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Abaco

What Makes You Think This Recession Will End?

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I know; it's a loaded question. My personal take is that this may be the new norm - that the recovery has already come. People keep talking of an upcoming recovery as though it is a sure thing. But, such talk causes me to ask what the trigger would be. What is your opinion on this? Do you think a recovery will occur because "economies go in cycles", or ....what? Do we need to bring the troops home? How about if we really revamp the tax code? When I see what is going on in my region I can't help but think that the current problems should just be seen as the expected result of actions taken by a government that is either inept or corrupt, or both. One example is the massive socialized losses that started in earnest about 3 years ago, including the resulting augmentation of debt, and devaluation of our currency. Maybe you think I'm speaking from the moon on this. No worries. What do you think will trigger a recovery? I have to admit that I'm woefully ignorant of what has caused recovery in past recessions, even in my lifetime.

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Abaco, you should read "This Time is Different" by Rogoff & Reinhart (for once, academics who know what they are talking about). It will go a long way towards helping you with the stated problem in your last sentence. I'll come back to this thread but none of the people I trust see a recovery. Nor, it seems, does the Fed.

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The recovery hasn't already come--the recovery hasn't been allowed to come. Interest rates are still too low and they're just multiplying the no down government mortgages. My prediction is that the things to come will make what we're going through right now a walk in the park, unless Americans dramatically cut government spending and start reducing the debt--otherwise the Fed will become a lender of last resort and print a lot of money to finance the debt. We can't count on China and Japan to pay for our spending forever. The problem is that they can't raise interest rates because Americans (individual Americans, the banks, etc) are so overleveraged from almost two decades of low interest rate policy that major financial institutions would go bankrupt at a level unseen in 2008. Americans better hope that Asia keeps buying their treasuries and that China doesn't allow its currency to appreciate. If they do, everything at Wal-Mart is going to get a lot more expensive.

What has caused a recovery in past recessions and depressions is the government allowing government-caused malinvestments to clear and then shifts of capital to actual productive areas of the economy. The depression of 1920-1921 was initially much worse than the Great Depression, but was handled without government interference and the recovery was extremely quick. The Great Depression was handled by Keynesian economic policy and extended by vast expansions in government so Americans never really regained their standard of living until Trueman dramatically cut the size of government after the war. We are currently handling the present crisis with Keynesian policy: stimulus, ditch-digging, deficit spending, etc--but at least we aren't slaughtering hundreds of thousands of farm animals and throwing them in the garbage like FDR did.

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The recovery hasn't already come--the recovery hasn't been allowed to come.

In fact, the real crisis hasn't really started.

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I agree with Joss. My view (and, Duke, you probably know him well, David Rosenberg's) is that any "recovery" we have seen in stock prices etc. has been driven purely by large injections of taxpayer money causing flights to "assets" (equity is an asset as it is a claim on a set of assets owned by a company). Whilst there are also very valid reasons for most commodities rising, part of it was pure shift to hard assets in the face of money printing.

We have diluted and are diluting the creditors and lenders and investors away. We are making it ok to borrow to buy a wide screen TV. The cost will be enormous.

Europe will, however, fall first and fairly soon. Allied Irish went down last week with a 3.7bn EUR injection wiping out shareholders. Despite new legislation mandating insurance firms to buy government bonds (see Solvency II, it's a bit more complicated) EU bond yields are slowly increasing. France's CDS has been trading above 100 points for weeks (to give you an idea, Portugal is at 450 and Greece at the height of the crisis was at 900 or so, that is, it cost you 9% of whatever you wanted to insure to insure it against it disappearing). The EU only has about 850bn EUR to inject to plug a 3.3trn EUR hole (and that includes IMF funds from Uncle Sam, too). Are you wondering why the EUR is sliding down irrevocably?

There is no recovery and there will be no recovery for a while. We have tried to avoid the pain and like a drunk man drinking to stave off the first signs of a hangover, we will get hurt immensely as a result. I just hope I can get my green card before my region falls apart.

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Here is a collection of articles distributed by email from the Massachusetts Citizens for Limited Taxation with current news on exploding union pension scams bankrupting states at the expense of taxpayers. It begins with excepts, then follows with commentary and the full articles.

