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Ryan, Christie should check Dutch public pension cuts

Friday, August 31st, 2012

By Frank Keegan | State Budget Solutions

Frank Keegan

Vice presidential candidate Wisconsin U.S. Rep. Paul Ryan and New Jersey Gov. Chris Christie put on cheery faces for the faithful this week at the Republic National convention, but both know the catastrophe states are hurtling toward because of hidden debt.

If they want to find out what it takes to deal with fiscal reality, they should check with the Dutch, who are getting ready to cut current civil service retirement benefits and increase contributions to save the pension system.

The Dutch website reported last week that “according to a confidential internal memo” of the national pension fund, “The pensions of 2.8 million working and retired civil servants” will be cut by 15 percent during the next two years.

Required contributions could increase 28.5 percent at the same time. That is what real solutions to fiscal problems look like. Ugly.

The cause there is the same as here: “Since the outbreak of the crisis in late 2007, the risk-free rate decreased from (5) to (2) percent.” Dutch public pensions require a realistic funding level based on a risk-free discount rate.

U.S. public pensions allow delusional funding levels at unachievable discount rates — a policy guaranteeing disaster.

What does any of it have to do with our presidential race? Everything, when the No. 1 issue is doomed entitlement programs, gross immorality and the economic homicide of taxing citizens twice for government services while shifting trillions of dollars in costs onto future generations who will derive no benefit.


State Lawmakers Get Warning About Muni Bond Bind

Tuesday, August 7th, 2012

By Frank Keegan | State Budget Solutions

Frank Keegan

CHICAGO — National Conference of State Legislatures members meeting here ended their first day with even more bad news about municipal bonds, debt interest that takes more than 20 cents of every dollar they spend each year and that pays for essential public works, among other things.

Some of the other things could be a problem.

Frank Shafroth, of the Municipal Securities Rulemaking Board, warned legislators at NCSL’s “The Future of Tax-Exempt Financing” that federal deficit reduction efforts could threaten the traditional tax exemption for municipal bonds even though that exemption is based on original, fundamental constitutional principles.

“This year they’re (Congress) caught in a vice. They need to reduce rates and reduce expenditures,” Shafroth said. “Their position is tax exempt bonds are a gift to the wealthy.”

But he pointed out that 38 percent are held by “households,” 32 percent by mutual funds and the rest by insurance companies, banks and only 7 percent by “other.”

The majority of municipal bonds traditionally have been used to finance long-life capital projects, such as public utilities, roads, bridges, schools and other essential government structures.

However in recent years, bonds have been used for other things and by agencies other than state and local governments. That raises questions about their tax exempt status.

Some of the other things have lead to criminal charges and prompted new and proposed laws and regulations.


SEC Report Reveals House of Bonds Turned Into Den of Thieves

Thursday, August 2nd, 2012

Frank Keegan

The word “taxpayer” appears only 14 times in 165 pages of the Securities and Exchange Commission’s Report on the Municipal Securities Market released Tuesday. Only two of those mentions refer to looking out for our interests.

In her statement introducing the report, SEC Chairman Mary Schapiro made it clear that bond buyers are primary beneficiaries of the recommendations: “While we have put in place measures to help investors make more knowledgeable decisions about municipal securities, we could do more for investors with statutory authority to improve disclosure and muni market practices.”

She initiated the study and hearings around the country two years ago, after egregious scams revealed systemic and pervasive failure of current regulations and standards for municipal bonds and related derivatives.

About 75 percent of the estimated $3.7 trillion in municipal bonds are owned by individuals, 50 percent directly and another 25 percent through mutual and money market funds, according to SEC. The rest are held by institutional investors.

According to Schapiro’s study, “The mission of the SEC is to protect investors — including investors in municipal securities — maintain fair, orderly, and efficient markets, and facilitate capital formation.”

The SEC mission does not explicitly include protecting taxpayers from unscrupulous politicians, bureaucrats, bond dealers, financial advisers, consultants or any other predators who have turned a solid house of prudent public finance into a den of thieves.

From the mass of regulatory and legislative reforms proposed in this report, it looks as if that house is so rotten at the foundation it could fall any time.


