Fundmastery Blog

Kurt Brouwer October 9th, 2009

We frequently are told by politicians that the only solution to our budget deficits at the Federal, state and local levels is to raise taxes.  I might buy this argument if those same politicians had made efforts to cut government spending that is not needed or is wasteful.  Unfortunately, those types of efforts get short shrift except when it is time to campaign.

From the Foundry blog, here are 10 examples of eggregious government waste:

50 Examples of Government Waste. (Foundry, October 6, 2009, Brian A. Riedl)

…Reducing wasteful spending is not easy. Even the most useless programs are passionately supported by the armies of recipients, administrators, and lobbyists that benefit from their existence. Identifying inefficiencies and abuses is much easier than devising a system to fix them. Many lawmakers focus more on bringing home earmarks than on performing the less exciting task of government oversight. Exasperated taxpayers see the cost of government rise with no end in sight.

Of course, eliminating waste cannot balance the budget. Lawmakers must also rein in spending by reforming Social Security and Medicare and by eliminating government activities that are no longer affordable. Yet government waste is the low-hanging fruit that lawmakers must clean up in order to build credibility with the public for larger reforms…

I have not cherrypicked these items, just took the first 10 from the Foundry’s list and added three bonus items from further down the list: [emphasis in the original]:

1. The federal government made at least $72 billion in improper payments in 2008.[1]

Okey dokey.  Has anyone thought of asking for these improper payments back?

2. Washington spends $92 billion on corporate welfare (excluding TARP) versus $71 billion on homeland security.[2]

We should be able to get to bipartisan agreement on this one.  Some don’t like waste, some don’t like welfare and some don’t like corporations.  It’s a match made in heaven.

3. Washington spends $25 billion annually maintaining unused or vacant federal properties.[3]

D’uh…Why not sell these properties?  We’d save $25 billion a year in maintenance savings alone plus the value of the properties, which are undoubtedly worth something.

4. Government auditors spent the past five years examining all federal programs and found that 22 percent of them–costing taxpayers a total of $123 billion annually–fail to show any positive impact on the populations they serve.[4]

Unfortunately, lawmakers do not seem to feel that positive impact from government spending is critical.  Witness the Cash for Clunkers program and many others.  Nonetheless, this is definitely low hanging fruit.  But still, $123 billion for programs that show no positive impact?

5. The Congressional Budget Office published a “Budget Options” series identifying more than $100 billion in potential spending cuts.[5]

This report from the CBO contains hundreds of recommendations to cut spending.  Again, we’re talking $100 billion per year.  $100 billion here and $100 billion there.  After a while, it adds up to real money.

6. Examples from multiple Government Accountability Office (GAO) reports of wasteful duplication include 342 economic development programs; 130 programs serving the disabled; 130 programs serving at-risk youth; 90 early childhood development programs; 75 programs funding international education, cultural, and training exchange activities; and 72 safe water programs.[6]

Do we really need 342 Federal economic development programs?

7. Washington will spend $2.6 million training Chinese prostitutes to drink more responsibly on the job.[7]

We previously said all we had to say on this one here: In this era of budgetary constraint and fiscal rectitude, we are pleased to report that our political leaders and bureaucratic chieftains have really gotten the message.  Otherwise, they would fund all kinds of crazy things.  Oops.

U.S. Will Pay $2.6 Million to Train Chinese Prostitutes to Drink Responsibly on the Job (CNS News, May 12, 2009, Edwin Mora)

The National Institute of Alcohol Abuse and Alcoholism (NIAA), a part of the National Institutes of Health (NIH), will pay $2.6 million in U.S. tax dollars to train Chinese prostitutes to drink responsibly on the job.

Dr. Xiaoming Li, the researcher conducting the program, is director of the Prevention Research Center at Wayne State University School of Medicine in Detroit.

The grant, made last November, refers to prostitutes as ”female sex workers”–or FSW–and their handlers as “gatekeepers.”

“Previous studies in Asia and Africa and our own data from FSWs [female sex workers] in China suggest that the social norms and institutional policy within commercial sex venues as well as agents overseeing the FSWs (i.e., the ‘gatekeepers’, defined as persons who manage the establishments and/or sex workers) are potentially of great importance in influencing alcohol use and sexual behavior among establishment-based FSWs,” says the NIH grant abstract submitted by Dr. Li…

This study certainly seems essential doesn’t it?  After all, what could be more important to people in Detroit, home of Wayne State University, than that Chinese prostitutes drink responsibly?  And, since this ’study’ is funded by the Federal government, it’s not as though we have any problems closer to home, right?