Citizens

for

Limited Taxation

and the

Citizens Economic Research Foundation

Post Office Box 1147 - Marblehead, Massachusetts 01945 - (508) 915-3665

“Every Tax is a Pay Cut ... A Tax Cut is a Pay Raise”

36 years as “The Voice of Massachusetts Taxpayers”

--------------------------------------

CLT UPDATE

Wednesday, December 29, 2010

--------------------------------------

The next fiscal crisis has arrived

"The most alarming thing about the state issue is the level of complacency," Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the most influential women in American business, told correspondent Steve Kroft.

Whitney made her reputation by warning that the big banks were in big trouble long before the 2008 collapse. Now, she's warning about a financial meltdown in state and local governments.

"It has tentacles as wide as anything I've seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," she told Kroft.

Asked why people aren't paying attention, Whitney said, "'Cause they don't pay attention until they have to."

Whitney says it's time to start....

[New Jersey] Gov. Christie acknowledged that's a lot of jobs. "I canceled it. I mean, listen, the bottom line is I don't have the money. And you know what? I can't pay people for those jobs if I don't have the money to pay them. Where am I getting the money? I don't have it. I literally don't have it."

Asked if this is going on all over the country, Christie told Kroft, "Yes. Of course it is. It's not like you can avoid it forever, 'cause it's here now. And we all know it's here. And the federal government doesn't have the money to paper over it anymore, either, for the states. The day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's comin'."...

"This is unsustainable, right?" Kroft asked.

"Totally unsustainable. We have a benefit problem," Christie said. "It's not an income problem from the state. It's a benefit problem. And so we gotta change those benefits."

Asked what the reaction to that has been, Christie said, "Well, it depends on where you sit. I mean, I think the general public thinks, 'I can't believe anybody gets a pension anymore. I've got a 401(k). It got killed in the stock market. I don't know what I'm gonna do for my retirement. I can't believe people get a pension anymore.' So I think amongst the broad, general public, they've said, 'Amen.' And I think among the public sector unions, they are yellin' and screamin'."

And Christie is yelling back. He provoked a very public fight with the teachers union, which is one of the most powerful political forces in the state of New Jersey....

Asked if he wants the public employee unions to share the pain, Christie told Kroft, "You bet. I want them to share in the sacrifice. And this is what I say to public sector unions: 'Listen you can boo me now, but I'm the first governor who has walked into this room in ten years and told you the truth. And here is the truth. If you don't partner with me to get this done in ten years you won't have a pension.' And that's the truth."

CBS News

60 Minutes

Sunday, December 19, 2010

The Next Financial Meltdown

----------------------------------------------------

Defenders of public employee pension systems often make the case that pension benefits are not all that generous. The outrageous cases you see on the news — Long Island police retiring in their 40s with pensions in excess of base pay, administrators “retiring” with six-figure pensions and then going back to work with another government agency, one ex-FDNY firefighter running marathons on his $86,000 “disability” pension — are the exceptions, they say.

The data, however, tells a different story. According to the Census Bureau, the average New York retiree receiving a corporate or union pension — a retiree from the private sector — was receiving an an annual benefit of $13,100 in 2009. For state and local government retirees, that figure was more than twice as high: $27,600. And that average figure includes retirees who were part-time workers or only spent part of their careers in government; full-career retirees often do far better....

The only way to protect New York taxpayers is to make it impossible for the legislature to give away the farm. That will require abandoning the defined benefit model and adopting 401(k) — and bringing the value of public sector retirement benefits closer into line with the private sector.

The New York Post

Saturday, December 18, 2010

Public vs. private retirements

----------------------------------------------------

Like most city workers, Boston teachers enjoy generous health benefits that would be the envy of many private-sector employees struggling with rising insurance costs.

But teachers can count on even more: A taxpayer-funded trust provides dental and vision coverage better than the plan for most city workers. In recent years, the trust paid some $45,000 annually for funeral expenses, hearing aids, a softball league, and other extras, according to recent tax filings.

As part of the package, taxpayers also contributed almost $1.3 million in the last school year for teachers’ legal services unrelated to the classroom, helping with wills, bankruptcy, real estate, name changes, and defense against some misdemeanor criminal charges.

