What happens when public employee unions begin calling too many of the shots in government?
Reuters reports on the backstory of the city of San Bernandino, California’s bankruptcy, which features a lot of politicians blaming everyone else for their dilemma:
Yet on close examination, the city’s decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward — and alarmingly similar to the path traveled by many municipalities around America’s largest state. San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers.
Little by little, over many years, the salaries and retirement benefits of San Bernardino’s city workers — and especially its police and firemen — grew richer and richer, even as the city lost its major employers and gradually got poorer and poorer.
Unions poured money into city council elections, and the city council poured money into union pay and pensions. The California Public Employees’ Retirement System (Calpers), which manages pension plans for San Bernardino and many other cities, encouraged ever-sweeter benefits. Investment bankers sold clever bond deals to pay for them. Meanwhile, state law made it impossible to raise local property taxes and difficult to boost any other kind.
No single deal or decision involving benefits and wages over the years killed the city. But cumulatively, they built a pension-fueled financial time-bomb that finally exploded.
How out of whack did things become? Reuters describes how the city’s retired public employees became members of the Top 3.6% of individual income earners in the U.S. (and Top 12.9% of American households):
In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.
Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents – most of that on wages and pension costs.
The article goes on to describe the cause of San Bernandino’s problems as the result of “back-scratching on an epic scale.” The funny thing is that all the parties, who are now anxious to point their fingers at their partners in this kind of civic racketeering, ignored all the red flags that independent observers brought in to assess the city’s situation were waving years in advance of the city’s bankruptcy, back in 2007 – ahead of the Great Recession.
And instead of heeding the warnings, the politicians rubber-stamped their public employee unions’ demands and voted to approve extremely generous pensions that were far beyond the city’s ability to pay and still provide essential services, sealing their city’s fate. The money quote belongs to Tobin Brinker, a former city council member:
“In hindsight I am not proud of this vote,” said Brinker, who was on the city council at the time.
But then, it wasn’t his money, was it? Why would any government official dependent upon this openly corrupt environment for their continued presence in power care about spending taxpayer money wisely when they can just issue bonds and borrow whatever money they like to keep the spending party going just a little longer?
That’s especially true today, because the state of California is set to hike its taxes on top income earners to try to cover its cities ever-increasing shortfalls in meeting their public responsibilities.
The chronic mismanagement in San Bernardino, though, is a common feature of local government in California and around the United States. Much power over municipal finance lies in the hands of those with the most at stake — city employees, elected officials and others who depend directly on government for their livelihood. And California is moving to put even more responsibility and funds, not less, in their hands.
One of Governor Jerry Brown’s marquee initiatives is “realignment,” an effort to move more public-safety, welfare and prison services from state control to the cities and counties. Local governments are more flexible and more responsive to local issues, Brown argues, and thus able to make better decisions.
The recently approved tax hike in California is what will provide additional funding to California’s cities to keep providing services like these on top of their gold-plated public employee compensation and pension plans. It is a bailout – pure and simple.
And because they’re being bailed out, it is unlikely that California’s debt-ridden city politicians will learn the lessons they need to make the reforms they need to reverse their situation. The Reuters article concludes with an observation on what the civic leaders of San Bernandino missed learning when they had the chance to avoid going bankrupt:
Charles McNeely, who served three years as San Bernardino’s city manager after 13 years in the same post in Reno, Nevada, quit last March, citing the “toxic” atmosphere on the council. He had warned repeatedly that without change, the city faced ruin. In a presentation to the city council in August 2010, he said spending was far outpacing revenue and predicted a budget deficit of $40 million for this fiscal year.
“I don’t know how you could come out of that meeting not understanding we had a serious problem,” McNeely said in an interview. “I told them, ‘You’re headed for trouble, it’s a train wreck. You can’t keep doing business this way.’”
If something cannot continue, it will stop, one way or another – it’s only ever a question of how much control you might have over how it does. If only today’s politicians would listen.
