Blame the Fed for the Pension Crisis Because They Created It; They Engineered the System Were the 'Haves' are the Public Sector and the 'Have Nots' are the Private Sector

More Hiring Freezes for California State Workers

February 16, 2011

AP – In the latest departure from his predecessor's plans for trimming a multibillion-dollar budget gap, Gov. Jerry Brown has dropped a lawsuit over whether his office has the authority to pay minimum wage to state workers.

Just a week ago, Brown dropped former Gov. Arnold Schwarzenegger's plan to sell state buildings to raise $1.2 billion and then lease them back, calling the proposal "a gigantic loan with interest payment." The state is facing a $26.6 billion fiscal crisis.

The Democratic governor said Tuesday that his administration also filed a dismissal for the wage lawsuit, ending Schwarzenegger's battle to impose the federal minimum wage on state workers during budget impasses.

Back in 2008, Schwarzenegger, a Republican, imposed minimum wage while the state operated without a balanced budget. The state's controller, John Chiang, refused to comply, which prompted the administration to sue and Chiang to countersue.

According to Brown's dismissal, the state's aging payroll system was incapable of making the changes without "modifications at a potentially significant cost." The filing indicated the administration planned to work with Chiang on future state employee pay issues.

Chiang applauded the move, calling the lawsuit "a frivolous waste of hard-earned tax dollars that should be dedicated to fixing our schools, protecting our communities and rebuilding our infrastructure."

But Brown on Tuesday also took a page from Schwarzenegger's playbook by announcing a hiring freeze that, along with a cutback of state-issued cell phones, would save an estimated $363 million in the fiscal year that begins July 1. About $200 million of that would be in general fund savings, he said.

In 2008, Schwarzenegger had ordered a state hiring freeze and payroll cuts to conserve cash as California struggled with a $42 billion budget deficit. He imposed days off without pay, known as "furlough Fridays."

Brown's hiring freeze applies to vacant, seasonal, full-time and part-time positions. The exemptions are for positions critical to public safety, revenue collection and other core functions, such as those who respond to disasters or life-threatening situations.

He will continue to make senior-level appointments to form his new administration.

"We must do everything possible to save money and make government leaner and more efficient," he said in a statement.

According to the state controller's office, California had about 234,000 employees as of Jan. 31.

Brown has made a point of trimming back as the state faces its latest multibillion budget gap. He issued an executive order to halt new vehicle purchases by the state and directed vehicles not essential for state business to be turned in.

Schwarzenegger made similar efforts to reduce the state vehicle fleet.

Brown has also ordered half of the 96,000 cell phones issued to state bureaucrats to be turned in over an 18-month period.

Blame the Fed for the Pension Crisis Because They Created It

May 24, 2010

Seeking Alpha - A key player in the nation's unfolding pension debacle is rarely fingered--The Federal Reserve.

If you reckon state and local government have created their own guaranteed-to-go-bankrupt pension problem, you'd be half-right: the Federal Reserve's policies of the past two decades are the crumbling foundation beneath the nation's unsustainable pension plans.

Here's a precis of how the nation's local government pension plans were set to implode.

1. Public unions formed an unholy alliance with elected officials (in effect, an oligarchy) to establish politically untouchable protected fiefdoms.
   
   In a typical labor-management nexus, labor negotiates with capital for a slice of the profits from the enterprise. In local government, the unions lavishly funded the election campaigns of state and local politicos, who then awarded unions lavish pensions and other benefits. There was no "push-back" against union demand except elections, and the unions stupendous "investment" in buying politicos ensured elections were never a threat to the fiefdom's rising share of the tax swag.
   
   Here is an MSM (mainstream media) summary of the public-union/politico oligarchy: The Bankrupting of America: We have a ruinous collaboration of elected officials and unionized public workers.


2. As the stock market bubbled ever higher in the 1990s, managers of pension plans ratcheted up their expectations of future "permanent" growth, giving politicos the go-ahead to ramp up pension pay-outs.
   
   In essence, pension plans, which were once constructed on the long-term expectation of 4-5% returns on capital, now based future earnings and pay-outs on the stock market's "average return" of 8% annually.
   
   As any reasonable person might have foreseen, the bubblicious stock market of the 1990s was not a "new permanent plateau" but, in fact, a bubble which imploded. Real returns in the past decade have been literally half what was anticipated and, as a result, state and local governments are having to make up the difference with cash out of general fund tax receipts.

Going for broke in L.A.?