Cities and States Bleed Out While Politicians Dither

Wednesday, July 18th, 2012

State Budget Solutions

Frank Keegan

If our states and municipalities were trauma victims, they would be bleeding out while doctors argued about injuries. Even as financial gurus Paul Volcker and Richard Ravitch studied the municipal and state fiscal crises for a report released this week, public pension debt alone grew to an untreatable $4.6 trillion, according to analysis released Wednesday by economist Andrew Biggs for State Budget Solutions.

Faced with a patient suffering equivalent life-threatening injuries, doctors would order radical surgery, stat. Stop the bleeding. Operate. Amputate. Suture.

But politicians are not doctors — in fact, politicians inflicted the wounds — so they continue palliative measures hiding self-indulgent deception, denial and outright corruption that put America’s economy at risk.

In Report of the State Budget Crisis Task Force, Volcker and Ravitch rehash old data proving state governments were fiscally injured even before the Great Recession, which merely revealed the depth and severity of their trauma.

They say clearly in the introduction: “… the magnitude of the problem is great and extends beyond the impact of the financial crisis and the lingering recession. The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened.”

Of course, they don’t include government obligations to bleeding taxpayers among the priorities for care.

Their study examined six states, but the conclusions apply one degree or another to every state, county, city, town and township in America.

To grasp how fast we’re hemorrhaging, just consider public pensions. The report cites unfunded liabilities at “… approximately a trillion dollars according to their actuaries and by as much as $3 trillion or more if more conservative investment assumptions are used.”

Biggs used the latest comprehensive pension data available and, based on those “conservative” accounting standards universally accepted by economists, calculated the pension debt at $4.6 trillion.

That is an increase of almost 50 percent to as much as 300 percent to in less than two years.

Unfortunately, it is the good news. The bad news is pension fund investments remained flat through the first quarter of this year as liabilities increase, mushrooming to cavitate the deeper wound.

The report outlines an array of other traumas first indicated in a Government Accountability Office report released two years ago, based on pre-recession data, concluding “state and local governments must steadily decline.”

GAO said then, “… closing the fiscal gap over the next 50 years would require action to be taken today and maintained for each and every year going forward equivalent to a 12.3 percent reduction in state and local government current expenditures. Closing the fiscal gap through revenue increases would require action of a similar magnitude ….”

GAO’s update released in April calculated the required cut or tax increases — every year for 50 years — was up to 12.7 percent, doubling taxes every five years or so to consume the entire U.S. economy in 50 years.

Don’t fall for the declining revenue myth Volcker and Ravitch cite in their Task Force introduction, claiming, “State tax revenues are recovering slowly and remain below their pre-crisis levels.”

According to the April GAO update including state and local taxes, “…from the second quarter of 2009 to the third quarter of 2011, total tax receipts increased nearly 11 percent, returning to prerecession levels of 2007.”

The bottom line for both reports is that no matter how much state and local politicians tax us, it never will be enough.

Even though 43 states and many municipalities recently imposed limited pension reforms on future benefits, those do little or nothing to reduce the increasing unfunded liability. Taxpayers will have to wait decades before those reforms produce significant relief.

Meanwhile, as a report issued this week by the Urban Institute points out: “When state pension plans are underfunded, someone eventually has to pay for the shortfall.”

Politicians are figuring out that citizens and businesses devastated by the Great Recession are not going to stand still for crippling tax increases that produce no government benefits or services of any kind.

So instead of working to heal, they just try to dope us up and push this onto future public workers and taxpayers, the way they have for decades.

The bigger problem is that pensions and the other five “major threats to fiscal sustainability” identified by the Task Force are not the only deep hidden wounds killing local and state governments.

Also hidden are billions of dollars in bond issues the Securities and Exchange Commission is trying to find.

And GAO has found at least $3 trillion in looted state catastrophe insurance funds.

Then there is more than $2 trillion in “critical infrastructure” beyond design life as of 2009 that the American Society of Civil Engineers says must be upgraded or replaced.

Almost three years ago, I estimated the total hidden long-term liabilities of state and local governments at $18 trillion: No matter how bad you think it is, it’s worse.

Since then, it has gotten even worse. It is getting worse every minute. Wounds to the body politic just keep on coming.

