State and Municipal Pensions are Busting Budgets even in tiny Rhode Island

Posted by PITHOCRATES - November 13th, 2011

Week in Review

If you thought states and municipalities had budget problems, here’s something to make you feel worse.  As bad as their budgets are, they’re even worse.  Because they’re cooking the books (see Rhode Island Pension Problem Larger Than Reported posted on Mercatus Center at George Mason University).

  • Rhode Island estimates the unfunded liability for municipal and state plans is $9.3 billion, while Mercatus researchers calculate it as closer to $18 billion.
  • How did they reach this number? The researchers argue that the huge difference in estimates is based on inaccurate accounting. In fact, financial markets and economists would calculate pension liabilities based on their relative risk. Currently, Rhode Island calculates their liabilities based on the expected return on investment of the pension assets.
  • Using the researchers’ revenue index, 17 of the 39 Rhode Island municipal governments are in the danger zone—their unfunded pension liabilities exceed revenues.

Keep this in mind whenever there is a millage to prevent the layoff of cops and firefighters.

The problem is that cops and firefighters aren’t too expensive.  It’s the pensions of the public sector that is making these municipalities go broke.  But it’s hard to get people to whistle a happy tune and pay more taxes so others can retire comfortably.  So they always put the fear of God into the voters.  “There will be a cop-less anarchy unless you approve this millage.  And in the bloodbath that will follow there will be no paramedics to save you.  Unless you approve this millage.”

A little more appealing than “pay more in taxes so Bob can have a better retirement that you.”

Just look at Rhode Island.  Smallest state in the union.  And they have an unfunded liability of $18 billion.  Assuming they have a larger funded part of their pension plans, the smallest state in the union has one helluva public sector pension obligation.  Which just goes to tell you that the public sector has grown too bloated.  And needs to be made less bloated.

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FUNDAMENTAL TRUTH #74: “When negotiating it’s important to understand the ‘time value’ of promises. The longer out in time something is promised the less likely that promise will be kept.” -Old Pithy

Posted by PITHOCRATES - July 12th, 2011

A Swath of Broken Promises

Mothers aren’t stupid.  They won’t let their kids have dessert until they eat their peas.  They don’t fall for the old, “I promise to eat my peas after I eat my dessert” line because she knows it won’t happen.  For the same reason kids have to clean their rooms first before they go out and play.  Mothers are on to their kids.  These sneaky little bastards will say or promise anything to get what they want now with no intention of keeping that promise later.  Especially when that promise is due light years into the future.  Like an hour or more later.

For kids are a lot like men.  Who also have a singular focus.  They want only one thing while dating.  And will say and promise anything to get that one thing.  They’ll say, “I love you.”  They’ll promise that their love will be everlasting.  That he will never leave her.  That he’ll be true and faithful.  Never love another.  Never could love another.  For their love is special.  Unique.  And greater than all other loves.  Combined.  If only she will just give it up to prove her love to him.  Which she eventually does, unable to resist his charms.  Or maybe it was all that binge drinking.  Next thing she knows she’s pregnant.  She bumps into her best friend at the clinic where their doctors coincidentally diagnose them with the same venereal disease.  And spends the next 18 years as a single mother chasing down that deadbeat dad for child support.

Of course, not all romances turn out this way.  Some men and women marry and live happily ever after.  Despite leaving a swath of broken promises in their wake.  A promise to watch sports with him on Sunday afternoons.  And a promise to keep going out dancing after getting married.  Even promising to take ballroom dancing lessons.  A promise to have sex as often as he wants to.  And a promise that sex won’t be just the 10 minutes between Sports Center and sleep.  A promise that her mother wouldn’t spend much time in their house filling her head with new ways to criticize him.  And a promise to pee in the toilet.  Not around it.  And to always leave with the seat down.

The Time Value of Promises

A lot of us make these promises with no intentions to break them.  We just do.  Because we wanted something at the time of the promise.  And making the promise just proved expedient.  But sometimes we make promises we have no intention of keeping.  Or know full well that in time we forget a lot of promises.  Such as manufacturers using mail-in rebates to entice us to buy their products. 

Manufacturers could give you a coupon for the savings.  But everyone gets their discount at the register with a coupon.  Which means everyone buying because of that coupon will get those savings.  But a rebate requires a lot of work after the purchase.  Bar codes to cut off.  Envelopes to address.  Stamps to buy.  It takes time.  At a most inopportune time.  You just want to play with your new toy.  Not do paperwork.  So people procrastinate.  And a lot of them forget about that rebate.  As the promise of those savings get pushed out further in time more people will forget.  And not get those savings.  So only a small percentage of people who buy because of a rebate get their savings.  Unlike the coupon user.