Currently, Riordan says, the city is struggling to meet its pension obligations, and that's assuming it will receive 8% annually on the money invested on retirees' behalf. In fact, the average return over the past decade has been just 4%.

As tax receipts plummet in the "slow-growth," jobless recession, then state and local governments are forced to gut their programs to fund the oligarchy / fiefdom's pension promises.

Pension issue balloons with soaring costs:

Los Angeles officials say Riordan's prediction is overstated. But pension costs are soaring to $800 million, tripling during the last decade, as Los Angeles faces years of projected budget deficits even with deep cuts in services and staff.

Since the pension pay-outs were based on plump stock market returns, the pension plan managers had no alternative but to gamble in the stock market on a massive scale. With "safe" bonds paying so little in the Fed's low-interest universe, the only way to get an 8% yield was to speculate in real estate or stocks. As the sharpy behind the three-card-monte card table could have told you, the pension fund sheep got sheared along with all the other marks:

The main driver of higher pension costs is the stock market crash. CalPERS gets about 75% of its revenue from investment earnings. Its portfolio peaked at $260 billion in 2007, fell to $160 billion last year and now is about $204 billion.

Now that the stock market is setting up for a long-term crash, CalPERS will be lucky to have $100 billion in its coffers in two years. And that won't be enough to fund the bloated promises made in the go-go 1990s:

A political issue is the benefit increases enacted a decade ago, when pension systems had surpluses during a strong economy. A major increase for state workers, SB400 in 1999, even included retirees.

A typical state worker can retire after 40 years of service with a pension equal to their final pay. The formula for the Highway Patrol, 3 percent of final pay for each year served at age 50, became a statewide trendsetter for police and firefighters.

In the usual gaming, favored by gutless politicos desperate to cling to their diminishing power to channel tax funds to their cronies and masters, elected officials are setting aside their pension fund contributions until next year, in the hopes that "growth" will magically save them next year. As this article explains, that is a vain hope without foundation in the real world:

Why economic growth isn't enough to fix budgets:

But under the laws now dominating government budgets, many expenditures essentially are or will be growing faster than both revenues and the rest of the economy. In fact, in many areas of the budget, automatic expenditure growth matches or outstrips revenue growth under almost any conceivable rate of economic growth.

Now, so much spending growth is built into permanent or mandatory programs that they essentially absorb much or all revenue growth. Meanwhile, we've also cut taxes, widening the gap between available revenues and growing spending levels.

Consider government retirement programs. Most are effectively "wage-indexed" insofar as a 10 percent higher growth rate of wages doesn't just raise taxes on those wages, it also raises the annual benefits of all future retirees by 10%. Meanwhile, in most retirement systems, employees stop working at fixed ages, even though for decades Americans have been living longer.

Today, so much of government spending is devoted to health and retirement programs that their growing costs tend to swamp gains we might achieve in holding down the ever-smaller portion of the budget devoted to discretionary spending. Still other programs add to the problem, such as tax subsidies for employee benefits, the cost of which grows automatically without any new legislation.

In other words, the entire system of state and local government is now based on the same 8% "permanent high growth" of the 1990s speculative market. Funding increases are wired in, regardless of how much tax revenues fall. That is a recipe for insolvency.

Now we get to the heart of the matter. Which institution engineered and enabled the heady stock market bubble of the 1990s that created the illusion of "permanent high returns" and growth of tax receipts? The Federal Reserve.

The Greenspan-era Federal Reserve's policy of low interest rates, abundant liquidity and lax oversight directly created the incentives and the wherewithal for malinvestment and speculation on a scale heretofore unknown. Under the phony guise of "boosting productivity and home ownership" with essentially free money and splendid opportunities for embezzlement, fraud and gaming of the system, the Fed studiously avoided any policy which might have offered some modest restraint on the asset bubbles it inflated.

As the dot-com era market foamed into an unmistakable bubble, wiser heads implored Greenspan to increase the margin requirement for borrowing funds to play the market--he steadfastly refused. Whatever barriers remained to rampant speculation were dismantled under the false banner of deregulation in the service of free enterprise.

Thus the Glass-Steagall divide between commercial and investment banking was effectively dismantled in 1980 (under President Carter) and the late 1990s (under President Clinton). (So much for the blame being placed solely on the evil Republican lackeys of the bankers-- the "liberal" Democrats were just as craven and slavish.)

Thanks to these long-standing Fed policies favoring exponential expansion of credit and low interest rates, pensions funds were forced into speculating in the stock market to "reach" for their required return on capital.

