November 21, 2010

California's Pension Nightmare

I use inflammatory titles such as the above because it's a great way to stir up readership for the blog. In general my hit count increases by a factor of about 50 for any post which concerns pensions in California. This is a highly nerve-wracking subject for those directly involved, that is, state pensioners, because this guy Joe Nation and the Stanford Institute for Economic Policy Research just won't shut up about it, much as the pension managers and local politicos wish they would. Last spring, for example, Nation & SIEPR came out with a report on CALPers, the teachers' fund and the UC system which demonstrated that they were unfunded, using reasonable rates of return over the foreseeable future, to the tune of about 1/2 trillion smackers. Now Stanford is back with a study of local (county, city and district) pension systems in California which demonstrates that these smaller funds are also on the short side by about $200 billion. Adding it all up, we're missing about $700 billion in order to guarantee payment of all those pension promises, those Constitutionally-mandated contractual rights, those good-as-gold annuities signed with the sacred blood of John C. Fremont and Ishi, the California Yahi who walked out of the wilderness in 1911 and into the waiting arms of the University of California Anthropology Department.

Serious stuff, in other words. A fiscal nightmare. I couldn't quite follow what was going on with the report as described in headline versions in the Marin Independent-Journal (Marin is one of the worst-funded local governments in the state), which were so unbelievable they seemed like something out of Mad Magazine, so I read the actual report from SIEPR, and I still don't quite get it. But the idea seems to be that the pension funds are in such bad shape that the only hope is to devote large amounts of existing budgets equal to huge fractions of existing employee payroll to cover the pension obligations. Using an 18-year "amortization" approach (that is, an attempt to pull even over an 18 year period), on average local pensions at the city, county and district level will have to devote about 50% of "covered payroll" in order to meet pension obligations.

I can't find a clear definition of "covered payroll," surprisingly enough, since that is the denominator for computing the fraction. I guess it means the payroll for current employees in the pension system, which must be a very large percentage of the government work force.
"The average for all systems
in the 18-year scenario is 50
percent, suggesting that one-half
of future covered payroll will
be required to meet unfunded
pension and OPEB obligations.
It is important to emphasize
that this estimated share of
covered payroll reflects only that
required to eliminate unfunded
obligations; contributions to
fund ongoing pension and OPEB
costs are additional."
Local governments generally have to throw in another 15 or 20% to meet the ongoing pension obligations. Anyway, it's a helluva mess. It explains a few things for me. As a lawyer, I use a lot of county facilities, and things have gotten a little sketchy lately, I've noted. Things just don't happen the way they used to. The clerk's office in Marin County, for example, used to allow access to case files on a more-or-less instantaneous basis; now you phone ahead and maybe a week later they'll call you back, but probably not. The file staff is only there four hours a day.

It's pretty clear what's going on. The county is firing current employees because they need the money to pay people who used to work there. San Rafael is, along with San Diego, one of the worst political entities in the state in terms of unfunded pension and health care liabilities. The SIEPR estimates that in the 18-year scenario, San Rafael will have to pay an amount equal to 82% of its "covered payroll" to meet unfunded liabilities. With slightly worse returns on investment, and higher inflation in health care (both factors more likely than not), San Rafael may achieve that exalted status where it owes more to former employees than it does to current employees, if there are any left.

Ah, the Bubble Years, first the Dot Com bonanza and then the housing boom. It raised such lofty expectations about what was fiscally possible in the coming era. The pension formulas were all based on that Golden Age. Now you're lucky if you can earn 2.5% on a 10-year Treasury bond, the benchmark for pension returns. Yet to work, the funds need to earn 6 or 8% per year, which is why the Illinois teacher's pension, for example, has gotten into writing credit default swaps in an effort to make up massive shortfalls. It worked so well for AIG. This is only one step away from playing the lottery as an investment strategy.

Naturally, the local government entities are not going to go in for anything as logical and orderly as "18 year amortization" plans. That's the stuff of policy institutes, not real life. These are politicians we're talking about, and the first line of defense will be denial (San Rafael is already denying like crazy). When the mathematics become overwhelming, they'll resort to blaming someone else, most likely a predecessor. And finally, of course, like pension systems all across the country, the locals will wait for a federal government bailout. I think this is one of the reasons, in fact, that the Federal Reserve has been manipulating the stock market with "POMO" operations, the shell game by which the Fed slips printed money to Primary Dealers with which to play the market. If the damn stock market will just keep going up (despite the overall weak economy), the pensions can make up some of their losses and delay the inevitable bailout.

In the end, however, none of this can work, any more than Social Security can work or the Fed's other Ponzi schemes. Having "globalized" our economy, we can't just print without limit or we risk a ruinous debasement of the currency. Odd, isn't it, how a former city hall janitor's future solvency depends on what the People's Bank of China thinks about our monetary policy? Byzantine complexity - such a good idea in human affairs!