8. A GAO audit classified nearly half of all purchases on government credit cards as improper, fraudulent, or embezzled. Examples of taxpayer-funded purchases include gambling, mortgage payments, liquor, lingerie, iPods, Xboxes, jewelry, Internet dating services, and Hawaiian vacations. In one extraordinary example, the Postal Service spent $13,500 on one dinner at a Ruth’s Chris Steakhouse, including “over 200 appetizers and over $3,000 of alcohol, including more than 40 bottles of wine costing more than $50 each and brand-name liquor such as Courvoisier, Belvedere and Johnny Walker Gold.” The 81 guests consumed an average of $167 worth of food and drink apiece.[8]

It has been found over and over again that government employees abuse credit cards to the point where they really should be given out sparingly.  No doubt there are plenty of responsible bureaucrats who do not abuse cards, but nearly half of all purchases are either improper, fraudulent or embezzled?  C’mon.  Cut up the cards.

9. Federal agencies are delinquent on nearly 20 percent of employee travel charge cards, costing taxpayers hundreds of millions of dollars annually.[9]

Apparently, Federal employee not only abuse credit cards, but their agencies are also frequently delinquent in paying the bill.  From the link for this item #9, we read:

The most stunning revelation concerns not how the cards are used but rather how long it takes the government to pay its bill — and what those delays are costing taxpayers.

According to the most recent data from the Office of Management and Budget, in January 2009, governmentwide delinquency rate for centrally billed card accounts — those paid by an agency rather than an employee — was 19.23 percent. The average delinquency rate for individually billed cards was 6.25 percent, data showed.

A card is considered delinquent if a bill is outstanding for more than 60 days.

“A private travel agency would be out of business running this kind of operation,” said Scott Amey, POGO’s general counsel. “This report summarizes problems with individual transactions and, more important, with government agencies that aren’t safeguarding taxpayer dollars.”…

10. The Securities and Exchange Commission spent $3.9 million rearranging desks and offices at its Washington, D.C., headquarters.[10]

Now, in all fairness, the SEC has been given some new responsibilities, but that is still a lot of dough for a pretty modest task.

And, here are three bonus items:

12.  Over half of all farm subsidies go to commercial farms, which report average household incomes of $200,000.[12]

I have never understood this farm subsidy concept in which we pay well-to-do folks not to do something.  What does it take to kill off something as silly as this?

13.  Health care fraud is estimated to cost taxpayers more than $60 billion annually.[13]

Much has been made of this as a source of ‘found’ money to help pay the cost of health insurance reform.  OK, fine.  Why not just fix this problem first, if it’s so easy.  See this post, Why Not Fix Medicare First? for more on this issue.

And, finally, the Pentagon’s procurement group should be summarily fired. Of course, Congress shares some of the blame for this one because Congressional leaders have frequently put great pressure on the Pentagon to allow wasteful cost overruns.

14.  GAO audit found that 95 Pentagon weapons systems suffered from a combined $295 billion in cost overruns.[14]

This should also be a Congressional ‘no brainer’ because some in Congress don’t like waste and some don’t like the Pentagon.  I don’t want to undercut our military men and women at all.  They do a difficult and often dangerous job and I would like to make sure they have adequate resources.  Yet, cost overruns on big projects do no one any good.

It looks to me as though savings in just these 13 items would be in the hundreds of billions per year.

That’s enough to give insurance tax credits or vouchers to all those who do not have health insurance, with some spare change left over.  No need to do more deficit spending or to raise taxes.  Just cut the waste and do it first.  What’s not to like?

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Kurt Brouwer October 1st, 2009

Though we did correctly call Cash for Clunkers a bad program, I still hate to see the entirely predictable end result.  The government handout just induced buyers to move up car and truck purchases a bit so we saw a temporary blip in sales.  This chart tells the tale:

Source: Clusterstock

CRASH: Was Cash for Clunkers a success?

I suspect Congress would say yes, however I would say no.

Let’s review the scoring here.  First, Joe Consumer turns in a decent car, which gets destroyed.  Not sold to a family that needs a decent used car.  Not even given to needy families.  Not even broken up for parts.  Destroyed!

