeable+future.jpg" alt="" id="BLOGGER_PHOTO_ID_5407096396510902306" border="0" /></a><br /><br />Spurned by the state legislature but emboldened by his election victory Schwarzenegger turned to the voters. In 2005 he backed four initiatives designed to restrain some of the leverage public unions held under current law. Proposition 74 extended the probationary period for new teachers from 2 years to 5 and made it easier to dismiss teachers with unsatisfactory performance. Proposition 75 prohibited public employee unions from using union dues for political purposes without the consent of the union members. Proposition 76 limited the growth of state spending to the growth in revenues and gave the Governor certain veto powers. Proposition 77 changed the way California draws boundaries for congressional and legislative districts giving the power to a panel of retired judges approved by the voters. Opposed by the California State Teachers Union and aggressively financed, all four initiatives went down to defeat.<span style="font-size:78%;">[6]</span><br /><br />Public employee unions hold a unique position in society. Unlike unions in the private sector where demands are constrained by the ability of a business to finance wage and benefits packages or go out of business, municipalities are monopolies. Public unions are well financed. Unlike private unions where dues collection is a cost, public union dues are deducted from pay and the cost of administration and collection is paid for by taxpayers. Because of the monopolistic nature of public services (if the local policeman doesn’t show up you can’t call a competing police station) unions hold a gun to the head of the public that pays them. With the potential for disruption in services from municipal transportation to schools, firefighting services to police protection, voters put enormous pressure on their elected representatives to settle public sector labor disputes.<br /><br />But the root of the problem is the ability of public unions to influence the outcome of elections. As noted above the unions are highly organized and well financed. When legislation is proposed the union and union members are well versed on the effect, often involved in writing the legislation as in SB 400. Union leaders lobby on behalf of their constituency, and unions are well represented at the ballot box. Often, legislation is targeted and very specific in its desired effect and misses the scrutiny of the public. Set against this specialized and skilled lobbying machine is the typical voter. So far in 2009 there have been 1,589 bills introduced in the California Assembly and 833 bills introduced in the Senate.<span style="font-size:78%;">[7]</span> The time and energy to simply understand and track a mere handful of legislation is daunting. The prospect of over 2,000 pieces of legislation each year leads to what is called “rational ignorance”, a condition that occurs when the cost of educating oneself on an issue exceeds the potential benefit that the knowledge would provide.<span style="font-size:78%;">[8]</span> And with this power in place the unions are in a position to elect their bosses, the very individuals the public relies on to manage the finances of government and negotiate union contracts. It is pretty easy to see who wins and who loses in this proposition.<br /><br />And unions now have the strong backing of the White House. When Governor Schwarzenegger attempted to reduce wages for unionized home care workers President Obama threatened to withhold billions of dollars in federal stimulus funds if the salaries weren’t reinstated<span style="font-size:78%;">[9]</span> placing the federal government squarely in the middle of the fiscal problems of the State.<br /><br />On January 30, 2009 the newly inaugurated president signed three executive orders,<span style="font-size:78%;">[10]</span> 13494, 13495 and 13496 strengthening the union’s position in any projects funded under ARRA (the American Recovery and Reinvestment Act) and overriding state labor rules.<span style="font-size:78%;">[11]</span> According to The Kansas City Star, “President Barack Obama …issued an executive order backing the use of union labor for large-scale federal construction projects.<br /><br />“The order encourages federal agencies to have construction contractors and subcontractors enter project labor agreements. Those agreements require contractors to negotiate with union officials, recognize union wages and benefits and generally abide by collective-bargaining agreements…”<span style="font-size:78%;">[12]</span><br /><br />And on the same day as those executive orders were signed a group of union leaders was welcomed to the White House. “I do not view the labor movement as part of the problem. To me, it’s part of the solution,” Mr. Obama told the group.<span style="font-size:78%;">[13]</span><br /><br />On November 18, 2009 the California Legislative Analyst’s Office released its report on California’s fiscal outlook projecting a deficit $20.728 billion<span style="font-size:78%;">[14]</span> for fiscal year 2010.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/SwnfFwsBpQI/AAAAAAAAAhg/AjjXKrgtQYo/s1600/LAO+projected+shortfall.jpg"><img style="cursor: pointer; width: 400px; height: 238px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/SwnfFwsBpQI/AAAAAAAAAhg/AjjXKrgtQYo/s400/LAO+projected+shortfall.jpg" alt="" id="BLOGGER_PHOTO_ID_5407098117696890114" border="0" /></a><br /><br />There is an unsettled debate over whether higher taxes and regulation are causing wealthy individuals and businesses to leave the state. What is not open for debate is that the cost of staying is rising while the quality of services provided by local and state government is declining. The poor are disproportionally impacted and that is the exact opposite of the goal of the so-called socially responsible. When a county employee recently told me about how tough it is to cut benefits for the poor, as the county has been doing repeatedly while grappling with their budget issues I suggested, “Why don’t the county employees take a pay or benefits cut and ease the burden for the poor?” The answer was immediate and unequivocal, “Are you kidding? We wouldn’t do that!” No doubt.<br /><br />The best analysis I have seen of the power of public sector unionism was published by the Cato Institute on September 28, 2009.<span style="font-size:78%;">[15]</span> It ends:<br /><br />“As keepers of the public purse, legislators and local council members have an obligation to protect taxpayers’ interests. By granting monopoly power over their governments’ supply of labor to labor unions, elected officials undermine their duty to taxpayers, since this puts unions in a privileged position to extract political goods in the form of high pay and benefits that are way above anything comparable in the private sector. Under such an arrangement, government, being itself a monopoly, leaves the citizens whose money it squanders with no options.”