Businesses understand the time value of promises.  A future promise (a rebate) is less costly than present promise (a coupon).  It’s similar for compensation.  During difficult economic times employers prefer bonuses over raises.  They’ll promise a raise later when things get better.  But things may not get better.  You may not get that raise.  And if you don’t get another bonus next year you’ll be taking a pay cut.  That’s why unions are dead set against merit pay or profit sharing in lieu of pay raises.  Pay raises are forever.  Profit sharing is not.  Especially if they do some creating accounting that limits their income taxes.  Which ‘inadvertently’ reduces your share of the profits.  Lots of things happen before money becomes profits.  A lot of bookkeeping.  And unless you’re a CPA you haven’t a clue what it all means.  With gross, though, it’s a different story.  What you see is what you get.  That’s why the big movie stars get a share of the gross.  There’s little time to devalue that promise.  If ticket sales are good the movie star’s pay is good.  Simple.

Broken Promises are just a Diplomacy Tool for the Dictator

And then there are those who promise only to buy time.  Or improve their position.  These people have no intention of keeping their promises.  Like dictators.  Hitler promised Chamberlain that the Sudetenland was his last territorial ambition.  So Chamberlain gave him part of Czechoslovakia.   To get “peace in our time.”  Hitler then took the rest.  To protect his right flank for a future territorial ambition.  East Prussia.  Across the Danzig corridor.  But before he attacked Poland he needed to make a deal to protect the back door.

There were few things Hitler hated as much as Jews.  Except, perhaps, Russians.  And Soviet Communism.  The NaziCommunist hatred went back years.  There were political rivals in Germany between the wars, each vying for power.  Hitler finally put an end to the rivalry when he torched the Reichstag and blamed it on the communists.  But before he attacked Poland he needed to make nice-nice with Joseph Stalin.  Which he did.  They made a non-aggression pact.  Agreed they would not attack each other.  Then they conquered Poland (the Nazis from the west and the Soviets from the east).  And partitioned it between them. 

That promise with the Soviets gave Hitler time to invade Denmark & Norway.  And France.  And after obtaining Atlantic ports for his U-boats, airbases within striking distance of the UK and securing his western border, he was ready to do what he always wanted to do.  Attack the Soviet Union.  Break that promise with Stalin.  For he no longer needed him.  And Stalin had something he wanted.  Lebensraum.  Living space.  With lots of grain.  And oil.  Everything an empire needs.  So through a series of broken promises he was going to expand Germany at the expense of the Soviet Union.  Using the time value of promises to his advantage.  Getting what he needed when he needed it.  And making his enemies wait a long time to get what they wanted.  Peace.  Which proved to be a promise not worth holding on to.

A lot of things happen between Tax Hikes and the Spending Cuts

Politicians make a lot of promises, too.  Most of which they break.  For they are professional liars.  But in a way they are worse than Hitler.  Hitler raped and pillaged other countries.  Politicians rape and pillage their own constituents.  They promise the moon to get their vote knowing full well they can deliver little of what they promised.   And then to add insult to injury, their policies just impoverish their constituents.  With higher taxes.  Or costly regulations that increase consumer costs.

But politician on politician lying is some of the worse lying out there.  And the king of all liars is the liberal Democrat.  Who want to tax and spend and change the way you live your life.  Things that don’t help you win elections.  So they lie during elections.  And lie during political debates.  Because being tax and spend liberals, they need high tax rates.  And fat benefits programs.  In fact, their favorite tactic is to deliver the benefits first and then try to find a way to pay for it.  Usually by browbeating Republicans to be ‘responsible’ and increase taxes.  When they resist the liberals belittle them and say they want to kill old people and starve children.  Of course, spending money they didn’t have in the first place is not really the model of responsibility.  But that’s different.  I don’t know how it is.  But in the liberal Democrat world it just is.

