TOPICS IN POLITICAL ECONOMY

COSTA MESA: FACE OF THE FUTURE?

Severe financial stringency in government, business and nonprofits can concentrate minds and wills wonderfully.  It provides the incentive to take actions that people know make sense but have been too difficult politically to implement when revenues were ample.  That is what is happening at all levels of government today.

Perhaps the most drastic restructuring, short of declaring bankruptcy, is taking place in the relatively wealthy city of Costa Mesa, California.  Earlier this month, facing a large budget deficit, it sent termination notices to more than 200 of the city's 450 employees.  Truly necessary services will be maintained by outsourcing to both private firms and other municipalities.  For example, fire fighting services will be obtained from the County government, which feels it can cover the city with 15 fewer firefighters. 

One major reason for the budgetary bind: mandatory pension fund payments of $15 million this year and a likely $25 million annually within five years - in a budget of less than $100 million. The City Councilman who led the restructuring battle is quoted as saying, "we see the train wreck coming and the only questions are how bad it will be and how quickly we want to try to stop it."

Costa Mesa's elected politicians are facing the future squarely - not "kicking the can down the road" like so many other state and local governments and the federal government.  In an important sense, they are "re-inventing government" under the threat of bankruptcy, just like a few American steelmakers changed radically and successfully the way management and labor worked together to make steel when severely pressured by foreign competition. (We should remember that a host of them did disappear because they could not change fast enough.)  

Three cheers for Costa Mesa's leaders - and that handful of state governors who have taken up similar challenges. May they show the way for others. 

TALKING POINTS FOR WOULD-BE BUDGET CUTTERS

Here are some powerful arguments, in one form or another, that most serious budget cutting politicians are using these days.  Readers might pass some of them on to their own elected representatives at the federal, state or local level. 

Reducing government spending in 2011 and beyond has three primary objectives:

1. Reducing current and future budget deficits and the crippling tax burden they mandate for the younger generation. We should not burden young people with old folk's excessive consumption and mindless handouts to business enterprises. Cases in point: lucrative pensions in the public sector, ethanol subsidies, and free bus passes for seniors. 


2. Reduce the needless intrusion of legislation and bureaucrats into how we live and work in our communities.  Cases in point:  the mandated phase-out of incadescent light bulbs, the design of health care insurance, and the font size of highway signs.


3. Head off a future financial “melt down” when investors (foreign and domestic) refuse to buy government debt (Federal, state, and local) - or will do so only at crippling interest rates. Case in point: the punishing interest rates Greece, Ireland, and Portugal have to pay as a result of their financial meltdowns.

Implementation.  Two basic points here:

1. Any set of budget cuts must keep in mind the maxim "the budget is the skeleton of the state stripped bare of all its misleading ideology."  The budget-cutting exercise should establish a consensus of what core functions of government are essential, which are merely "nice to have," and which are egregious rip-offs of taxpayers.  Rip-off case in point: farmers being paid to grow nothing.


2. Pay no attention to the argument, "but my program only costs each taxpayers $1 a year."  There are lots of programs that cost "only" $150 million a year (the number of taxpayers, roughly).  In fact, the Catalog of Federal Domestic Assistance alone lists over 1,600 grant programs for you to apply to (and it excludes most foreign aid programs). If each of these averaged $150 million a year, we are starting to talk big money. 

Case in point: The Corporation for Public Broadcasting (CPB) has objected to President Obama's proposed $460 million advance appropriation for FY 2013  for itself, since it is "only" a 3.4% increase over the prior year. However, the House of Representatives has zeroed out the entire amount, presumably because they believe there is no convincing argument in the age of the internet that the federal government needs to be in the domestic broadcasting business - and it is time to get spending under control.

The best the CPB can do in its press releases is to refer to jobs "at risk" at the 1,300 or so public radio/TV stations around the country - and ask its affiliates to lobby on its behalf over the air (as my local station is doing).  Talk about the dangers of media concentration and Rupert Murdoch!

The struggle to bring government spending (and deficits) under control is similar to that waged by a few, lonely voices who decried the pell mell extension of mortgage credit to poorly-qualified home mortgage borrowers after 2005.  Let's hope the current effort has more success than than the earlier one.

 

PRESIDENT OBAMA AND THE COLA: PANDERER IN CHIEF

On October 5th, I commented - critically - on the legislation moving through Congress to award Social Security recipients a special $250 payment.  Due to a small projected decline in inflation for 2009, there will be no cost-of-living  (COLA) increase in Social Security monthly stipends for 2010.

Now President Obama has come out in favor of this $13-$14 billion post-Christmas present (financing unspecified by the White House), thus joining the pandering politicians in Congress at throwing money at what might be called "the grasping geezers." 

The original legislation which provided for COLAs said that upward adjustments in COLA would always be made (my social security check went up 5.8% this year), but if prices declined (as in 2009, for the first time since the COLA was instituted) downward adjustments were ruled out. Talk about a sweetheart deal.  But not sweet enough, apparently, especially for frequent voters. 

The White House says that seniors are among those "hardest hit by this recession."  In a class with automobile workers??  The  Presidential statement points to the decline in home values, but ignores the reality that, so long as seniors stay in their current residence, the fluctuation in home values has no impact on them - only their heirs. Yes, maybe their retirement savings accounts have fallen in value - but so have those of "juniors."  And juniors didn't get a 5.8% increase in Social Security stipends this year.