The perks cost taxpayers $1,423 per teacher and $887 per paraprofessional this year, for a total of almost $8.4 million. That figure is above and beyond the $86.2 million the city will contribute for teachers’ life and health insurance, which includes below-average premiums and copayments as low as $10....

“It’s time to rethink health and welfare and treat teachers exactly as other employees in terms of benefits, and eliminate the expenditures for these other services,’’ said Samuel R. Tyler, president of the Boston Municipal Research Bureau, a fiscal watchdog funded by businesses and nonprofits.

The Boston Globe

Monday, December 27, 2010

Fund gives Hub teachers $8m in perks

Union defends trust that dates to 1968

----------------------------------------------------

Greetings activists and supporters:

For over a decade CLT has been warning of "The Ticking Time Bomb" of "public employee unions" pensions and benefits but far too few have bothered to listen, or again chose to kick the can down the road hoping they're not in office when it explodes, or can still grab a chair when the music stops.

It's now apparent that "unfunded public employee benefits" are quickly becoming the next "housing bubble" that's about to burst, the next dot.com crash -- the next national financial crisis adding to the recent economic debacle. The smoldering embers have caught spark at last, the explosion will likely ignite this coming year, in 2011. What's the possible solution for this impending crisis -- is there one this time? Even China is balking at loaning the USA more of its capital, and without more of China's cash infusion where will the feds get the money this time to bail-out the states' political profligacy?

"Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and B) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington . . ."

Secret GOP plan: Push states to declare bankruptcy and smash unions

Reuters News Service

Tuesday, December 7, 2010

Chris Christie, the hard-nosed and outspoken governor of New Jersey, is only the first governor to confront this crisis-of-crises head-on. The rest will soon follow, I expect in the year ahead. This is about to become the top story of 2011.

Gov. Christie said it best to the so-called "public servants": "If you don't partner with me to get this done in ten years you won't have a pension."

Chip Ford

See:

The Next Financial Meltdown

The day of reckoning is at hand. Steve Kroft tells us what we need to know about the

looming financial crisis that almost

no one is talking about.

Can New Jersey's Finances Be Fixed?

December 19, 2010

Can the Garden State's dire financial state be fixed? New Jersey's Governor Chris Christie tells Steve Kroft he is determined

to solve the problems.

How It Got So Bad

December 19, 2010

New Jersey Governor Chris Christie explains to Steve Kroft how and why states - including his own - have ended up with

such severe financial problems.

---------------------------------------------------------------

CBS News

60 Minutes

Sunday, December 19, 2010

The Next Financial Meltdown

The day of reckoning is at hand. Steve Kroft tells us what we need to know about the looming financial crisis that almost no one is talking about.

"The most alarming thing about the state issue is the level of complacency," Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the most influential women in American business, told correspondent Steve Kroft.

Whitney made her reputation by warning that the big banks were in big trouble long before the 2008 collapse. Now, she's warning about a financial meltdown in state and local governments.

"It has tentacles as wide as anything I've seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," she told Kroft.

Asked why people aren't paying attention, Whitney said, "'Cause they don't pay attention until they have to."

Whitney says it's time to start.

California, which faces a $19 billion budget deficit next year, has a credit rating approaching junk status. It now spends more money on public employee pensions than it does on the state university system, which had to increase its tuition by 32 percent.

Arizona is so desperate it sold off the state capitol, Supreme Court building and legislative chambers to a group of investors and now leases the buildings from their new owner. The state also eliminated Medicaid funding for most organ transplants.

Then there's New Jersey. It has the highest taxes in the country, a $10 billion deficit and a depressed economy when first-year Governor Chris Christie took office. But after looking at the books, he decided to walk away from a long-planned and much-needed project with New York and the federal government to build a rail tunnel into Manhattan. It would have helped the economy and given employment to 6,000 construction workers.

Gov. Christie acknowledged that's a lot of jobs. "I canceled it. I mean, listen, the bottom line is I don't have the money. And you know what? I can't pay people for those jobs if I don't have the money to pay them. Where am I getting the money? I don't have it. I literally don't have it."