And then the negotiations begin.  Yes, everyone agrees the government needs to balance its books.  That they can’t spend money they don’t have.  The Democrats want to fix that problem by increasing taxes.  Whereas the Republicans want to cut spending.  Then the Democrats, being the devious little bastards they are, fall back on an old favorite.  They use the time value of promises to screw Republicans.  They offer spending cuts in exchange for tax hikes.  Often in 2-1 or a 3-1 ratio.  For every new dollar in taxes they’ll make $3 in spending cuts.  But these are a special kind of tax cuts.  They call them ‘future’ tax cuts.  And they happen at some mystical time far out in the future.  Where all responsible government apparently lies. 

Because they often make these deals during a crisis, they need to implement the tax hikes right away so the government can mail those Social Security checks.  And pay their soldiers.  But with the people suffering from the bad economy, they’ll ease the spending cuts in later to ease their pain.  Because they ‘care’ about the people.  That’s why they are always ‘future’ tax cuts.  Of course, a lot of things happen between those tax hikes and future spending cuts.  They write new budgets every year.  And there are Congressional elections every 2 years.  And a lot of the time the new Congress people just write those spending cuts out of the budget.  Especially if the Democrats pick up a lot of seats.  Which is why Democrats are quick to offer this deal.  Because they get what they want when they want.  And a lot of time to renege on those spending cuts promises.

It’s amazing how often the Republicans fall for this trick.  Then again, poor old Charlie Brown will forever try to kick that football.  Unwisely trusting Lucy, his devious sister.  Who no doubt will grow up one day to become a registered Democrat.

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FUNDAMENTAL TRUTH #28: “Politicians love failure because no one ever asked government to fix something that was working.” -Old Pithy

Posted by PITHOCRATES - August 24th, 2010

GOVERNMENT FIXES PROBLEMS.  Or so they say.  And the people think.  When something isn’t right in the country, the people demand that government do something about it.  And politicians are more than happy to oblige.  It strokes their egos.  Increases their budgets.  Their staffs.  And they get to do what they like best.  Tell others what to do.  Well, that, and spend money.

Politicians are happiest when government grows.  Because when it does, there’s more stuff to do.  More people to manage.  Bigger offices to move into.  More people to hire.  And the more they hire, the more people are indebted to them.  Who love them.  Respect them.  Are in awe of them.  Which inflates their egos even more.  As if that was even possible.  And, of course, there’s more money to spend. 

As government grows, so does their job security.  I mean, there may come the day that the good people may not reelect them.  As devastating as that may be, they can be comforted in the fact that they will leave Washington far richer than they were upon entering Washington.  And there’ll always be a place for them in an ever expanding government.  A cabinet position.  An agency position.  Or, perhaps, they’ll be named a czar.  Of something.  In charge of a policy issue.  Away from the oversight powers of Congress.  Anything is possible.  As long as government grows.  And there is more money to spend.

And just why is that?  Why does government continue to grow?  Simple.  They don’t fix problems.  They’re always ‘fixing’ problems.  But they’re never fixed.  They’re always a work in progress.  Because a fixed problem doesn’t require their services any longer.

DON’T THINK SO?  Suppose the government gives you a federal job.  An important one.  You’re in charge of the Office of Getting People to Happily Accept the Banning of Smoking in Public Places.  They give you a big office.  A staff.  A budget.  And a title.  You feel pretty good.  Important.  You diligently go about your work.  You take polls.  You analyze data.  You place public service announcements.  You intensify your polling before and after local laws are implemented banning smoking in public places. 

You analyze your data.  You correlate satisfaction with dissatisfaction.  Pacification with irritability.  Your numbers look good.  As more and more localities ban smoking from most public spaces the more your numbers show that the satisfaction/dissatisfaction ratio is trending favorably.  The trending is flatter with pacification/irritability but the trending is still favorable.  You conclude that these new laws come in, on average, at 9.875.  And that’s very good on the scale you created to measure overall effectiveness and acceptance of new laws to influence social behavior.   You happily report your findings to your superior.

“What are you,” your superior asks, “stupid?  Trying to put yourself out of a job?  Are you trying to cut my budget?  Because that’s exactly what’s going to happen if you turn in a report like this.  Now here’s what you’re going to do.  You’re going to report that your findings indicate some improvements in some select demographics.  But overall there is still much work to do.  Then write up a proposal for additional work required and throw in a budget that increases your current budget by 12%.  For starters.  Then I’ll critique your findings and find your funding request insufficient because of a mistake you made in your analysis.  Have it on my desk by the end of the week.”

Sound ridiculous?  That’s probably because it is.  And probably all too true.  I mean, how many federal programs do politicians shut down because they were successful in achieving their objective?  I think few.  If any.  Because no one wants to put themselves out of a job.  Especially a federal job.  Because there’s no job like a federal job.  At least, not in the private sector.