<br />______________________________________________________________<br /><span style="font-size:78%;">[1] </span><a href="http://www.ci.vallejo.ca.us/GovSite/default.asp?serviceID1=712&Frame=L1">http://www.ci.vallejo.ca.us/GovSite/default.asp?serviceID1=712&Frame=L1</a><br /><span style="font-size:78%;">[2]<a href="http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/06/BACH10HUK6.DTL"> </a></span><a href="http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/06/BACH10HUK6.DTL">http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/06/BACH10HUK6.DTL</a><br /><span style="font-size:78%;">[3] </span><a href="http://www.bondbuyer.com/issues/117_87/-288275-1.html">http://www.bondbuyer.com/issues/117_87/-288275-1.html</a><br /><span style="font-size:78%;">[4] </span><a href="http://www.kget.com/news/local/story/3-at-50-retirement-debate/msXwaOs5k0eCtPms3hnh6g.cspx">http://www.kget.com/news/local/story/3-at-50-retirement-debate/msXwaOs5k0eCtPms3hnh6g.cspx</a><br /><span style="font-size:78%;">[5] </span><a href="http://info.sen.ca.gov/pub/99-00/bill/sen/sb_0351-0400/sb_400_cfa_19990928_142123_sen_floor.html">http://info.sen.ca.gov/pub/99-00/bill/sen/sb_0351-0400/sb_400_cfa_19990928_142123_sen_floor.html</a><br /><span style="font-size:78%;">[6] </span><a href="http://en.wikipedia.org/wiki/California_special_election,_2005#Results_2">http://en.wikipedia.org/wiki/California_special_election,_2005#Results_2</a><br /><span style="font-size:78%;">[7] </span><a href="http://www.sen.ca.gov/%7Enewsen/senate.htm">http://www.sen.ca.gov/~newsen/senate.htm</a><br /><span style="font-size:78%;">[8] </span><a href="http://en.wikipedia.org/wiki/Rational_ignorance">http://en.wikipedia.org/wiki/Rational_ignorance</a><br /><span style="font-size:78%;">[9] </span><a href="http://www.kget.com/news/local/story/President-Obama-threatens-to-withold-billions/6bQ0EuJLlkq3mzJ0_q3dOA.cspx">http://www.kget.com/news/local/story/President-Obama-threatens-to-withold-billions/6bQ0EuJLlkq3mzJ0_q3dOA.cspx</a><br /><span style="font-size:78%;">[10] </span><a href="http://www.archives.gov/federal-register/executive-orders/2009-obama.html">http://www.archives.gov/federal-register/executive-orders/2009-obama.html</a><br /><span style="font-size:78%;">[11] </span><a href="http://www.flemploymentlawblog.com/articles/government-contracts/">http://www.flemploymentlawblog.com/articles/government-contracts/</a><br /><span style="font-size:78%;">[12] </span><a href="http://artfularticulations.blogspot.com/2009/02/president-obama-executive-order-favors.html">http://artfularticulations.blogspot.com/2009/02/president-obama-executive-order-favors.html</a><br /><span style="font-size:78%;">[13] </span><a href="http://www.telegraph.co.uk/news/worldnews/northamerica/usa/barackobama/4401782/Barack-Obama-welcomes-union-leaders-to-the-White-House.html">http://www.telegraph.co.uk/news/worldnews/northamerica/usa/barackobama/4401782/Barack-Obama-welcomes-union-leaders-to-the-White-House.html</a><br /><span style="font-size:78%;">[14] </span><a href="http://www.lao.ca.gov/handouts/education/2009/California%E2%80%99s_Fiscal_Outlook_Proposition_98_Briefing_111809.pdf">http://www.lao.ca.gov/handouts/education/2009/California%E2%80%99s_Fiscal_Outlook_Proposition_98_Briefing_111809.pdf</a><br /><span style="font-size:78%;">[15] <a href="http://www.cato.org/pub_display.php?pub_id=10569"><span style="font-size:100%;">http://www.cato.org/pub_display.php?pub_id=10569</span></a></span>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com4tag:blogger.com,1999:blog-9117475697006161197.post-28741729054853296862009-11-02T16:02:00.000-08:002010-07-23T08:12:44.496-07:00Health Care Part II; Would you Buy an Insurance Policy from this Man?[1]<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://www.nytimes.com/2010/07/23/nyregion/23rangel.html?_r=1&th&emc=th"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer; width: 119px; height: 145px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/SvL2yP_4AeI/AAAAAAAAAgw/s96RGwBfjpQ/s320/Rangel%27s+head.jpg" alt="" id="BLOGGER_PHOTO_ID_5400650246318981602" border="0" /></a>On October 29, Speaker of the House Nancy Pelosi released the long-awaited House version of health care reform which was crafted partly in Congressman Rangal’s Committee on Ways and Means. Actually, she introduced two bills; H.R. 3961, the Medicare Physician Payment Reform Act<a href="http://www.ssa.gov/OP_Home/ssact/title18/1848.htm"><span style="font-size:78%;"><insert><span>[2]</span></insert></span></a> and H.R. 3962, the Affordable Health Care for America Act.<a href="http://docs.house.gov/rules/health/111_ahcaa.pdf"><span style="font-size:78%;">[3]</span></a><br /><br />Let’s look at H. R. 3961. In my last blog post I discussed the $285 billion budgeted in 2010 for overturning the impending 21% cut in Medicare payments to physicians scheduled to take place on January 1, 2010. That discussion pointed to a budget resolution from the House Finance Committee passed on March 29, 2009<span style="font-size:78%;"><a href="http://budget.house.gov/PRArticle.aspx?NewsID=1677">[4]</a> </span> which requires enacting legislation. H.R. 3961<a href="http://docs.house.gov/rules/health/111_sgr1.pdf"><span style="font-size:78%;">[5]</span></a> is that legislation and it seeks to permanently change the way physician reimbursements are calculated through amendments to Section 1848 of the Social Security Act,<a href="http://www.ssa.gov/OP_Home/ssact/title18/1848.htm"><span style="font-size:78%;">[6]</span></a> the section of the Act that sets physician reimbursement rates.<br /><br />In an effort to be diligent and to supply you, the reader, with a clear picture of how physicians are currently compensated under Medicare, I read Section 1848. It is 40 pages long, contains 14,000 words and 86 footnotes including legislative changes. The complexities of the language make it impossible to do a simple calculation and we can only assume the Mandarins in Washington have it right. But the question is really about the cost of this legislative change. In most of my analysis I consult the Congressional Budget Office report of the fiscal impact of legislation. Unfortunately H. R. 3961 has not been scored by the CBO. I assume this is because it is in the aforementioned budget resolution, which was. I score it as they did then at a cost of $285 billion. There is a silver lining. That is Ms. Pelosi’s claim that this legislation will fall under the new Pay-go rules codified by the house, but that silver lining dims significantly when you consider the Senate has openly rejected that kind of budgetary restraint.<a href="http://thehill.com/homenews/house/63399-senate-move-on-medicare-payments-sets-up-pay-go-showdown-with-house"><span style="font-size:78%;">[7]</span></a> Nevertheless this represents somewhere in the neighborhood of a quarter of a trillion dollars that have to come from somewhere.<br /><br />The other examination is of H. R. 3962, the “Affordable Health Care for America Act.”<a href="http://docs.house.gov/rules/health/111_ahcaa.pdf"><span style="font-size:78%;">[8]</span></a> It is nearly 2,000 pages of legislative language. I again deferred in my analysis to the CBO.<a href="http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf"><span style="font-size:78%;">[9]</span></a> Table 2 from their report shows their estimate of the Net Cost at $894 billion. The first thing I noticed is the disparity between the Net Cost and the impact on the budget. In years 2010 through 2012 the cost is minimal. Yet the impact to budget is different with deficit increases of $6.8 billion in<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/SvL3JWKob9I/AAAAAAAAAhA/ZhcAC4KIQXg/s1600-h/table.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 141px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/SvL3JWKob9I/AAAAAAAAAhA/ZhcAC4KIQXg/s400/table.jpg" alt="" id="BLOGGER_PHOTO_ID_5400650643111702482" border="0" /></a><br /><br />2010 and $16.6 billion in 2011. In 2012 there is a decrease of $15.8 billion. What accounts for this? As part of the American Recovery and Reinvestment Act of 2009 (ARRA) there was a temporary increase in payments to states for Medicaid (FMAP) which apparently is not considered part of health care when it is stimulus.<a href="http://www.legis.state.ia.us/lsadocs/SC_MaterialsDist/2009/SDDLH031.PDF"><span style="font-size:78%;">[10]</span></a> That stimulus expires on December 31, 2010 so the House has included a one-time extension of these payments into 2011 at an estimated cost of $23.5 billion. Payments to Primary Care Practitioners account for the majority of the rest at an average of $5.7 billion per year over the ten-year estimate.<a href="http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf"><span style="font-size:78%;">[11]</span></a> This of course is in addition to the $285 billion discussed above from H.R. 3961. The majority of the savings comes from discounts in Part D (Prescription Drug Benefit) and Phase-in of Payment Based on Fee-for-service Costs.<table style="width: 681px; height: 825px;"><br />But the best way to analyze the bill is to put it against the Chairman’s Mark of the proposed Senate legislation, which I discussed in my last blog post. <insert>Several things stick out. First, the House bill is 30% more costly than the Senate proposal. Interestingly both bills assume half of<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/SvL28ZW3fcI/AAAAAAAAAg4/BV0nYg_3bgo/s1600-h/table+cropped.