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Losses Mount As Washington Post Continues Downward Spiral
Don Irvine — August 6, 2012
The Washington Post Co. reported last week that operating profits dropped 28.6 percent in the latest quarter, as the newspaper division continued to struggle with circulation and advertising revenue losses.
The flagship Washington Post newspaper suffered a 15 percent drop in print advertising revenue compared to the year before. Plus, the paper’s circulation continued to slide. In the first six months of 2012, the newspaper’s average daily circulation fell 9.3 percent from the same period in 2011, and Sunday circulation dropped 6.1 percent.
Online advertising rose eight percent in the quarter, but the $2 million increase was not enough to offset the $9.9 million decrease in print advertising.
The total operating loss in the newspaper division, which includes Slate and Washingtonpost.com, was $15.9 million in the second quarter, compared with a $2.9 million loss for the same period in 2011. The latest results include a $3.4 million expense for severance packages for news staff. Overall, the division’s second-quarter revenues were down seven percent from last year to $151.8 million.
For the first six months of 2012 the division lost $38.4 million, compared to an operating loss of $15.7 million for the same period in 2011. These operating losses include noncash pension expenses of $16.4 million and $12 million respectively for the first six months of 2012 and 2011.
These results are continuing to drag down the company which is otherwise profitable, thanks to its television properties and, to a small extent, its education division. They also show no signs of reversing their downward trend anytime soon.
The more money the Post loses, the more it resembles the formerly Post Co.-owned Newsweek. And we know what happened to that publication.
Statistics: Posted by yoda — Mon Aug 06, 2012 7:39 am
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The Death Spiral of Debt, Risk and Jobs
May 9, 2012
Debt, risk and employment are in a death-spiral of malinvestment and debt-based consumption.
Standard-issue financial pundits (SIFPs) and economists look at debt, risk and the job market as separate issues. No wonder they can’t make sense of our "jobless recovery": the three are intimately and causally connected. An entire book could be written about debt, risk and jobs, but let’s see if we can’t shed some light on a complex dynamic in a few paragraphs.
Risk: As I described in Resistance, Revolution, Liberation: A Model for Positive Change, risk cannot be eliminated, it can only be shifted to others or temporarily masked.
Masking risk simply lets it pile up beneath the surface until it brings down the entire system. Transferring it to others is a neat "solution" but when it blows up then those who took the fall are not pleased.
Risk and gain are causally connected: no risk, no gain. The ideal setup is to keep the gain but transfer the risk to others. This was the financial meltdown in a nutshell: the bankers kept their gains and transferred the losses/risk to the taxpayers via the bankers’ toadies and apparatchiks in Congress, the White House and the Federal Reserve.
Risk is like the dog that didn’t bark. In the story Silver Blaze, Sherlock Holmes calls the police inspector’s attention to the fact that a dog did something curious the night in question: it did not bark when it should have.
When scarce capital is misallocated to unproductive uses such as duplicate tests that can be billed to Medicare, sprawling McMansions in the middle of nowhere, etc., "the dog that didn’t bark" is this question: what productive uses for that scarce capital have been passed over to squander the scarce capital on Medicare fraud, McMansions, Homeland Security ("Papers, please! No papers? Take him away"), etc.
Once the capital has been squandered, it’s gone, and the opportunity to invest it in productive uses has been irrevocably lost.
Debt: Debt has a funny cost called interest. If you have a corrupt, self-serving central bank (a redundancy) that can lower interest rates by printing money to buy government bonds, then this funny thing called interest can be lowered to, say, 1%.
At 1% interest, the government can borrow $100 and only pay 1% in annual interest. That is almost "free," isn’t it? The key word here is "almost." If you borrow enough, then that silly 1% can become rather oppressive.
Let’s say the Federal Reserve is willing to loan you $100 billion at zero interest. You have an incredible sum of cash to use for speculation, and it doesn’t cost anything! Wow, you must be an investment banker….