Asked if this is going on all over the country, Christie told Kroft, "Yes. Of course it is. It's not like you can avoid it forever, 'cause it's here now. And we all know it's here. And the federal government doesn't have the money to paper over it anymore, either, for the states. The day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's comin'."

And nowhere has the reckoning been as bad as it is in Illinois, a state that spends twice much as it collects in taxes and is unable to pay its bills.

"This is the state of affairs in Illinois. Is not pretty," Illinois state Comptroller Dan Hynes told Kroft.

Hynes is the state's paymaster. He currently has about $5 billion in outstanding bills in his office and not enough money in the state's coffers to pay them. He says they're six months behind.

"How many people do you have clamoring for money?" Kroft asked.

"It's fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state," Hynes said.

Asked how these people are getting by considering they're not getting paid by the state, Hynes said, "Well, that's the tragedy. People borrow money. They borrow in order to get by until the state pays them."

"They're subsidizing the state. They're giving the state a float," Kroft remarked.

"Exactly," Hynes agreed.

"And who do you owe that money to?" Kroft asked.

"Pretty much anybody who has any interaction with state government, we owe money to," Hynes said.

That would include everyone from the University of Illinois, which is owed $400 million, to small businessmen like Mayur Shah, who owns a pharmacy in Chicago and has been waiting months for $200,000 in Medicaid payments. Then there are the 2,000 not-for-profit organizations that are owed a billion dollars by the state.

Lutheran Social Services of Illinois has been around since 1867 and provides critical services to 70,000 people, mostly the elderly, the disabled, and the mentally ill. The state owed them $9 million just before Thanksgiving, and they nearly had to close up shop.

Asked how long his organization can go on like this, Rev. Denver Bitner, the president of Lutheran Social Services of Illinois, told Kroft, "Well, we wonder that too because we really don't know."

He says they were forced to tap their entire line of credit and all their cash reserves before the state would finally pay them as a hardship case.

"It has to be that you've sold off all your assets, you have borrowed from everybody that you can borrow from, and then, we'll think about it," Rev. Bitner explained.

And according to Bitner, that's even though the state owes his organization the money.

"The first words out of my mouth are usually an apology, because they have been you know put in this situation, that is really unacceptable. And you know there is very little I can do or say other than apologize," Comptroller Dan Hynes said.

It's not just the social safety net that Hynes has to worry about: there have been Illinois legislators that have been evicted from their offices because the state didn't pay their rent, and stories about state troopers being turned away from gas stations because the owners refused to take their state credit cards.

"The state's a deadbeat," Kroft remarked.

"Yeah. I mean, the state of Illinois is known as a deadbeat state. This is a reputation that has taken us years to earn and we've reached, you know, the heights of, I think, becoming the worst in the country," Hynes said.

Not all of the problems that Illinois and other states are facing right now can be traced to the recession. But the precipitous drop in tax revenues did expose decades of financial irresponsibility, reckless spending, unrealistic benefit packages for public employees, and the use of political gimmicks to cover up hidden deficits. It's forcing state governors and the public to confront some harsh realities.

"This is different, isn't it?" Kroft asked New Jersey's governor, Chris Christie.

"It is very different," Christie said. "The reason it's different is because the only choices left are choices that people previously have said were politically impossible, that you couldn't do. You couldn't cut K to 12 education funding. You couldn't do those things. They were, you couldn't talk about pension and benefit reform for the public sector unions. That were third rails of politics. We are now left with no alternatives."

"Just the third rail?" Kroft asked.

"Yeah, that's it. I'm just gonna grab it and go, and let the chips fall where they may," Christie said.

In some ways, Christie is the political canary in the coal mine of the state fiscal crisis. He slashed New Jersey's budget by 26 percent, including a billion dollars in cuts to education, forcing the layoffs of thousands of teachers. He got rid of 1,300 state workers and drastically reduced funding to New Jersey cities, counties and villages which have their own financial problems. And he's still facing another $10 billion deficit next year.

Long term, the situation is much, much worse.

"Okay. Let's talk about the pension obligations. Forty-six billion unfunded liability for pensions? Sixty-six billion unfunded for healthcare liability?" Kroft asked.