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 380px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/SvL28ZW3fcI/AAAAAAAAAg4/BV0nYg_3bgo/s400/table+cropped.jpg" alt="" id="BLOGGER_PHOTO_ID_5400650420630027714" border="0" /></a><br /><br />the cost will be paid for by savings in Medicare, Medicaid and other programs. Second, the House bill forgoes tax on high premium plans and makes only minimal changes in existing tax expenditures, leaving us with a $598 billion shortfall compared to the Senate plan’s $85 billion. And how does this become deficit negative? The House plan charges significantly higher penalties for non participation (to the tune of $167 billion) and raises taxes on the wealthy by $536 billion! And, if the House is successful in enforcing Pay-go for H. R. 3961 they will either have to raise taxes by an additional $285 billion or cut spending by that amount. If the savings are truly realized the plan will simply be deficit neutral at a cost of $800 billion in potential new taxes.<br /><br />Once again I will pose the question, “With an unfunded liability of $107 trillion in the current Social Security and Medicare program<span style="font-size:78%;"><a href="http://www.freerepublic.com/focus/news/2269595/posts">[12]</a> </span>can we afford to just spin our wheels?” It appears to me the “Affordable Health Care for America Act” will be very unaffordable for someone, possibly everyone.<br /><br /><br />___________________________________________________<br /><br /><span style="font-size:85%;">[1] <a href="http://www.politico.com/news/stories/0609/24167.html">http://www.politico.com/news/stories/0609/24167.html</a><br />[2] <a href="http://www.ssa.gov/OP_Home/ssact/title18/1848.htm">http://www.ssa.gov/OP_Home/ssact/title18/1848.htm</a><br />[3] <a href="http://docs.house.gov/rules/health/111_ahcaa.pdf">http://docs.house.gov/rules/health/111_ahcaa.pdf </a><br />[4] <a href="http://budget.house.gov/PRArticle.aspx?NewsID=1677">http://budget.house.gov/PRArticle.aspx?NewsID=1677 </a><br />[5] <a href="http://docs.house.gov/rules/health/111_sgr1.pdf">http://docs.house.gov/rules/health/111_sgr1.pdf</a><br />[6] <a href="http://www.ssa.gov/OP_Home/ssact/title18/1848.htm">http://www.ssa.gov/OP_Home/ssact/title18/1848.htm</a><br />[7] <a href="http://thehill.com/homenews/house/63399-senate-move-on-medicare-payments-sets-up-pay-go-showdown-with-house">http://thehill.com/homenews/house/63399-senate-move-on-medicare-payments-sets-up-pay-go-showdown-with-house </a><br />[8] <a href="http://docs.house.gov/rules/health/111_ahcaa.pdf">http://docs.house.gov/rules/health/111_ahcaa.pdf </a><br />[9] <a href="http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf">http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf </a><br />[10] <a href="http://www.legis.state.ia.us/lsadocs/SC_MaterialsDist/2009/SDDLH031.PDF"> http://www.legis.state.ia.us/lsadocs/SC_MaterialsDist/2009/SDDLH031.PDF</a><br />[11] <a href="http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf">http://www.cbo.gov/ftpdocs/106xx/doc10688/hr3962Rangel.pdf</a>, pg. 23, Table 3.<br />[12] <a href="http://www.freerepublic.com/focus/news/2269595/posts">http://www.freerepublic.com/focus/news/2269595/posts</a></span><br /></insert></table>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-37413190910287592432009-10-18T18:20:00.000-07:002009-10-18T20:55:52.574-07:00“You Lie!” The American Health Care Debate<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/StvjG7gxROI/AAAAAAAAAfo/fST7xAWLNi0/s1600-h/Joe-Wilson-You-Lie-photo.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer; width: 226px; height: 320px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/StvjG7gxROI/AAAAAAAAAfo/fST7xAWLNi0/s320/Joe-Wilson-You-Lie-photo.jpg" alt="" id="BLOGGER_PHOTO_ID_5394154686900159714" border="0" /></a><br />In my lifetime no domestic issue has raised more rancor in America than the debate raging over health care. Representative Joe Wilson’s outburst has been repeated over and over by both sides, from the capitol to my own dinner table, as we wrestle with what may be the seminal issue of the Obama presidency’s first year. So, is government-funded health care just one more Unfunded Liability? Let’s take a look.<br /><br />Support for the Senate version of health care reform got a boost this month when the CBO, in a letter from Director Douglas Elmendorf to Senator Max Baucus, said, “…enacting the Chairman’s mark, as amended, would result in a net reduction in federal budget deficits of $81 billion over the 2010-2019 period.”<span style="font-size:78%;"> </span><span class="MsoFootnoteReference" style="font-size:78%;"><span style=""><span class="MsoFootnoteReference"><span style=";font-family:";" >[1]</span></span><!--[endif]--></span></span><br /><br />The “Chairman’s mark” of the America’s Healthy Future Act is a marked up version of the proposed legislation that came out of the Senate Committee on Finance.[2] It is not the legislation. As Director Elmendorf’s letter states, “…analysis is preliminary in large part because the Chairman’s mark, as amended, has not yet been embodied in legislative language.”<br /><br />Payment for reform comes from two sources: new revenue and cost savings in existing government funded programs. So as I thought about how to approach an analysis it occurred to me there are two steps: The first is to look at the line items to see who pays and the second is to ask the question of how likely these items, if passed, will survive and generate the revenue or savings envisioned. At the very least the analysis provides a baseline from which to track the legislation to see what passes and what doesn’t and to monitor its performance over time.<br /><br />The cost for the proposal is broken down into the following three categories: Medicaid and Children’s Health Insurance Program (CHIP), insurance exchange subsidies, and tax credits for small employers. The total estimated cost is $829 billion. Cost offsets (revenue) in the form of additional taxes amount to $311 billion and are divided into these four categories: a tax on high premium insurance plans, penalty payments by uninsured individuals, penalty payments by non-offering employers, and tax revenue from the expansion of insurance. Two thirds of the revenue (or $201 billion) is tax on premium plans. How likely are those plans, once the rules are set, to be modified to avoid some or all of the tax? Beware the law of unintended consequences. Nevertheless the net result still leaves a half trillion dollar hole.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/StvBOIfkWyI/AAAAAAAAAfg/IEZ_KkZ0Bj0/s1600-h/Chairman%27s+Mark+chart8.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 147px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/StvBOIfkWyI/AAAAAAAAAfg/IEZ_KkZ0Bj0/s400/Chairman%27s+Mark+chart8.jpg" alt="" id="BLOGGER_PHOTO_ID_5394117427248519970" border="0" /></a><br /><br />Now we look at the intangibles<br /><br />Of the total $420 billion in savings $404 billion comes from reductions in direct spending, or in other words, savings on existing government outlays. There are 19 categories and multiple sub categories. I will focus on the largest.<br /><br />Excluding the Medicare Improvement Fund, which I will address later, I see these five major categories: (1) savings from reduction in direct benefits under current programs; (2) reductions in payments to health care providers; (3) savings in payments to drug companies; (4) reductions in payments to health care facilities primarily hospitals; (5) and modification of current plans.<br /><br />Figures in Billions of Dollars<br />1. Reduced benefits..........................................................$ 18.8<br />2. Reduced payments to health care providers.....................$ 73.7<br />3. Reduced payments to drug companies............................$ 28.6<br />4. Reduced payments to health care facilities.......................