Now what happens when the interest rate goes from zero to 1%? Yikes, you suddenly owe $1 billion a year in interest. That is some serious change. You can of course pay the interest out of the borrowed $100 billion, unless you’ve spent it building bridges to nowhere and supporting crony capitalism.
Yes, we’re talking about Japan–and Greece, the U.S., China, and every other nation that piled up staggering debts to fund an unproductive Status Quo. If you play this "borrow at low rates" Keynesian game for 20 years, then you end up with a debt that far exceeds your national output (GDP). That funny cost is now so large all your tax receipts generated by your vast economy only cover the interest and your Social Security tab. That’s Japan today: all its tax revenues only cover its gargantuan interest on its unimaginably vast debt and Japan’s social security outlays. The rest of its government expenses must be borrowed and added to the already monumental debt.
Interest creates a death spiral when the borrowed money was squandered on unproductive bridges to nowhere and consumption.
Jobs: Jobs have an interesting feature called productivity. If you pay me $1 million for a manicure (OK, you’re an investment banker and can afford it), that money funds consumption, interest and taxes (presuming I pay taxes, which I might not if I hire the right Wall Street law firm). Once the money is spent on consumption (housing, energy, entertainment, hookers for the Security Guys, etc.), interest and taxes, then it’s gone. It cannot be invested in productive assets.
If I invest the $1 million in software and robotics that produce equipment for the natural gas industry, then I will hire a software person to manage the software and technicians to maintain the machines, a few more to transport the raw materials and finished goods, a few more to oversee the accounts, and so on. The $1 million funds a number of jobs that will be permanent if the products being produced meet a real market demand and can be sold at a profit.
The $1 million spent on consumption pays for some labor, but it doesn’t create any value. If we track where it went, it ended up in the government coffers as taxes, in the five "too big to fail" banks as interest, and in various agribusiness, food services and energy corporations. A few bucks were distributed as tips and donations.
Now imagine if that $1 million was borrowed. If the $1 million was squandered on consumption, interest and taxes, then it’s gone in a short period of time–but the interest remains to be paid forever. If you’re an investment banker and the Fed loves you (and of course it does), then you can roll that $1 million into a new $2 million loan. You use some of the $1 million in fresh debt to pay the interest, and then you blow the rest on unproductive consumption.
The causal connection between debt, risk and jobs is now visible. Debt is intrinsically risky because the interest accrues until the debt is paid in full. If the debt will never be paid–for instance, the $14 trillion in Federal debt–then the interest is eternal, or at least until the system implodes and all the debt is renounced.
If the money has been squandered on consumption (marginalized college degrees, medical procedures with minimal or even negative results, $300 million a piece F-35 fighter jets, etc.) then there are two risks: the interest that piles up must be paid, meaning potentially productive investments must be passed over to pay the interest, and productive uses that could have been funded by the borrowed capital have been passed over.
Consumption funds temporary labor, but there is no wealth created or sustainable employment created. When you borrow $100K for a marginal MBA, the money paid some staffers at the Status Quo educrat edifice and some overhead/profit, but when it’s gone, the debt remains and the staffers need another debt-serf to fund their pay next semester.
If the borrowed money were actually invested in a marketable product (in our example, equipment for natural gas production), then jobs and wealth are created by the increase in productivity and output created by the enterprise.
What we have instead is a Central State and an economy that has borrowed and squandered trillions of dollars on consumption and malinvestment in unproductive "stranded" assets. The debt and risk pile up, while the labor that results from consumption is temporary and does not create wealth or permanent employment.
Figuratively speaking, we’re stranded in a McMansion in the middle of nowhere, a showy malinvestment that produces no wealth or value, and we’re wondering how we’re going to pay the gargantuan mortgage and student loans.
Debt and the risk generated by rising debt create a death-spiral when the money is squandered on consumption, phantom assets, speculation and malinvestments. Sadly, that systemic misallocation of capital puts the job market in a death spiral, too.
Statistics: Posted by yoda — Wed May 09, 2012 9:08 am
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