Joe Consumer then buys a new car for, let’s say $25,000.  Government borrows $4,500 from investors, both at home and abroad, and pays car dealer the dough, which offsets that portion of the cost of Joe’s car.  However, Joe Consumer has to come up with the balance of $20,500 which has to come from his savings or from a loan.  Of course, when Joe drives the car off the lot, the value drops by 20% or so.

Joe Consumer: Loses older car that was paid off.  Now, he’s making payments on a loan of $20,500 on a car worth $20,500.

U.S. Government: Now owes another $4,500 to bondholders.

New car company: One new car sale

Other consumer product retailer: One less sale

Environment: One more scrapped car plus environmental costs of making new car

Environment: Slightly higher average mileage for gasoline

Charities: Fewer folks donate old cars to needy charities

Used Car Buyers: With used car costs soaring, those who need a decent car end up paying more

U.S. Taxpayer: Grab your wallet

Update:  ABC News’ John Stossel does a very good job of pointing out the economic fallacy in government programs at his blog:

…Now it appears that Congress will ask not just for another billion, but another TWO billion. Look how generous Congress is with your money!

The idea is that by destroying used cars, people will buy new cars, which creates jobs. But this commits the “broken window fallacy”. That $3 billion taken from taxpayers to, essentially, destroy used cars now cannot be put towards college, or a new home, or new clothes, or anything else. Some used cars are no longer available for poor consumers to buy. If the “new car” market is helped by “Cash for Clunkers”, every other market is hurt because that $3 billion cannot be spent on anything else…

The government cannot just make up the billions needed for Cash for Clunkers out of thin air.  That money has to come, ultimately, from us as taxpayers.  Government spends more; we spend less.  Result: no net benefit. If you are interested in more on this topic, go to Stossel’s link above on the ‘broken window’ fallacy as put forth originally by a 19th century French economist, Frederic Bastiat.

If you want to see how much actual environmental benefit we have accrued under Cash for Clunkers, go to the Political Calculations blog right here.  They have a handy online tool that helps you do the calculations.  Here is a summary of the findings:

…Using the default numbers, we find that it takes a very long time for taxpayers to get their money’s worth for what they were required to spend to support the “Cash for Clunkers” program. At 26.5 years, the time needed to obtain the perceived benefits of reduced CO₂ emissions will very likely outstrip the useful life of the new “green” vehicle, suggesting that taxpayers will never realize a positive environmental return on the $4,500 they provided to subsidize the new car sale…

The cost for the unintended consequences and the collateral damage from Cash for Clunkers is rising. As is quite common, Congress never really did its homework on this issue and they have wasted money on a program that did very little, if any, economic good and clearly has had a net, negative environmental impact.

You’ve seen us drive, now watch us heal…

What’s next from those brilliant minds in Congress?

Source: Economists Do It With Models

Our government cannot properly manage a pretty simple $1 billion car rebate program, but the fearless folks in Congress are willing to give it a go with healthcare and health insurance, which together comprise about 17% of our economic activity.  What could go wrong?

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Kurt Brouwer September 23rd, 2009

The U.S. Treasury issued a new record of $7 trillion in bonds for the fiscal year that will end next week:

U.S. issues $7 trillion debt, supply to stabilize  (Reuters, September 23, 2009, Burton Frierson)

The U.S. government will have issued $7 trillion in bonds by the time the current fiscal year ends next week, but it expects the debt deluge to stabilize by mid 2010, a Treasury official said on Wednesday.

…However, this expansion may take place in an environment where investors consider leaving the safe-haven Treasury market for riskier assets, and debt issuance is likely to level off mid next year, said Treasury Acting Assistant Secretary for Financial Markets Karthik Ramanathan.

“In fiscal year 2009, which ends next week, Treasury will have issued $7 trillion in gross issuance — that’s in a 12-month period,” Ramanathan told a financial markets conference in New York…

A trillion here and a trillion there.  After a while, it adds up.  Not all of these bonds were brand new.  In fact, most of the bonds issued replaced bonds that were maturing.  Nonetheless, the new debt issuance is huge.  Reuters continues:

“This issuance was necessary to meet nearly $1.7 trillion in net marketable borrowing needs, nearly $1 trillion more than what we raised last year,” he added.

That’s sizeable.  $1.7 trillion in net new borrowing.