$168.4<br />5. Modification of Medicare Advantage (Part C)..................$117.4<br /><br />Benefit reductions are accomplished by means testing and raising co-payments on higher earning individuals. Savings pertaining to payments to health care providers are made by reducing and/or capping the growth of payments to doctors and other providers. Reductions in payments to drug companies are accomplished by switching to generics. Reduced payments to facilities come from a significant shift from emergency room use to other facilities, presumably primary care providers. The last savings is a modification of a current program called Medicare Advantage that has resulted in significantly higher delivery costs than Medicare A and B. Medicare Advantage lets a beneficiary shift the administration of Medicare to other plan providers such as Health Maintenance Organizations (HMO), Preferred Provider Organizations (PPO), Private Fee-for-Service Plans (PFFS), Special Needs Plans (SNP) and Medical Savings Account Plans (MSA).<br /><br />While there is little doubt the expense side of the ledger will survive, one must question the revenue side. As pointed out earlier none of the proposals are in legislative language. We can only imagine the depth of lobbying going on. We can also imagine a world where the legislation actually passes as envisioned. What are the consequences? For example if we drain $168.4 billion of revenue from the hospitals in this country, how many will survive? With shorter patents on drugs and reduced cash flow to drug companies how much capital will flow into innovation? And how likely is sapping doctors, nurses, hospice care providers and homecare providers of $73.7 billion in income to promote better care and service if in fact it happens? As we shall see shortly, for the doctors it won’t.<br /><br />But the real question in my mind is this: can the government execute? For example, in the past, cuts scheduled in fee-for-service to physicians have been routinely overridden by congress. From the 2009 annual report for the trust funds of Medicare parts A and B, “Congressional overrides of scheduled physician fee reductions…could jeopardize Part B (payments for doctor visits) solvency… Part B costs have been increasing rapidly, having averaged 7.8 percent annual growth over the last 5 years, and are likely to continue doing so. Under current law, an average annual growth rate of 5.5 percent is projected for the next 5 years. This rate is unrealistically constrained due to multiple years of physician fee reductions that would occur under current law, including a scheduled reduction of 21.5 percent for 2010. If Congress continues to override these reductions, as they have for 2003 through 2009, the Part B growth rate would instead average roughly 8.5 to 9.0 percent.”[3] To watch Secretary Giethner’s press conference releasing the report click <a href="http://medicareupdate.typepad.com/medicare_update/2009/05/2009medicaretrusteesannualreport.html">here</a>.<br /><br />So what did Congress do? The answer is sleight of hand. $22.2 billion, 5% of the “savings” in the current legislation, are from funds scheduled to be spent between 2014 and 2019 from the Medicare Improvement Fund.[4] They were actually moved to a budget resolution for Fiscal Year 2010 and increased to a whopping $285 billion overriding past and future reductions in one fell swoop. So the way the current bill became “deficit neutral” was to actually authorize a quarter of a trillion dollars of Medicare spending that will occur during the years the bill covers but keep it out of the bill.[5] Where is Joe Wilson when we need him?<br /><br />The last item I will address is the Medicare Commission. From Director Elmendorf’s letter to Senator Baucus, “The projected longer-term savings for the proposal also assume that the Medicare Commission is relatively effective in reducing costs—beyond the reductions that would be achieved by other aspects of the proposal—to meet the targets specified in the legislation. The long-term budgetary impact could be quite different if those provisions were ultimately changed or not fully implemented. (If those changes arose from future legislation, CBO would estimate their costs when that legislation was being considered by the Congress.)” The Medicare Improvement Fund[6] was created by Congress in 1999 with complete implementation by 2003 with three objectives:<br /><br />• the design of a premium support system,<br />• improvements to the current Medicare program, and<br />• financing and solvency of the Medicare program<br /><br />So can the government execute? Can we trust Congress to pass the legislation they are proposing without bowing to pressure from lobbies? Even if passed will Congress avoid tinkering either with the level of benefits or the adjustments in compensation? All evidence suggests the answer is no. Each year we continue to add one unfunded liability to another. The most dangerous four words in the English language be it investing or government spending are, “This time is different.” Albert Einstein defined insanity as, “Doing the same thing over and over again expecting different results.”<br /><br />But the most frightening result of this is that if it succeeds at all levels it is only deficit-neutral. With an unfunded liability of $107 trillion in the current Social Security and Medicare[7] can we afford to just spin our wheels?<br />________________________________________________<br /><span style="font-size:85%;">[1]<a href="http://www.cbo.gov/ftpdocs/106xx/doc10642/10-7-Baucus_letter.pdf">http://www.cbo.gov/ftpdocs/106xx/doc10642/10-7-Baucus_letter.pdf</a><br />[2]<a href="http://thehealthcarevalueblog.com/files/2009/09/Health-Care-Reform-Mark-Document-FINAL.pdf">http://thehealthcarevalueblog.com/files/2009/09/Health-Care-Reform-Mark-Document-FINAL.pdf</a><br />[3]<a href="http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2009.pdf">http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2009.pdf</a><br />[4]<a href="http://www.ssa.gov/OP_Home/ssact/title18/1898.htm">http://www.ssa.gov/OP_Home/ssact/title18/1898.htm</a><br />[5]<a href="http://www.healthreformmusings.com/2009/03/articles/cost-of-health-care/medicare-physician-fix-may-result-in-more-fundamental-reform/">http://www.healthreformmusings.com/2009/03/articles/cost-of-health-care/medicare-physician-fix-may-result-in-more-fundamental-reform/</a><br />[6]<a href="http://www.ssa.gov/OP_Home/ssact/title18/1898.htm">http://www.ssa.gov/OP_Home/ssact/title18/1898.htm</a><br />[7]<a href="http://www.freerepublic.com/focus/news/2269595/posts">http://www.freerepublic.com/focus/news/2269595/posts</a></span>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-4004919802263446002009-10-11T18:38:00.000-07:002009-10-18T07:40:20.170-07:00Subsidized Housing; America's Iceberg<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/StKJkoTA-MI/AAAAAAAAAfQ/1OiIu6fx4hE/s1600-h/titanic_3.jpg"><img style="float:left; margin:0 10px 10px 0;cursor:pointer; cursor:hand;width: 320px; height: 226px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/StKJkoTA-MI/AAAAAAAAAfQ/1OiIu6fx4hE/s320/titanic_3.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5391522966301374658" /></a><br /><br />Friday’s issue of the New York Times has an article about the pending problems with the Federal Housing Administration (FHA).(1) For those of you who read this blog that is old news. But it is just the tip of the housing iceberg. The real danger lies within the Government Sponsored Enterprises (GSEs).