Our local and state governments are bleeding out. They need radical surgery, fast.

The Task Force report is drawing attention to realities others have been sounding alarms about for years.

Now is the time to act. Stat.

Frank Keegan is editor of a project of The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.

[email protected]



The People Shouldn’t Get to Vote on Public Pensions?

Thursday, June 21st, 2012

Frank Keegan

Reality is closing in on public pension liars and deniers trying to keep docile government workers and taxpayers in the dark about how catastrophic our public pension crisis actually is. Politicians’ false promises guarantee huge tax hikes and draconian government service cuts for decades, but one public pension expert thinks “Pension benefits are a component of compensation not best determined by the people.”

Keith Brainard, research director of the National Association of State Retirement Administrators, acknowledged Thursday in response to a question about recent California city voters cutting future benefits that “they have that right, but it’s far better for compensation to be determined by a smaller group … instead of the passions of the popular vote.”

His response came during a web presentation Thursday by NASRA and the Center for State and Local Government Excellence, an organization founded “to promote excellence in local and state governments so they can attract and retain talented public servants.

“Pension Reform Landscape” panelists ignored the question of who is going to make up more than $4 trillion — and growing fast — in pension shortages to focus on recent reforms that might, if markets never decline again, take pressure off taxpayers 30 years from now.

As for what to do about the crisis now, SLGE research vice president Joshua Franzel cited in the “Lessons Learned” presentation an idea pension reform advocates have been pushing for almost a decade: “Use quality data.”

Franzel said that includes, “periodic review by independent actuaries.”


COMMENTARY: Study Calls For ‘Drastic Reform’ of Public Pension Regulation

Friday, June 1st, 2012

By Frank Keegan | State Budget Solutions

Frank Keegan

Politicians are forcing public pensions to take more risks with taxpayer money and public workers’ retirements. Recent accounting reforms actually will make the crisis worse, according to a study just released by three economists. They call for “drastic reform.” Congress actually has the power to impose something drastic now.

According to “Pension Fund Asset Allocation and Liability Discount Rates: Camouflage and Reckless Risk Taking by U.S. Public Plans?” posted Tuesday on the Social Science Research Network, “current laws and regulations effectively exempt states and cities from behaving prudently in how they manage and disclose the financing of pension systems of their employees.”

The result is “… camouflaging and risky behavior of U.S. public pension plans seems driven by the conflict of interest between current and future stakeholders, and could result in significant costs to future workers and taxpayers.”

This report comes as a comprehensive study by the Center for Retirement Research calculates the 126 largest plans have only half the money they need to pay promised pension benefits.

The Funding of State and Local Pensions: 2011-2015” says that while official funding is 75 percent, and “… the funded ratio is projected to remain steady next year and then gradually improve as the market meltdown is phased out of the calculations …,” real numbers reveal how bad the pension crisis really is.

Calculating “… liabilities using the riskless rate, as advocated by most economists for reporting purposes … shows an aggregate funded ratio in 2011 of 50 percent.”

The difference between the 8 percent investment return pushed by politicians — so they don’t have to invest more taxpayer money in pensions now — and the “riskless” 4 percent return economists say is based on reality, is what pushes pension boards to bet on long shots.


COMMENTARY: This plan could save municipal, state workers’ pension checks

Friday, April 27th, 2012

State Budget Solutions

Hey, young public employees, what are you going to do when your pension checks bounce after you paid in for decades? That is what will happen in many — maybe all — states and municipalities sooner or later if they do not reform right now. If you want to see the future, just look at Illinois. One citizen there did, and came up with a real reform plan that might work.

Bill Zettler owns a small business that — like all others — must make sure income is more than expenses or it goes under and he and all the employees lose their jobs.

One of the biggest — and getting bigger — challenges he faces is paying taxes. They are expenses that create no new jobs and provide zero benefits to buy equipment, expand markets, develop resources or produce anything for him, employees or customers.

About 10 years ago when a neighbor told him he retired from teaching at 58 with $120,000 a year income, cost-of-living increases and health insurance, Zettler thought that was great and might be good for his employees.

He found out it would quickly bankrupt his company. “I got interested in it and became self-taught” on the complicated issue of retirement benefits. He would have to come up with millions of dollars to provide equivalent benefits to even a handful of employees.