Finally, the headline of this piece cracks me up.  ‘U.S. issues $7 trillion debt, supply to stabilize.’  Since the Treasury determines what the supply is, I guess that’s like saying, “We’re borrowing scads of money now, but we plan to borrow less in the future.”  OK, that’s nice, but we’ll believe it when we see it.

• Economy , Geopolitics , Investing , debt , deficit , income taxes
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Kurt Brouwer September 17th, 2009

This is part two of the Plunging Pensions series (go here for Part One).

Some other states are starting to wake up and take notice of the mess we have made in California [emphasis added]:

Pension Costs Can Ruin Cities and States (Grand Forks Herald, June 18, 2009)

…As a result, California is “less than 50 days away from a meltdown of state government,” the state controller said last week.

It’s hard to know whether to stare in horror or avert your eyes.

Our advice: Stare. Because in California’s example, there are lessons for Minnesotans and North Dakotans to learn.

One such lesson has to do with public-employee pensions and a state’s fiscal health. California faces unfunded public employee retirement benefits of somewhere between $300 billion and $1 trillion, a panel discussion at the Milken Institute’s State of the State Conference concluded in May.

Joel Kotkin, presidential fellow at Chapman University in Orange County, Calif., and a popular writer on public policy, agrees. “The item that is most killing the state budget is the huge pensions for public employees,” he said in a recent CNBC interview.

“We have to figure out what we’re spending, how we’re spending, and to begin to make the public employees live by something close to the rules that the rest of society does.”

Basically, California governments let many workers retire early and collect generous pension and benefits for life. In Vallejo, Calif., for example, “base pay for firefighters is more than $80,000 per year, and employees can retire at age 50 with a pension equal to 90 percent of their salary,” Governing magazine reported last year.

Vallejo declared bankruptcy in 2008, citing pension benefits it no longer could afford.

The Milken Institute estimates that California has an unfunded pension liability of between $300 billion and $1 trillion.  Unless changes are made, that monstrous shortfall is going to haunt our workers, bankrupt our state and cause even more difficulties than we currently have.

And, just to put a human face to this, consider these stories of what our out-of-control pension laws have wrought.  The Grand Forks Herald continues:

“According to the data compiled to date, the highest paid public employee retiree in the state is Bruce Malkenhorst, the former city administrator, clerk, finance director and treasurer of the city of Vernon, Calif.,” the Sacramento Bee noted in an editorial.

“Vernon is a tiny industrial enclave near Los Angeles. He earns $499,674.84 a year or $41,639 a month in pensions.

“The local governmental agency with the most retirees earning $100,000 or more is the Sacramento Metropolitan Fire District. Fifty former employees of the Sacramento Fire Department receive pensions of more than $100,000.”

A pension of almost $500,000 per year for a small town treasurer?  Assuming he lives 30 years past retirement, that would be $15,000,000 and probably much more with cost-of-living increases (see the SacBee’s State Worker Blog for more).

Just to put the last point in perspective, the City of Sacramento is paying out $5 million per year to just 50 retired firefighters.  Now, I admire firemen and I have friends and relatives who do that work, which is dangerous and hard.  I don’t begrudge them a thing, but does anyone think this is sustainable.  $5 million per year for just 50 retirees from one modest-sized city?

In addition to underfunded state and local pension plans, we have the underfunded biggies — Social Security and Medicare. This chart from investment firm, TCW, demonstrates the rapidly-rising liabilities at just the Federal level.  The biggest unfunded liability is Medicare, but there are many more:

Source: TCW / Jeffrey Gundlach

As you can see the Feds owe vast sums stretching as far as the eye can see.  Yet, there is a steady stream of applicants for more Federal backing — private pensions, state and local pensions and so on.  The Feds are the backer of last resort, but that backing is getting mightily stretched.

Either governments rein in the soaring costs of public pensions or they face an increasing likelihood of bankruptcy, as we saw in the case of Vallejo, CA.  Stopgap measures will not work for very long and the longer we wait to address this, the worse it will get.  Even raising taxes won’t help for very long because states such as California have tax rates among the highest in the nation.

And, our top Federal income tax rates are already high compared to the global rates, as this chart illustrates.  How much higher can they go?

Source: Carpe Diem

Taxpayers are the ones who will be left holding the bag when all the politicians’ pension promises blow up.  I also believe that public retirees are at risk because taxpayers are increasingly restive and unwilling to accept tax hikes.  Yikes.