<br /><br />The Federal National Mortgage Association was part of the FHA until 1968 when, under mounting budget pressures brought on by his policy of “guns and butter,” President Lyndon Johnson privatized Fannie Mae taking it off the federal government’s balance sheet. Unfortunately he didn’t disconnect it from the government’s guarantee. Two years later the Federal Home Loan Mortgage Corporation, later known as Freddie Mac, was formed to “compete” with Fannie Mae. Both became public companies and were two of the largest companies in the Fortune 500. <br /><br />Initially both GSEs operated like great big savings and loans borrowing from the public and purchasing mortgages for their portfolios. In addition to the implied government guarantee the GSEs were exempt from state and federal income tax and, unlike any other companies in the Fortune 500, were not required to report potential financial difficulties in their annual filings. In the early 1980s Fannie Mae faced bankruptcy because of a mismatch between assets and liabilities and a surge in foreclosures. Losing $1 million a day, by 1983 its net worth had fallen below zero. But the government came to the rescue and under an accounting change sponsored by then President Regan, both Fannie and Freddie were able to capitalize the losses on their portfolio loans, some worth only seventy cents on the dollar, sell the loans as mortgage backed securities and amortize the loss over the next 20 to 30 years. This policy, called “forbearance” allowed the lenders to operate with negative net worth. Fannie president David Maxwell increased lending standards and moved the portfolio into adjustable loans to reduce the sensitivity to short term borrowing costs.(2) The sensitivity between assets and liabilities improved as both GSEs extended the maturities by issuing longer term debt and securitizing and selling many of their loans. As the yield curve steepened Fannie recovered but the same fate that befell Fannie Mae hit the savings and loan industry leading to the failure of over 740 institutions at a cost to the taxpayer of $124 billion.(3) <br /><br />Not content to let the mere subsidization of housing rest with the benefits already bestowed on Fannie and Freddie successive congresses and administrations pressed their own agendas on the agencies. The profits of Fannie and Freddie were ripe for use as subsidies to the under-served segment of the market, the euphemism for low to moderate income home buyers. The Federal Home Loan Mortgage Corporation Act updated Freddie’s charter in 2005, “to provide ongoing assistance to the secondary market for residential mortgages <span style="font-style:italic;">(including activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities)</span>…”(4) Much of this subsidy was provided to bring in the very borrowers who today cannot afford the homes they were encouraged to buy.<br /><br />And then came the Great Panic of 2008. With the future financing of the GSEs very much in doubt the Bush administration released a proposal that would temporarily authorize the Department of the Treasury to purchase $100 billion each, up from $2.25 billion, of Fannie Mae and Freddie Mac obligations. At the time the CBO estimated the chance of this occurring at less than 50% and “that the expected value of the federal budgetary cost from enacting this proposal would be $25 billion over fiscal years 2009 and 2010.” The CBO assigned only a 5% probability the price tag would reach $100 billion between them. On September 7, 2008 Fannie Mae and Freddie Mac became wards of the U. S Government. At the end of March, 2008 the combined portfolio of mortgage loans and guarantees of the GSEs stood at $5.2 trillion(5) and by July 2009 the bailout was fast approaching that $100 billion mark. Mortgage analyst Bose George of Keefe, Bruyette & Woods said, “We’re assuming they <span style="font-style:italic;">each</span> will cross the $100 billion mark fairly soon.”(6) <br /><br />Today the picture is only bleaker. Losses continue to mount. Renegotiated loans are re-defaulting at a rate in excess of 50%(7) and the default rate on the current portfolio is approaching 10%. On September 9, 2009 the Congressional Research Service released a report entitled “Options to Restructure Fannie Mae and Freddie Mac”.(8) The table below from that report shows that total taxpayer support for Fannie and Freddie now stands at $1.058 trillion dollars.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/StKJBah9n0I/AAAAAAAAAfA/YqQ5JiKeEx0/s1600-h/Fannie+Freddie+Table7.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 149px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/StKJBah9n0I/AAAAAAAAAfA/YqQ5JiKeEx0/s400/Fannie+Freddie+Table7.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5391522361310551874" /></a><br /><br />In a recent interview Rep. Barney Frank (D-Mass.) responding to a question of becoming Secretary of Housing and Urban Development said, “I want at least two years with President Obama and a solidly Democratic Senate so that we can get the federal government back in the housing business.” With the government insuring 90% of current home loan activity I am having a real tough time finding what’s left for the government to "get...back in..."<br /><br />And see the debt ticker to the right of this blog? Add the $5.2 trillion of debt guaranteed by the GSEs that isn’t yet shown on the government’s balance sheet. Including the GSEs government debt now stands at a mind-boggling 122% of GDP. There are only three countries in the world with a higher percentage; Lebanon, Japan and Zimbabwe.(9) I wonder which one we are aspiring to? <br />____________________________________<br /><br />(1) http://www.nytimes.com/2009/10/09/business/09fha.html?_r=1&th&emc=th<br />(2) “Getting Fannie Mae in Shape” NY Times, December 26, 1985<br />(3) http://en.wikipedia.org/wiki/Savings_and_loan_crisis<br />(4) Federal Home Loan Mortgage Corporation Act, 12 U.S.C. Sec. 1451 Note. Sec. 301(b)3. <br />(5) CBO Report to the Committee on the Budget, U. S. House of Representatives by Peter R. Orszag, CBO Director, July 22, 2008<br />(6) http://money.cnn.com/2009/07/22/news/companies/fannie_freddie_bailout/<br />(7) http://finance.yahoo.com/news/Homeowners-in-financial-apf-1726904164.html?x=0&sec=topStories&pos=6&asset=&ccode<br />(8) Options to Restructure Fannie Mae and Freddie Mac, N. Eric Weiss, September 9, 2009<br />(9) https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.htmlLiablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-1635424814634582182009-10-05T20:40:00.000-07:002009-10-06T18:03:17.772-07:00The FDIC: Fuzzy Math?<a href="http://www.weaponsofmathdestruction.com/wmd.cfm?comicID=123"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://4.bp.blogspot.com/_y3c1XyakSC0/Ssq_yvtpZ4I/AAAAAAAAAeg/RdhfmjypVE8/s1600-h/118-mathmurdered.jpg"><img style="float:right; margin:0 0 10px 10px;cursor:pointer; cursor:hand;width: 256px; height: 320px;" src="http://4.bp.blogspot.com/_y3c1XyakSC0/Ssq_yvtpZ4I/AAAAAAAAAeg/RdhfmjypVE8/s320/118-mathmurdered.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5389330782624507778" /></a></a><br />Like clockwork each Friday since January 16, save three, the FDIC has released a list of banks it has closed. This Friday there were three.(1) The mounting closures now total 98 and are taking a toll on another government run insurance company, the Federal Deposit Insurance Corporation. The fund within the FDIC that insures deposits is called the Deposit Insurance Fund (DIF). For 2008 the DIF’s loss totaled $35.1 billion compared to income of $2.2 billion for the previous year. As a result, the DIF balance declined from $52.4 billion to $17.3 billion as of December 31, 2008.(2) <br /><br />2009 has not been kinder. Despite the strength in financial stocks since the end of March, the FDIC issued another grim quarterly report Thursday on the health of the nation’s banks. In the second quarter of 2009 the banking industry lost $3.7 billion amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses. Meanwhile the FDIC’s deposit insurance fund dropped to $10.4 billion, its lowest level in nearly 16 years. And the number of “problem banks” increased to 416, from 305 in the first quarter, and is expected to remain high.(3) <br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/SsrASL9UuII/AAAAAAAAAew/jV7kOKvZYuE/s1600-h/problem+institutions.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 311px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/SsrASL9UuII/AAAAAAAAAew/jV7kOKvZYuE/s400/problem+institutions.