This certainly suited Wall Street and the deeply politicized leaders of the supposedly independent Federal Reserve, but it set in motion a set of policies, expectations and incentives which fatally undermined pension plans.

In a richly ironic playing out of unintended consequence, the Fed's "zero interest rate policy" (ZIRP) and endless creation of credit for speculation in asset bubbles will in effect bankrupt all the states and local governments which foolishly based their pension plans on 8% yield in a low-inflation environment.

But one last pernicious Fed-created self-destruct awaits pension managers scrambling for both safety and yield. As they pour into long-term Treasuries based on low inflation and low interest rates as far as the eye can see, the pension fund managers will find their remaining capital decimated as interest rates rise later this decade.

The Fed's policy of pushing zero interest rates and abundant credit has undermined not just pension plans and local government, but the entire U.S. economy. Asset bubbles and incentives for embezzlement, fraud and gaming the system are not productive. While Bernanke et al. issue ponderous promises that the "nascent recovery" is not just a house of cards flying apart in the rising wind of global volatility and malinvestment, high above his head the chickens are coming home to roost at the Fed.

A Hole They Dug for Themselves

The crisis in state budgets is not an accident, and it wasn't unforeseeable.

July 30, 2009

Reason Magazine - Everywhere you look, states are being crunched by fiscal emergencies that range from painful to excruciating. California, which has been paying bills with IOUs, is now preparing to close state parks and furlough state employees—which is what you have to do when your budget deficit is bigger than the entire budget of some states.

It's not alone.

"At least 39 states have imposed cuts that hurt vulnerable residents," trumpeted a recent report from the liberal Center on Budget and Policy Priorities. California, New York, and Delaware have approved income-tax increases, and Pennsylvania and Illinois are considering doing likewise.

We all know the reason for the squeeze: An unexpected, severe national recession has dried up revenues just when states need funds to help out-of-work citizens. That's true: You would expect the worst downturn in decades to have a negative effect on tax collections. But it's a long way from the whole truth.

The crisis in state budgets is not an accident, and it wasn't unforeseeable. For years, most states have spent like there's no tomorrow, and now tomorrow is here. They bring to mind the lament of Mickey Mantle, who said, "If I knew I was going to live this long, I'd have taken better care of myself."

If they had known the revenue flood wasn't a permanent fact of life, governors and legislators might have prepared for drought. Instead, like overstretched homeowners, they took on obligations they could meet only in the best-case scenario—which is not what has come to pass.

Over the last decade, state budgets have expanded rapidly. We have had good times and bad times, including a recession in 2001, but according to the National Association of State Budget Officers, this will be the first year since 1983 that total state outlays have not increased.

The days of wine and roses have been affordable due to a cascade of tax revenue. In state after state, the government's take has ballooned. Overall, the average person's state tax burden has risen by 42 percent since 1999—nearly 50 percent beyond what the state would have needed just to keep spending constant, with allowances for inflation.

Even low-tax states like Texas and Nevada have followed the same course. No one has been inclined to say, "Taxpayers don't need to send us more money. We've got plenty."

All that growth should have been enough to pay for essential programs and furnish ample reserves, allowing state governments to weather a downturn without major adjustments. But the states put a priority on burning through all the cash they could get. Last year, they spent about 77 percent more than they did 10 years before.

California illustrates the problem. Adam Summers of the libertarian Reason Foundation in Los Angeles has calculated that:

If it "had simply limited its spending increases to the 4.38 percent average annual increase in the state's consumer price index and population growth each years since fiscal year 1990-91, the state would be sitting on a $15 billion budget surplus right now."

Illinois is another problem child. The state's general fund appropriation is some two-thirds higher today than it would be if the state had just kept those outlays in line with inflation over the last two decades. That increase, as in California, is the difference between a gaping deficit and a comfortable surplus.

Then there is New York. Last fall, Democratic Gov. David Paterson called for an end to the "unsustainable growth in state spending" in recent years. Since the mid-90s, he noted, the state budget has doubled, outstripping the inflation rate by nearly twofold. And New York was not exactly notorious for its frugality 15 years ago.

Unlike the federal government, states can't simply run deficits indefinitely. For that reason, they have a powerful duty to pile up surpluses during fat years, which would allow them to make up the revenue that goes missing during lean years. But for many lawmakers, the future extends only to the next election. So any money they have, they feel an insatiable need to lavish on someone.

Politicians are happy to blame the recession for depriving citizens of programs they have come to expect. The recession didn't create the gap between state government commitments and state government resources. It only exposed it.

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