Update:  I had a few questions about the chart above which tracks the top personal income tax rates around the world.  One CPA I had lunch said that the average seemed low because many of the European countries have high rates of 40% or even 50%.  And, that is true. The U.S. does not have the highest country rate, that honor goes to Denmark I believe.  But, the U.S. rate is well above the worldwide average.

By the way, the data underlying this chart is from a study done by accounting firm, KPMG.  The study can be found here.

I come away from this with three points.  First, the study found that there has been a steady downward decline in global income tax rates, even in Europe.  For example, the average rate in Europe was 41% in 2003 and now it is 36%.  Part of this decline has been the introduction of flat tax rates in several Eastern European countries.

Second, that there is wide disparity in rates with Europe generally having the highest rates, averaging 36%.  But, in South American the top personal income tax rate is about 26%.  In Asia, the highest rate is Japan at 50% for the top personal rate.  The lowest rate seems to be Hong Kong, which is 15%.

Third, the U.S. seems to be bucking the trend as we have before Congress a number of proposals to significantly and substantially increase our income tax rates.  For example, there have been discussions of income tax surcharges to pay for healthcare reform.  There is also a strong likelihood that the Bush tax cuts will be phased out, which would be an effective tax increase.  Those alone will be controversial. Adding additional income taxes or additional payroll taxes to deal with Social Security or Medicare, would be both very difficult and very divisive.

See also:

Plunging Pensions

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Kurt Brouwer September 11th, 2009

Good piece from MarketWatch on the mounting problems we are experiencing with pension plans, both private and public.  Many corporate and public pension plans are underfunded and that means taxpayers are probably on the hook.  Why you ask? C’mon.  You and me and other taxpayers are the payer of last resort.

First, we find that faltering industrial companies have failed to adequately fund their pension plans and that leads to the Feds as the funder of last resort [emphasis added]:

Companies’ Pension Problems Could Hit Taxpayers (MarketWatch, September 3, 2009, Andrea Coombes)

When the agency that insures traditional pension plans is running a $33.5 billion deficit — the largest in its 35-year history — should you be worried? If you’re a worker or retiree counting on a traditional pension, the answer is probably not. But if you’re a taxpayer, start worrying.

Though it will likely take years, it’s all but inevitable that at some point the Pension Benefit Guaranty Corp., the agency responsible for guaranteeing pension benefits for some 44 million Americans, will need to either cut those benefits or raise a lot of cash, experts say.

Given that slashing payouts to older people is considered political suicide, the likely scenario is that the U.S. government will pony up funds to shore the agency’s finances.

Pensioners “don’t have to worry,” said Douglas Elliott, an author of numerous studies on the PBGC and a fellow at the Brookings Institution, a Washington-based public-policy think tank.

“The taxpayer has to worry.

This is the crux of the matter.  When pension plans fail, taxpayers are the funders of last resort.  The problem is that all kinds of pension plans — Social Security, state and local pensions, the Pension Benefit Guaranty Corporation — are all sinking into fiscal insolvency.  And, then there is Medicare and Medicaid. What happens if they all go broke? MarketWatch continues:

… “There’s a point where the Social Security fund starts to run out of money if they don’t change anything. That’s a similar analogy to the PBGC,” said David Kudla, chief executive of Mainstay Capital Management LLC, an investment advisory firm that often works in the auto industry. “At some point, they either need to charge higher premiums or reduce benefits to current beneficiaries or have a capital infusion from the U.S. government,” he said. “The third [option] is probably the most likely.”

…If taxpayers do eventually bail out the PBGC, it could be a bitter pill for some of them. “You [pension recipients] would be getting a bailout from taxpayers who never had a defined-benefit plan,” Bovbjerg said. “If you have a 401(k), you don’t have guarantees like that,” she said…

In my opinion, it’s not a matter of if taxpayers bail out PBGC, but when taxpayers bail it out.  Unfortunately, this issue of corporate pension failures is far from the full extent of the problem.

Next, as this opinion piece from the Wall Street Journal demonstrates, we find another huge problem, the underfunding of public pension plans:

Public Pensions Cook the Books (Wall Street Journal, July 6, 2009, Andrew C. Biggs)

Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods — which discount future liabilities based on high but uncertain returns projected for investments — these plans are underfunded nationally by around $310 billion.