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5389331322782398594" /></a><br /><br />Without action to replenish it, the DIF will have a negative balance as of September 30, while its longer-term liquidity will dry up in the first quarter of 2010.(4) On September 30 Federal regulators said the likely cost of failed banks to the FDIC over the next 4 years will be $100 billion up from $70 billion forecast in March, an increase of almost 50%.(5) <br /><br />The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Like the FHA it has never cost the taxpayer anything since its founding and has only had a negative balance one year. Now it too is staring into the abyss. <br /><br />So what’s the plan? Sheila Bair wants to accelerate the annual fees collected from insured institutions taking the next three years of fees into current income. Let’s forget that this is in fact an accounting trick that depletes bank cash but doesn’t deplete their book capital. It amounts to only $45 billion. So to plug a $100 billion gap the FDIC is going to forgo all its fee income for the next three years. And by the way since when does 0+45=100? One might also ask why the assessment revenue, which in 2008 was $4.42 billion will average $15 billion over the next three years? Part of that might be from the larger account balances insured, up to $250,000 from $100,000, and part will be from an increase in the insurance premium of .03%. But that doesn’t add up either. Non assessment revenue from 2007 to 2008 was roughly flat at $2.5 billion so once again where does all the revenue growth come from? And this is all predicated on a loss estimate that has increased almost 50% in the last 6 months. <br /><br />Will the FDIC be dipping into its credit line from the US Treasury (aka taxpayer) for the first time in its 75 year history? Today that credit line stands at a staggering $500 billion. <br />__________________________<br />Comic courtesy of <a href="http://www.weaponsofmathdestruction.com/wmd.cfm?comicID=123">Oak Norton</a><br />(1) http://www.fdic.gov/bank/individual/failed/banklist.html<br />(2) http://www.fdic.gov/about/strategic/report/2008highlight/index.html<br />(3) http://www2.fdic.gov/qbp/2009jun/qbp.pdf<br />(4) http://industry.bnet.com/financial-services/10003682/fdic-wants-banks-to-pay- in-advance-to-restore-deposit-insurance-fund/<br />(5) http://www.npr.org/templates/story/story.php?storyId=113333298&ft=1&f=1017Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-24389425431384047612009-10-01T09:08:00.000-07:002009-10-04T09:13:48.838-07:00The FHA and Subprime America: House on Fire!<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://3.bp.blogspot.com/_y3c1XyakSC0/SsTWGyKljWI/AAAAAAAAAeQ/kBIgTcSOp2g/s1600-h/Burning+House5.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer; width: 111px; height: 170px;" src="http://3.bp.blogspot.com/_y3c1XyakSC0/SsTWGyKljWI/AAAAAAAAAeQ/kBIgTcSOp2g/s320/Burning+House5.jpg" alt="" id="BLOGGER_PHOTO_ID_5387666466275691874" border="0" /></a><br />The Federal Housing Administration, the longtime self-funded mortgage arm of government insurance programs, is now taking a number and waiting in turn for its taxpayer-financed government bailout. Get out your checkbooks.<br /><br />Created in 1934 the FHA’s purpose was to stimulate mortgage underwriting by insuring mortgages for risk-averse banks and encouraging a new wave of home-loans. The program worked during the depression and continued to work even as an increasingly privatized mortgage industry developed ever-more creative loan packaging to insure sub-prime mortgages. Promoted by politicians the FHA evolved in the 21st century to underwrite home loans for low and moderate-income buyers whose shaky credit would otherwise lock them out of the housing market. Whether or not you agree that every low-income American with Swiss-cheese credit deserves to own his or her own home is beside the point. As a taxpayer, and therefore a stakeholder in the FHA, you could rest easy knowing that “the FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.”(1) But that was in 2006, when the FHA insured just 2.7% of the single-family mortgage market. By the second quarter of 2009 its market share was 23% and self-funding was as viable as General Motors’ Hummer.<br /><br />Led by the government’s attempt to stem the housing collapse this 10-fold increase in market share was due in large part to the Housing and Economic Recovery Act of 2008 which then-President Bush signed into law on July 29, 2008. Sponsored by Reps. Barney Frank (D-Massachusetts) and Maxine Waters (D-California) the bill included new authority for FHA to insure up to $300 billion of troubled mortgages. FHA is working overtime to accomplish the task.<br /><br />FHA loans are packaged by mortgage bankers and sold in pools of Ginnie Maes then distributed by Wall Street dealers to investors either as Mortgage Backed Securities (MBS’s) or as Collateralized Debt Obligations (CDO’s). Ginnie Maes carry the full faith and credit guarantee of the U. S. Treasury. Their losses are covered by the FHA. So Ginnie Mae, a full faith and credit issuer of the government is on track for a record issuance of securities and the taxpayer’s backstop is the FHA. On September 10, 2009, Ginnie Mae announced it had issued $45 billion of mortgage backed securities in August alone, the fifth consecutive month of record issuance.(2)<br /><br />Swamped with increasing delinquencies the FHA is “probably going to need a bailout at some point because they’re making loans in a riskier environment,” says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. “…I’ve never seen an entity successfully outrun a situation like this.” The problem stems from the FHA’s cash flows. As an insurance company, the FHA earns a percentage of loan payments on its insured mortgages. When its market share was in the single digits and home-owners were actually paying their bills, things worked well. But FHA delinquencies have increased from 5.4% a year ago to 7.8% today and accelerating default rates are rapidly eating through the FHA’s reserves. David Stevens, the FHA Commissioner, told Congress that the agency will fall below the 2% minimum reserve required in its charter, down from a 6.7% reserve in 2007.(3) In 2007 FHA earned $1.521 billion and gross costs (government speak for expenses) were $3.89 billion for a net cost of $2.369 billion, the first loss in 75 years of operation. In 2008 revenue was down slightly at $1.471 billion and costs soared nearly tripled to $11.378 billion for a net cost of $9.9 billion! (4)<br /><br />And how is the program created in 2008 to help troubled borrowers working? On Wednesday the Office of the Controller of the Currency and the Office of Thrift Supervision reported re-default rates on troubled borrowers is running in excess of 50%. <br /><br />With 5 months of record issuance behind us, and ostensibly many more to come, why isn’t the FHA on track for record profits? The FHA funds itself by receiving an ongoing percentage of the interest payment made by the borrower for insuring each mortgage. But now delinquencies are increasing faster than even the government can issue debt. Revenue on the portfolio is 37.5 basis points or approximately 1/3 of 1 percent. At the end of Fiscal Year 2008 the outstanding portfolio was $534 billion generating roughly $2 billion in revenue and defaulting at a rate of almost 8%. At September 30, 2008 the FHA surplus reserve fund was $12.9 billion. That number is expected to fall below $10 billion by September 30, 2009, the end of this fiscal year, for a net decline of $4.7 billion dollars. This gives the FHA a leverage ratio of 54:1 nearing twice the highest leverage of the major banks prior to the 2008 crash on a portfolio with only 3.5% down payment. Do the math.<br /><br />And this is a drop in the bucket compared to our next discussion: Fannie Mae and Freddie Mac. With the combined entities of FHA, Fannie Mae and Freddie Mac, the American taxpayer is now guaranteeing 90% of all the home mortgages made in America. And then the Federal Reserve is purchasing those loans so we are first guaranteeing the loans then buying them! Huh?