"Yes, Sir," Christie said.

"That's a lot of money," Kroft remarked. "That's a lot of money, even for the federal government."

"That's a lot of money," the governor agreed.

When Kroft pointed out that there are people who think it's worse, Christie said, "Yeah, I think that's an optimistic view. I think that's an optimistic view. Listen, at this point, if it's worse, what's the difference? I mean, it's bad enough as it is, so what's the difference? I mean now, we're talkin' about money that none of us can really get our arms around."

"This is unsustainable, right?" Kroft asked.

"Totally unsustainable. We have a benefit problem," Christie said. "It's not an income problem from the state. It's a benefit problem. And so we gotta change those benefits."

Asked what the reaction to that has been, Christie said, "Well, it depends on where you sit. I mean, I think the general public thinks, 'I can't believe anybody gets a pension anymore. I've got a 401(k). It got killed in the stock market. I don't know what I'm gonna do for my retirement. I can't believe people get a pension anymore.' So I think amongst the broad, general public, they've said, 'Amen.' And I think among the public sector unions, they are yellin' and screamin'."

And Christie is yelling back. He provoked a very public fight with the teachers union, which is one of the most powerful political forces in the state of New Jersey.

When one teacher told him at a public hearing, "And you're not compensating me for my education and you're not compensating me for my experience. That's all," the governor replied, "Well you know what, then you don't have to do it!"

It's a scene that is starting to play out all over the country.

Governors of cash-strapped states are beginning to cajole or bully public employee unions into making concessions on what are considered to be gold-plated retirement and health care packages, which are now collectively underfunded to the tune of $1 trillion.

"Some union leaders have suggested that you're running the state like Tony Soprano," Kroft told Christie.

"Well, as an Italian American, I take great offense to that," he replied, laughing. "Listen, you know what it is? I'm the first person to expose them for what they've been doin' to the public."

Asked if he wants the public employee unions to share the pain, Christie told Kroft, "You bet. I want them to share in the sacrifice. And this is what I say to public sector unions: 'Listen you can boo me now, but I'm the first governor who has walked into this room in ten years and told you the truth. And here is the truth. If you don't partner with me to get this done in ten years you won't have a pension.' And that's the truth."

It's also the truth that some of the responsibility for New Jersey's pension woes lie at the doorstep of the governor's mansion. Christie and his predecessors have failed to contribute to the state's share of its pension obligation in 13 of the last 17 years, one of the reasons the fund is going broke. Christie says it's ancient history.

"We spent too much on everything. We spent too much. We spent money we didn't have. We borrowed money just crazily. The credit cards maxed out, and it's over. It's over. We now have to get to the business of climbin' out of the hole. We've been diggin' it for a decade or more. We've gotta climb now, and a climb is harder. Gotta do it," he said.

The problem with that, according to Wall Street analyst Meredith Whitney, is that no one really knows how deep the holes are. She and her staff spent two years and thousands of man hours trying to analyze the financial condition of the 15 largest states. She wanted to find out if they would be able to pay back the money they've borrowed and what kind of risk they pose to the $3 trillion municipal bond market, where state and local governments go to finance their schools, highways, and other projects.

"How accurate is the financial information that's public on the states? And municipalities," Kroft asked.

"The lack of transparency with the state disclosure is the worst I have ever seen," Whitney said. "Ultimately we have to use what's publicly available data and a lot of it is as old as June 2008. So that's before the financial collapse in the fall of 2008."

Whitney believes the states will find a way to honor their debts, but she's afraid some local governments which depend on their state for a third of their revenues will get squeezed as the states are forced to tighten their belts. She's convinced that some cities and counties will be unable to meet their obligations to municipal bond holders who financed their debt. Earlier this year, the state of Pennsylvania had to rescue the city of Harrisburg, its capital, from defaulting on hundreds of millions of dollars in debt for an incinerator project.

"There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.

Asked how many is a "spate," Whitney said, "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."

Municipal bonds have long been considered to be among the safest investments, bought by small investors saving for retirement, and held in huge numbers by big banks. Even a few defaults could affect the entire market. Right now the big bond rating agencies like Standard & Poor's and Moody's, who got everything wrong in the housing collapse, say there's no cause for concern, but Meredith Whitney doesn't believe it.