The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won’t be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That’s nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it’s likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers…

Public pension plans have been quietly accumulating huge long-term liabilities with very little public notice.  But, a few factors have brought this issue to the public’s attention.  First, the bankruptcy of Vallejo, CA and other cities, with pension liabilities a significant part of the bankruptcy filing.  Second, the huge pension payouts being received by public employees.

Budget Busting Pension Plans

On a daily basis, we are seeing alarming news about the pension crisis in towns and cities across the state of California and the nation.  What the heck is going on?  In a nutshell, while you were out living your life, your local and state politicians were making pension promises that extend many years into the future.  And, in many cases, the required funding simply is not in place.  To make things worse, these promises were made to our firefighters, police and other employees of the government.  These are the people who make everything in a given town work.

42 Years Driving for Dolly Madison Cakes

Columns such as these two below have been attacked by unions as an attack on public employees.  I view it differently.  I come from a union family.  My father drove a Dolly Madison Cakes delivery truck for 42 years and he was a member of the Teamsters Union.  My mother still receives a very modest monthly check from the Teamsters.

My view of this issue is that if a city or county makes a promise to its employees, it should keep it.  But, if the city goes bankrupt, then of what value is the promise?  Both sides — taxpayers and employees — should be on guard to make sure that promised benefits are reasonable and sustainable because if they are not, then everyone loses.

This is no longer a boring and arcane topic of interest only to local politicians, municipal employees, union officials and pension plan actuaries.  We posted on this several months ago when pension obligations threatened the city of Vallejo, CA.  Now we see that the city of  Vallejo, California has broken a union contract after having to seek court approval for doing so (see CalPensions).

The $3 Billion Pension Miscalculation

The Sacramento Bee makes an important — and politically explosive — point in the following piece.  About 10 years ago, the State of California got taken to the cleaners on employee pensions [emphasis added]:

Pension hike of a decade ago backfires (Sacramento Bee, June 22, 2009, Dan Walters)

A milestone on California’s meandering journey toward fiscal insolvency occurred exactly a decade ago when the Legislature enacted a massive increase in state employee pensions on the expedient assumption that it would cost taxpayers nothing.

Although the new pensions would generate almost countless billions of dollars in extra income for retirees in the years ahead, the CalPERS board, dominated by union representatives, told legislators that taxpayers wouldn’t have to bear the load because investment income, which was flowing into the pension trust fund from high-tech stocks, would continue indefinitely.

As it has done in so many ways, California took the good times for granted and assumed lavish investment returns would buoy public pension plans forever.  Unfortunately, reality has hit home, not once, but twice.  First, the tech bubble blew and now the real estate bubble and tumbling stocks have done the same.

“They (CalPERS) anticipate that the state’s contribution to CalPERS will remain below the 1998-99 fiscal year for at least the next decade,” said a final Senate analysis of the 1999 legislation that expanded state pensions, allowing Highway Patrol officers, prison guards and other “safety” workers in some cases to get more than 100 percent of their salaries.

…Within a few years, dot-com bubble had burst, CalPERS had suffered major losses and the state’s burden for pensions had pushed into the multibillion-dollar range, not counting the heavy impact on local governments that had cavalierly followed the state’s lead on boosting pension benefits (see Oakland ‘Mulls’ Bankruptcy).  

The situation was ripe for a backlash, such as an initiative measure that would rein in public pensions, but union-controlled CalPERS lowered the political heat by offering employers a “smoothing” policy that would protect them against immediate jolts, spreading out the increases over a number of years.

By and by, the economy improved, albeit through an unsustainable explosion in real estate development, and the pension issue dropped from the political radar screen. But now we’re mired in the worst recession since the Great Depression, CalPERS’ investments have dropped by nearly a third and the state is paying more than $3 billion a year into the pension fund, nearly 10 times what it paid a decade ago when CalPERS made its bogus assertion to lawmakers…

I would say that’s a bit of a miss.  California is being forced to pay $3 billion a year (10 times what it paid a decade ago and far more than estimated) and we are now hearing that another billion or so is needed.  Eventually, a billion here and a billion adds up to real money.

This is an example of how little credibility we should give to legislative estimates of future pension costs.  Either our legislators — in Washington or Sacramento or anywhere else — don’t know or they simply don’t want to know what a given pension will really cost.  But, shame on us for believing their estimates.

This problem — plunging pensions — is one that will be plaguing us for many years.

Stay tuned for Plunging Pensions (Part Two) — next week.

See also:

New York City

New Jersey

Hidden Pension Fiasco

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