<br /><br />1. http://www.nls.gov/offices/hsg/fhahistory.cfm<br />2. http://www.ginniemae.gov/news2009/news2009.asp?Section=Media<br />3. http://www.washingtonpost.com/wp-dyn/content/article/2009/09/18/AR2009091803578.html?hpid=topnews<br />4. 2008 Department of Housing and Urban Development Annual Performance and Accountability Report (Available on request)Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com2tag:blogger.com,1999:blog-9117475697006161197.post-38308975503273513652009-09-21T15:21:00.000-07:002009-09-21T16:20:08.082-07:00The Pension Benefits Guarantee Corporation<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/SrgJ1p-dFuI/AAAAAAAAAd4/MQH6MSaVRl8/s1600-h/pickpocket.jpg"><img style="float:right; margin:0 0 10px 10px;cursor:pointer; cursor:hand;width: 320px; height: 320px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/SrgJ1p-dFuI/AAAAAAAAAd4/MQH6MSaVRl8/s320/pickpocket.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5384064171926951650" /></a><br /><br /><br />The US Government runs a number of insurance plans. As we debate the issue of adding another, the so called “government option” for health care reform, it is instructive to look at the existing programs. These include FHA, Ginnie Mae, Fannie Mae, Freddie Mac and a number of student loan programs (which incidentally may disappear under legislation that has passed the House and is on its way to the Senate which eliminates all federal aid to students who don’t qualify under a needs based system). Today we will look at the Pension Benefits Guarantee Corporation.<br /><br />PBGC is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector traditional pension plans known as defined benefit plans. If a participating plan terminates, usually through the sponsor’s bankruptcy, without sufficient money to pay all benefits PBGC's insurance program will pay the benefits provided by that plan up to the limits set by law. PBGC financing comes from insurance premiums paid by participating companies which are invested, from the assets taken from defunct pension plans, and from recoveries from the companies formerly responsible for the plans. The PBGC was presumably never supposed to be funded by the American public.<br /><br />In hearings in 2005 Jim Nussle, Chairman of the House Budget Committee said, “Now in theory, the PBGC was supposed to be completely self-financing…But as we are discovering, and as most of us here know, that is not what is happening.” That year there was a $23 billion shortfall. Later in the hearing Chairman Nussle said, “To make matters worse, the Center on Federal Financial Institutions, which tracks pensions, tells us that on the current path, all PBGC assets will be exhausted, completely gone, by 2021, just 15 years from now.” We appear to be ahead of schedule. As it turns out, the PBGC has continuously operated in deficit every year since 2002. Through the second quarter of 2009 the unaudited deficit is $33.5 billion.(2) PBGC estimates that in just the auto sector alone underfunding of defined benefit plans is $77 billion. At the end of fiscal year 2008 audited financial statements showed total assets of $61,648,000,000. If we combine the $33.5 billion loss and just the unfunded auto liabilities the liabilities total over $95 billion. So the PBGC, a self funding government provided and managed insurance plan has a net deficit of over $30 billion, in other words it is bankrupt. Again from Chairman Nussle’s opening remarks in 2005, “So where does that leave us? Well, under the current scenario, if and when PBGC’s assets fall short, the choice is really one of two right now. Either for pension holders to lose the promised retirement benefits or for the taxpayers to get slapped with the bill for failed private pension plans.” So once again American taxpayers, many of whom have limited entitlements and no defined benefits, will be asked to pay the bill. The PBGC was in theory going to pay for itself, just as in theory the public option for health care will “pay for itself in future savings.”<br /><br />And by the way, the PBGC was recently given wider investment authority and made its first investments in the stock market in the second quarter of last year setting up a Federal Government agency making investments in private sector companies. As a result of those investments PBGC experienced a 23% loss in its assets for the fiscal year ending September 30, 2008.(3) It is also interesting to note that the former head of PBGC, Charles Millard, is currently under investigation for improprieties for directing funds for favors involving, among others, Goldman Sachs.(4) This happened as a result of the fund’s recently granted ability to invest in publicly traded equities.<br /><br />So here we have another unfunded liability, created by an entitlement in the form of a guaranteed benefits plan, under-insured by a government-run insurance program placing the responsibility for payment squarely on the shoulders of the American taxpayer.<br /><br />Next issue: the housing insurance programs, all bankrupt or tottering on the edge, which the government has started since FDR created the Federal Housing Administration during the Depression.<br /><br />1. http://ftp.resource.org/gpo.gov/hearings/109h/21761.pdf<br />2. http://www.pbgc.gov/media/news-archive/news-releases/2009/pr09-30.html<br />3. http://www.boston.com/news/nation/washington/articles/2009/03/30/pension_insurer_shifted_to_stocks/?p http://ftp.resource.org/gpo.gov/hearings/109h/21761.pdf<br />4. http://documents.nytimes.com/documents-in-the-pbgc-investigation#p=1Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com1tag:blogger.com,1999:blog-9117475697006161197.post-27233480733676626992009-09-14T14:51:00.001-07:002009-09-27T07:47:39.443-07:00General Motors<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/Sq67zPAEN2I/AAAAAAAAAcI/Hl-cpQ63Q68/s1600-h/blog3.jpg"><img style="margin: 0pt 10px 10px 0pt; float: left; cursor: pointer; width: 320px; height: 200px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/Sq67zPAEN2I/AAAAAAAAAcI/Hl-cpQ63Q68/s320/blog3.jpg" alt="" id="BLOGGER_PHOTO_ID_5381445093628852066" border="0" /></a><br /><br />For many years I have watched compliant politicians bow to the unions, often in collusion with business, and the result is a bigger and bigger pile of unfunded liabilities. The most notorious side-effect of that deference is the failure of General Motors.<br /><br />Like many of the current Federal benefit programs the United Auto Workers used a young workforce to fund ever increasing benefits. But as the work force aged and more and more retirees began to draw on the promised benefits, General Motors found itself in trouble. Its pension fund failed to earn enough to balance what the company was paying out in benefits while the ratio of workers paying in to retirees taking out got smaller. Whether it was poor money management, over-exuberant forecasting of returns, or endless faith in the generosity of a government hungry for union votes, GM repeatedly came off the tracks, only to be reset by bailouts.<br /><br />A recent history of quick-fix GM bailouts begins in 2001. Just as consumers peeked out their heads from the detritus of the imploded dot.com bubble the far more terrible collapse of the world trade center froze consumer spending. With car sales stalled completely General Motors found itself in dire straits. Unfunded pension fund liabilities threatened to topple the automotive giant. But as usual the government stepped up with tax incentives on big cars and trucks while GM unveiled its patriot-themed campaign to “keep America rolling” with 0% financing for 5 years on all new vehicle purchases. Hummer sales soared but the underlying problems at GM continued, ignored for the time being as the new SUVs’ revving engines drowned out any cries for real financial repairs.