"When individual investors look to people that are supposed to know better, they're patted on the head and told, 'It's not something you need to worry about.' It'll be something to worry about within the next 12 months," she said.

No one is talking about it now, but the big test will come this spring. That's when $160 billion in federal stimulus money, that has helped states and local governments limp through the great recession, will run out.

The states are going to need some more cash and will almost certainly ask for another bailout. Only this time there are no guarantees that Washington will ride to the rescue.

--------------------------------------------------------------

The New York Post

Saturday, December 18, 2010

Public vs. private retirements

By Josh Barro and E.J. McMahon

Defenders of public employee pension systems often make the case that pension benefits are not all that generous. The outrageous cases you see on the news — Long Island police retiring in their 40s with pensions in excess of base pay, administrators “retiring” with six-figure pensions and then going back to work with another government agency, one ex-FDNY firefighter running marathons on his $86,000 “disability” pension — are the exceptions, they say.

The data, however, tells a different story. According to the Census Bureau, the average New York retiree receiving a corporate or union pension — a retiree from the private sector — was as receiving an annual benefit of $13,100 in 2009. For state and local government retirees, that figure was more than twice as high: $27,600. And that average figure includes retirees who were part-time workers or only spent part of their careers in government; full-career retirees often do far better.

To understand what sort of public pension you might be eligible for, the Empire Center for New York State Policy has created a Pension Calculator, available at nypensionbomb.org. Simply enter your age at retirement, years worked and final average salary — typically, the average of your wage earnings in your last three years worked — and you can see what benefit you would be entitled to, if you were lucky enough to work for the government.

You can also find out that pension’s present value — how much cash you would need on hand to buy an annuity making payments equal to the pension. But sit down before you read it — in many cases, that’s an amount well into the seven figures.

What the calculator will show you is that New York pension benefits can be extremely rich for typical employees. Consider a teacher in Albany County, retiring at 59 after a 37-year career, with a final average salary of $89,000. That teacher is eligible for a pension benefit starting at $62,745 (70.5% of final average salary) with an annual cost-of-living adjustment.

Is your 401(k) as rich as that? Consider that a private-sector worker seeking an equivalent annuity would need a whopping $1.25 million on hand at retirement to buy it.

The richness of benefits is even more astounding in some downstate communities. A Yonkers teacher with a master’s degree and some additional coursework could expect a final average salary just over $110,000 after 37 years worked. That translates into an annual pension of $78,255 — exempt from state and local income tax — with a present value of more than $1.5 million, assuming retirement at 59. Police and firefighters, famously, get to retire earlier with even more generous benefits.

These calculations don’t include the value of retiree health-care benefits. While health benefits for retirees are nearly unheard of in the private sector, New York public employees may keep their same health insurance in retirement nearly for free — or absolutely for free in many cases, as workers can use accumulated sick time to pay their share of the premiums. This is a benefit worth approximately $14,000 per year for family coverage.

And the benefit doesn’t stop at 65. Once retirees become eligible for Medicare, taxpayers generously pick up their Medicare Part B premiums and pay for high-quality Medigap coverage.

These benefits are almost entirely funded by taxpayers. Public employees in New York state do make pension contributions of 3% of their salary, but only for their first 10 years of work.

Last year’s “Tier V” pension reform will force most new employees to make 3% contributions throughout their careers — maybe. The state enacted a similar reform in the 1980s, and then undid it at the unions’ behest when the stock market performed well.

So, how do private sector retirement benefits look in comparison? Even if you’re one of the lucky few private-sector workers who gets a defined benefit pension (just 16% of workers in private industry do, as of 2009) your benefit is likely about half as generous as a government worker’s. And in New York, you must pay state and local income tax on pensions over $20,000, while public workers are entirely exempt.

The vast majority of private sector workers receive their retirement benefits in the form of a defined contribution plan, such as a 401(k) with employer match. These benefits are, on average, significantly less generous than the pensions provided to government workers.

The average American private sector worker receives 99 cents per hour worked in retirement benefits, mostly in the form of an employer-paid 401(k) contribution. The average state and local government worker gets $3.26, mostly in the form of pension benefits, according to the Bureau of Labor Statistics. But those figures actually understate the public-private gap.