Now that the President has endorsed it, the $250 pandering payment is probably unstoppable in Congress, despite a growing sense that Federal spending is on a suicidal track. Only a resolute, far-sighted leader in the White House could have mustered the political courage to derail a craven, populist proposal.

But we don't have a lion in the White House; we have a free-spending fox. 

SOCIAL SECURITY COLAS: THE PANDERING POLITICIANS AT WORK

Here's a letter I have just sent one of my Senators.  The leaders of this classic example of the mob at work are Senator Sanders from Vermont and Congressman Pete DeFazio of Oregon.  The official title of the legislation is The Emergency Senior Citizens Relief Act (H.R. 3597 in the House, S. 1685 in the Senate). If you agree with the thoughts, send something similar to your Senators and Congressman - or, better yet, your newspaper.

Dear Senator Casey:

I understand you are a co-sponsor of legislation to provide a one-time payment of $250 to all Social Security recipients, since there will be no cost-of-living (COLA)  increase for them this year.  Your proposal would increase federal outlays by $14 billion.

I am one of those potential recipients. And I strongly oppose your proposal. The reason there is no COLA this year is because consumer prices have declined. When consumer prices increase, my Social Security check increases; but it doesn’t decrease if prices decline. That was the deal when Congress wrote COLA into the Social Security System in 1975.  A lot of working people would say that’s pretty good deal – if they’re still working.

You argue that medical costs keep going up.  But most Social Security recipients are on Medicare, which insulates them from the bulk of such cost increases.

My bus fare hasn’t gone up in years: I pay nothing, thanks to my senior pass.

You say you will make up the $14 billion in handouts by increasing Social Security taxes on the working rich.  Sounds very familiar: robbing Peter at work to pay Paul at home.

Seniors have been insulated from economic hardship more than any other age group during this economic recession.

Senator, stop pandering to us.

  Sincerely,

    James B. Burnham

PENSIONS AND POLITICS

    Pension promises get people into trouble.  But it makes a great deal of difference if we are talking about private versus state and municipal government pensions. (I save discussion of the federal government’s Social Security program for another day.)

    When defined benefit pensions are promised by publicly-held corporations, those commitments are scrutinized by auditors, stock market analysts, the government’s Pension Benefit Guarantee Corporation and the Securities and Exchange Commission, among others. If it looks like a company is going to be unable to meet its commitments, the media gets excited. Politicians start to accuse corporate chieftains of either incompetence or putting the interests of shareholders ahead of the rank and file. Not infrequently, heads roll and bankruptcy beckons. But eventually a solution which roughly apportions pain among the directly interested parties – shareholders, retirees, and taxpayers – is usually found.

    Not so for municipal government pensions. The release this past August of the Kroll report on San Diego’s pension fund debacle, which has left the City with a $2 billion hole in its finances, makes this abundantly clear.  As Arthur Levitt, Jr., former SEC Chairman and overseer of the independent audit put it in the Los Angeles Times,

The evidence demonstrates not mere negligence, but deliberate disregard for the law, disregard for fiduciary responsibility and disregard for the financial welfare of the city's residents over an extended period of time.

    The central problem with state and municipal government pensions is that powerful employee unions are frequently instrumental in electing the politicians. There has been a growing (and understandable) tendency for unions and elected officials to agree to substitute pension promises for outright wage and salary increases in many bargaining situations.  Whereas 100% of the wage and salary increases would show up immediately in operating budgets (and thus require a tax increase or expenditure cuts elsewhere in the budget), pension promises typically require very small immediate outlays.  Instead, the estimated cost of the promise is buried in a financial footnote. The Reason Foundation's 2005 study demonstrates clearly the perverse incentives inherent in defined pension plans for public employees.

    Estimating the financial implication of a promised pension is a murky combination of art, science and assumptions.  To keep required outlays for funding future pensions as low as possible, elected officials frequently use highly optimistic assumptions about future returns on pension fund investments, or longevity assumptions about their retirees.

    When the reality of a large gap between the value of promises to retirees and assets on hand to meet those promises looms too large to ignore (as was the case in San Diego), elected officials sometimes decide, with great encouragement from investment bankers, to “double up.” They do this by issuing long term general obligation bonds, putting the cash into the pension fund and investing the proceeds in the stock, corporate bond and “alternative asset” markets. So funding pensions now becomes a bet between the cost of the bonds (which do not enjoy tax-exempt interest rates) and the return on the invested cash. (If you want to know about pension bonds, see my article for the Government Finance Officers Association.)

    The poster child for bad bets on pension funding is my local government – the City of Pittsburgh. In the late 1990s the city issued roughly $275 million in pension bonds and tossed the cash into a woefully underfunded pension plan.  Interest payments on the bonds to date have been roughly $144 million.  Total returns on investments made with that cash are on the order of $98 million, meaning City of Pittsburgh taxpayers are about $46 million worse off for having their elected politicians play the stockmarket with borrowed money.

    There is more bad news to come. Starting in 2007, financial statements of state and municipal governments will have to reflect the cost of promised retiree health benefits (corporations have had to do this for the past ten years or so). The yawning gap between politicians’ promises and government’s ability to meet them will widen precipitously for communities  like Pittsburgh. The temptation to “double up” with pension bonds will be even stronger, particulary where they haven't been tried before.

     Isn’t is about time for political leaders to level with employees, retirees and taxpayers, and start the painful process of designing better ways to save for retirement that the private sector has been engaged in for the past decade?