<br /><br />One of those necessary repairs was a revamping of unrealistic assumptions on the rate of return earned in the pension fund itself. A New York Times article published August 25, 2002 said in part, (1)<br /><br />“Lately, the focus is on GM’s pension fund, which totaled $80 billion two years ago but has dropped to $67 billion. Although the company's current pension payouts are not exceeding pension fund earnings, the market's volatility has destroyed GM’s assumption that it would earn a net return of 10 percent a year on the fund assets. Mr. Devine said GM was ready to transfer cash to fund some of the future liability at year-end, but he contends that cannot be done all at once without endangering GM’s product spending. Yet until the shortfall for future liability is funded, he acknowledged, the issue will not go away.<br /><br />“'It doesn't get off the table until it gets off the table,' he said.”<br /><br />At the end of 2002 GM’s unfunded pension obligations stood at $19.3 billion. In an attempt to fix the shortfall GM issued $13.2 billion of a new type of bond complete with Government subsidy (2). The proceeds were contributed to the fund along with a $4.26 billion “tax shield” created by that bond issuance. In theory GM should have been close to fully funded. Yet when it collapsed (again, and this time for real) in 2009, the unfunded pension liabilities were $13.5 billion. So from the time the quick-fix financing scheme was cooked up in 2002 to the final GM collapse in 2009, the unfunded liability in the pension fund grew by 50%. And GM became, as one commentator put it, “a benefits company funded by an auto company.”<br /><br />The taxpayer is now invested in GM to the tune of $80 billion and growing. And the history of government bailouts to GM continues: we just added $3 billion more in taxpayer money to bribe individuals to buy cars through the “cash for clunkers” program!<br /><br />But who is now responsible for the UAW pension fund? Normally the Pension Benefit Guaranty Corporation, an insurance company run by the U. S. Government similar to the FDIC, would step in and assume those liabilities. So the theory is by bankrupting GM and letting the emergent company continue to operate the pension fund the PBGC would avoid taking that loss. What happens if the new GM fails? It turns out that the PBGC and the American Taxpayer are on the hook, once again, for the benefits of the UAW. But the PBGC itself is just one more, all together now, “unfunded liability” of the US Treasury. The PBGC was formed to insure the pension funds of participating corporations. In concept it was supposed to be self-funding. In reality it has been in deficit every year since 2002. As Mr. Devine said earlier, “It doesn’t get off the table until it gets off the table.”<br /><br />My next article will start to look at all the various insurance companies run by the Federal Government beginning with the Pension Benefits Guarantee Corporation.<br /><br />(1) http://www.nytimes.com/2002/08/25/business/business-in-detroit-steady-hands-are-steadying-nerves.html?pagewanted=all<br />(2) http://www.nytimes.com/2003/06/21/business/gm-to-raise-10-billion-for-pension-gap.html<br />Photo from: http://www.durangoherald.com/sections/News/2008/11/12/Student_gets_SUV_stuckLiablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-45276800036610021872009-09-10T14:38:00.000-07:002009-10-15T13:03:02.125-07:00Beware the Public Option<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://1.bp.blogspot.com/_y3c1XyakSC0/Sql5O0jircI/AAAAAAAAAbw/hYid4njFP54/s1600-h/Obama.jpg.jpg"><img style="margin: 0pt 0pt 10px 10px; float: right; cursor: pointer; width: 320px; height: 240px;" src="http://1.bp.blogspot.com/_y3c1XyakSC0/Sql5O0jircI/AAAAAAAAAbw/hYid4njFP54/s400/Obama.jpg.jpg" alt="" id="BLOGGER_PHOTO_ID_5379964525403614658" border="0" /></a><br /><br />I originally anticipated discussing the collapse of GM in this blog, however given the debate currently raging over health care reform this is where I will focus today because, guess what, the hidden cost of health care overhaul is… another Unfunded Liability!<br /><br />Last night the President laid out a plan for health care overhaul. The plan contains numerous necessary reforms, others are not. Here I will only take issue with one: the Public Option. Why? Because the Public Option is a prime example of an unfunded liability.<br /><br />Here is what he said, “But an additional step we can take to keep insurance companies honest is by making a not-for-profit public option available in the insurance exchange.” And how does that get paid for? “... not a dollar of the Medicare trust fund will be used to pay for this plan… Reducing the waste and inefficiency in Medicare and Medicaid will pay for most of this plan.” Isn’t this contradictory? In other words, if Medicare and Medicaid savings are going to pay for this isn’t the payment by definition going to come out of money that would otherwise be available to the Trust Fund?<br /><br />This provides us with an easy segue into a discussion of the financial health of Medicare. If we are relying on savings in one entitlement to pay for another the former had better be financially sound. It is not.<br /><br />Each year the Social Security and Medicare Boards of Trustees publish an annual report along with “A Message to the Public”.(1) In this year’s report signed by the Secretary of the Treasury as Managing Trustee it states, “As was true in 2008, Medicare's Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017, after which the percentage of scheduled benefits payable from tax income would decline from 81 percent in 2017 to about 50 percent in 2035 and 30 percent in 2080. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time.”<br /><br />The consequence of this statement is profound. The current Medicare system will need substantial savings and additional revenue just to keep its own head above water. The problem once again is the unfunded liability that arises from guarantees of benefits without a dedicated payment plan. Simply reducing the deficit of an unfunded liability doesn’t create funding available for another. Today the unfunded liability in Medicare alone is $85.9 trillion or six times the total annual production of our economy. The report goes on, “The projected exhaustion of the HI Trust Fund within the next eight years is an urgent concern. Congressional action will be necessary to ensure uninterrupted provision of HI services to beneficiaries. Correcting the financial imbalance for the HI Trust Fund—even in the short range alone—will require substantial changes to program income and/or expenditures.” And this is how we are going to fund the new Public Option?<br />___________________________________________________________________________<br />(1) http://www.ssa.gov/OACT/TRSUM/index.htmlLiablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0tag:blogger.com,1999:blog-9117475697006161197.post-90668511356094251472009-09-08T18:12:00.000-07:002009-09-08T18:15:40.205-07:00Unfunded Liabilities 101<span style="font-family: times;">Unfunded liabilities are insidious critters. Say for example you buy a ten year old house. When you buy it the roof is fine. But it has a fifteen year roof which, after five years, starts leaking. Time for the roofer but you didn’t include the cost of a new roof in your budget. Congratulations, you’ve just experienced your first unfunded liability. Now you must take away from other spending, draw on savings or get a loan.</span><br /><br /><br /><span style="font-family: times;">Let's play a game. Make a list of all your future liabilities: a college education, retirement or simply the replacement of your car? How many of these have a funding plan? Those that don't are unfunded liabilities. Now think about the government. If you are a taxpayer, every future commitment the government makes becomes your obligation...</span><br /><br /><br /><span style="font-family: times;">Next week the low hanging fruit, the auto industry.</span><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://2.bp.blogspot.com/_y3c1XyakSC0/SqcBN2BlAcI/AAAAAAAAAbg/KUnPDcQq-60/s1600-h/gm.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 150px; height: 150px;" src="http://2.bp.blogspot.com/_y3c1XyakSC0/SqcBN2BlAcI/AAAAAAAAAbg/KUnPDcQq-60/s400/gm.jpg" alt="" id="BLOGGER_PHOTO_ID_5379269617269408194" border="0" /></a>Liablility Warriorhttp://www.blogger.com/profile/15999008627900868212noreply@blogger.com0