IN THE PRIVATE sector, your work has to have value.  When people are voluntarily paying for goods or services, you can’t have fat payrolls and fat budgets to produce goods and services no one wants.  You can only do that when government pays.  And by government I mean you and me.  With our taxes.  Which we have little choice but to pay.  For we are forced to under penalty of law.  Which can be pretty persuasive in making you pay for stuff you don’t want.  For we wouldn’t normally give away our hard-earned pay for the ridiculous wastes of resources known as government work.  To make the lives of federal workers better than ours.  And speaking of federal workers, what’s that joke?  Question:  What is federal work?  Answer:  Work for the unemployable.  There’s a lot of truth in that.  For a lot of these people couldn’t make it in the private sector.  And if they had to, they would only do so with the utmost bitter resentment.  They’d resent the longer hours.  The huge cut in pay.  The huge cut in benefits.  And the accountability.

You see, in the private sector, failure has consequences.  People get fired.  If a business is losing money because of silly projects they’re pursuing, the board of directors will fire the corporate officers.  If it’s a small business, the owner may lose his or her life savings.  And their house (which is often mortgaged up to the hilt to support their business).  There will be change after failure.  And it will be painful to many.  Unfeeling.  Cold.  But necessary.  But it’s different in government. 

When politicians fail, they reward themselves.  When their policies fail, the politicians simply say they need more time to make those policies work.  And more money.  That’s always the answer.  And they get away with it.  More money.  Keep throwing money at the problem.  No matter what a train wreck their programs turn out to be.  Or what the unintended consequences are.

POLITICIANS LIKE TO tinker.  Often in things they shouldn’t.  Because when they do, bad things often happen.  Those unintended consequences.  For when it comes down to it, they’re not very smart.  They could have graduated from their Ivy League schools at the top of their class, but they often know squat about the things they’re meddling in.  Most of them are lawyers.  And what does a lawyer know about economics?  Foreign policy?  National security?  Bupkis.  But it never stops them. 

And it doesn’t even matter.  Because their motives were honorable.  They acted with the best of intentions.  At least, that’s what they say.  As do their supporters.  And when everything goes to hell in a handbasket, they don’t mind.  Just more problems for government to fix.  More programs.  More staff.  And more money to spend.

Of course, we ultimately pay the price for their actions.  Whether it’s recession, depression or a more dangerous world to live in.  Which is often the case.  More times than not.

EVER WONDER WHY everything is a crisis?  Because a crisis needs urgent action.  By politicians in Washington.  And that urgent action is typically vast new government programs with an exploding federal bureaucracy.  Along with explosive federal spending.  And because it’s a crisis, there’s no time to lose.  If we don’t take immediate action the consequences could be dire.  There’s no time for debate.  For opposition.  To read a bill.  No.  We have to act and we have to act NOW.  Before this crisis gets any worse.

And when things do get worse after we take all that urgent action, you know what they’ll say?  That they were wrong?  Yeah, right.  In some fantasy world maybe.  No.  Instead, they’ll say just imagine how bad things would have been if they didn’t act like they did.  That we should be thankful things are only as bad as they are, for they could have been a whole lot worse if government didn’t act.  Why, they’ll be patting themselves on the back.  While you suffer more.

Hard to fight that logic.  I mean, they can say anything.  If their action takes unemployment to record levels, they can say unemployment would have been twice as high if they didn’t do what they did.  Twice as high would be worse.  But how do they know it would have been twice as high?  How can they prove it?  Well, they don’t have to.  Because you can’t disprove it.  And those who gamble know that a tie goes to the house.  So they’re right.  Because you can’t prove otherwise.  So they act accordingly.  And their supporters go along.  And the answer to the new problems that are worse than the original problems?  You guessed it.  More of the same.  More government programs.  More government spending.  At least, that’s what the historical record shows.

POLITICIANS LOVE FAILURE.  They thrive on it.  It gives them life.  Success, on the other hand, destroys them.  Removes their raison d’être.  Their reason for being.  A prospering nation, after all, doesn’t need government to fix anything.  And that’s no good.  Especially if that’s the business you’re in.  Fixing things.  Fixers need to fix.  But it needs to remain a work in progress.  So there’s still fixing to do.  Always.  And forever.   

And they’ll never let a good crisis go to waste.

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