He wondered how the state, counties, cities and towns could afford it. He found out they cannot and began to warn taxpayers and public workers of the inevitable crash.

On Monday he put forward a pension reform plan, “Taxpayer Costs Must Be Fixed, Not Unlimited,” that gives a detailed outline for stanching the pension hemorrhage in Illinois that other governments should study.

Basically, “it fixes taxpayer pension cost at 15 percent of payroll and all pension cost in excess of that must come out of departmental budgets and employee compensation costs.”

He writes that, “The very best private sector pension system costs about 14 percent of employee payroll …” so the plan still would be better than the best that taxpayers get.

“Currently state pension costs are about 33.3 percent of payroll (including interest on pension bonds) and change every year according to multiple assumptions used by state actuaries. Health care costs are about 20 percent of payroll,” he wrote.


COMMENTARY: Fed screams softly in warning about public pension crisis

Wednesday, April 18th, 2012

By Frank Keegan | State Budget Solutions

This is what it sounds like when the Federal Reserve Bank screams: “Much has been written about the various headwinds restraining economic activity over the near term. However, our economy also has other headwinds to confront over the medium- to-longer-term. … the finances of some state and local governments are also under stress and in need of serious adjustments.”  – Federal Reserve Bank of Cleveland President Sandra Pianalto

Pianalto’s carefully worded column in the latest “Forefront” magazine refers to “Public Finances: Shining Light on a Dark Corner,” three reports on a year of research by the Cleveland and Atlanta Feds.

Forefront editors introduce the issue: “Many state and municipal budgets are in woeful shape. What concerns should we have about public pensions and municipal bond markets? … we explain where risks could be building and how reforms might help forestall their impact on the broader economy and financial system.”
Forestall? How about prevent their impact on the broader economy and financial system?
No such luck, citizens. “Public Pensions Under Stress” reports, “It now seems inevitable that sacrifices will be required from current employees, employers, and in some cases, retirees. …
“Without strong remedies, at what point would pension plans run out of money, leaving financially impaired state and local governments on the hook? That question is not quite settled.”
Actually, asking when they will run out of money instead of if they will run out of money confirms that politicians and pension fund managers have been denying reality for years.
Even under the most optimistic — even delusional — assumptions about fund investments, the article cites a study showing virtually all plans eventually “exhausted” even when using up annual contributions.
The study admits: “Other estimates paint a bleaker picture. Joshua Rauh, Northwestern University professor, …” who calculated exhaustion dates if pension plans use risk-free assumptions and do not cannibalize annual contributions, but said, “… a recent GAO study concludes that Rauh’s projected exhaustion dates are not a realistic estimate ….”
Actually, the Government Accountability Office said just the opposite.

COMMENTARY: Latest municipal, state pension data show crash continues

Thursday, March 29th, 2012

By Frank Keegan | State Budget Solutions

WASHINGTON, D.C. — Even as actuaries argued at their annual meeting here about the exact speed of our public pension crash, how to slow it with the least economic damage and who is going to take the hit, U.S. Census finished compiling numbers on the top 100 municipal and state plans. Those numbers add up to catastrophe.

Enrolled Actuaries wrapped up here Wednesday after three days of presentations, discussion and debate kicked off by an opening session titled “Pension Funding to Avoid Ruin.”

That was appropriate because Thursday morning Census released 2011 results for public pensions representing 89.4 percent of the national total. A quick look shows those funds fell another $1.4 trillion short of politicians’ promises.

Worse, in 2011 the trend from the 2008 financial crash turned downward again toward a certain collision with reality that will cost the United States at least $39 trillion — that’s TRILLION with a T — over the next three decades even if there never is another market crash and pension fund investments grow at rates never seen in history.

If any investments fall even a little short, this hidden extra tax must grow to more than $100 trillion, putting working Americans in debt to public employees forever.

No wonder the actuaries were nervous. They know the numbers, and they know the odds better than anybody.

Actuaries are true geniuses who calculate the incomprehensible for pension funds, insurance companies and anybody else who merely wants to foretell the future.

The only problem is, the future ain’t what it used to be.