Krugman & the Wal-Martians

I don't know if you've seen the email-forward shtick called "Wal-Martians," but they're making the rounds in various formats and iterations, the one here being a rather tame depiction of one of your fellow Americans shopping at America's biggest chain (and biggest employer!). Wal-Mart is not only a huge purveyor of imported Chinese junk, but also sells more groceries than Safeway, Ralph's or the A&P.

Where I live we have CostCo, Home Depot and other Big Box, but no Wal-Mart. It's an attitude thing, I think. It's as if the locals consider it the Line in the Sand: if Wal-Mart arrives, the game is up. Civilization as we've known it ends. Personally, I think that's a little delusional. All the other signs of the End Times are here in force; what difference does it make if we add Wal-Mart to the mix? Still, we must take our comforts in American culture where we can find them. There are no Wal-Marts within ten miles of my house - hooray for us! I realize, of course, that the prejudice works both ways. Wal-Mart knows that we're not really their target demographic. Why waste a big, ugly warehouse on us?

The lady in the picture is Wal-Mart's target demographic. Camo shorts, huge caboose, and all on patently obvious display. As I say, these pictures can be multiplied ad infinitum. Largely speaking (ahem), what these specimen slides reveal is rather pathetic and touching, in their way. For what they are actually portraying is a subcategory of Americans (increasing in number by the minute) who are victims of America's agribusiness-sponsored reliance on high fructose corn syrup as a major food stuff, combined with our atrocious system of public education (indeed, our public schools are main purveyors of junk food). 43 million Americans are on food stamps, and a lot of that subsidy goes to buying crap at Wal-Mart. Perhaps you have read about the legions of food stamp zombies who roam the aisles at Wal-Mart at midnight on the last day of the month, waiting for their credit for the next month to kick in.

So in an overall sense, what we have here are people who are unable to defend their alimentary canals from the propaganda and market dominance of ConAgra and Archer Daniels Midland. Diabetes, obesity and premature death are the direct results.

While considering these pictures of Earth-bound extraterrestrials, I was also thinking about that redoubtable economist at the New York Times, Paul Krugman, who has become, in his pugnacious way, the favorite intellectual piƱata in the blogosphere and beyond. Krugman takes his field, economics, pretty seriously, which is hilarious in its own way. He regards it as "science," and he wrinkles his rather low brow and pontificates to anyone who will listen to him on a very regular basis, including twice a week in his column, which is actually the same column published twice a week. These essays, which are atrociously written, have a "Groundhog Day" feel to them. Every Monday and Friday, Krugman writes that the stimulus should have been bigger. That's it. I don't know how his editors let him get away with it, but he won the Nobel Prize, so I guess they have to. At any rate, Krugman believes that if the Chinese would just stop manipulating their currency, and the Republicans would cooperate, the United States could borrow more money, pump it into the American economy, and we would recover promptly. Unemployment would be cut in half faster than you could say John Maynard Keynes.

Personally, I'm not so sure. That's where the Wal-Martians come in. Granted, one should not impute too much importance to anecdotal evidence and impressionistic conclusions. These are just pictures of fat people at Wal-Mart, after all. But you see, I can't help thinking that the "science" of economics posits or presupposes some sort of Ideal Actor for its neat formulations to work, some sturdy, moderately-well educated, healthy Person to carry out the actions implied in the formulae. You know? And such animals are in short supply in American society. Wal-Martians are not really Bell Curve outliers anymore. In Krugman's Princeton Ivory Tower, he is somewhat shielded from this reality, which the rest of us live with daily. To him, a statistical cohort is a statistical cohort: Standard Man.

Nope, that ain't right. I can see where Krugman and his ilk would rather not think about this reality. In the first place, how do you statistically "model" Wal-Martians? More important, however, is that Krugman is one of those "globalists" who infest the editorial pages of the New York Times. A free trade advocate, an "internationalist," a bigger-is-better apostle of worldwide integration. He doesn't allow himself to think too much about what those movements have done to the United States, the offshoring of all our productive jobs, the hollowing out of the American economy, the reduction of our business activity to "financialization" and multinational corporate headquarterism. Krugman goes in for a lot of jingoistic attacks on China (and now Germany), but these are red herrings resulting from his willful blindness about his own complicity in the destruction of America.

What did these clowns think would happen if we encouraged a system where Detroit line workers competed head to head with Chinese laborers willing to work for a couple of bucks a day? Globalization has been a disaster for the United States, along with refusal to enforce our anti-trust laws, so that we have now, as Roy Zimmerman sings, "One World, One Bank." 24% of the country's wealth is concentrated in 1% of the population, the average CEO makes over 500 times as much as whatever line workers are left. The elites make their huge salaries and bonuses playing globalist games; the rest of the country is moving to the Red Planet.

Sorry, Paul, but transfusing blood into the American cadaver isn't going to get the job done. That high unemployment is here to stay, along with printing money to pay bills. Keep up the Harry Potter good guy/bad guy tropes and memes, but if you want to see what's really happening, go buy a 50 pound package of frozen Nachos at your local Wal-Mart.