You may have read that public pension plans use rosy accounting rules that understate the size of their true liabilities. These same rules also understate the value of benefits accrued by workers. One study from the American Enterprise Institute found that, in the case of California workers, official estimates understated the value of pensions by nearly half — that is, California workers receive pension benefits worth 16% of their salaries, not the official 8.2%.

So, the average government worker is receiving retirement benefits several times richer than his or her counterparts in the private sector. This fact — not abusive practices like “pension spiking” and “double-dipping” — is the reason that public pension costs have become unsustainable.

Over the next five years, state and local governments’ payments to New York state pension systems will nearly triple. For school districts, they will more than quadruple, driving an 18% increase in school property taxes just to pay for rising pension costs. New York City has already seen this explosion — pension costs have grown tenfold in the last decade — and pension costs in the city will continue to rise going forward.

State lawmakers will only get a handle on this problem when they admit that public employee pensions have not simply been mismanaged and abused. The root driver of exploding costs is legislators’ willingness to make unsustainable promises to be paid by future taxpayers — a proclivity as fundamental to a legislator’s brain as the will to breathe is to yours or mine.

The only way to protect New York taxpayers is to make it impossible for the legislature to give away the farm. That will require abandoning the defined benefit model and adopting 401(k) — and bringing the value of public sector retirement benefits closer into line with the private sector.

Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute, where E.J. McMahon is a Senior Fellow.

------------------------------------------------------------

The Boston Globe

Monday, December 27, 2010

Fund gives Hub teachers $8m in perks

Union defends trust that dates to 1968

By Andrew Ryan

Like most city workers, Boston teachers enjoy generous health benefits that would be the envy of many private-sector employees struggling with rising insurance costs.

But teachers can count on even more: A taxpayer-funded trust provides dental and vision coverage better than the plan for most city workers. In recent years, the trust paid some $45,000 annually for funeral expenses, hearing aids, a softball league, and other extras, according to recent tax filings.

As part of the package, taxpayers also contributed almost $1.3 million in the last school year for teachers’ legal services unrelated to the classroom, helping with wills, bankruptcy, real estate, name changes, and defense against some misdemeanor criminal charges.

The perks cost taxpayers $1,423 per teacher and $887 per paraprofessional this year, for a total of almost $8.4 million. That figure is above and beyond the $86.2 million the city will contribute for teachers’ life and health insurance, which includes below-average premiums and copayments as low as $10.

The Boston Teachers Union makes no apology for its trust fund, saying that it agreed to the benefits decades ago instead of a pay hike. Payments to the fund are set at a fixed rate per teacher, union officials said, so the expense to taxpayers is capped and will not rise unexpectedly like other health-care costs.

But with a sputtering economy, the city faces intense financial pressure as it negotiates a new contract with teachers and almost all of its other 43 unions. The School Department alone must close an estimated budget gap of $63 million and plans to shutter 10 schools and consolidate eight others to cut costs. Some observers argue that the time has come for the city to take a hard look at old collective-bargaining deals.

“It’s time to rethink health and welfare and treat teachers exactly as other employees in terms of benefits, and eliminate the expenditures for these other services,’’ said Samuel R. Tyler, president of the Boston Municipal Research Bureau, a fiscal watchdog funded by businesses and nonprofits. “It really ought to be an item on the list in terms of trying to negotiate changes.’’

The fund dates to 1968, when Mayor Kevin H. White sought an alternative way to compensate teachers, said former members of the contact negotiating team for both the union and management. The first year, taxpayers contributed $50 for each of the city’s 4,500 teachers, according to a 1972 decision by the Supreme Judicial Court.

“It came in lieu of salary,’’ said Richard Stutman, president of the union, which has about 6,500 members. “It is no extra than saying to someone, ‘You make 60 grand; two grand of that was extra back when you got it.’ We were offered more salary, but we took it this way. [Other unions] got larger salary increases all those years that we didn’t.’’

The union’s website describes the services as “a generous and valuable package’’ with “unique ‘extras’ to add to your total benefits.’’ School administrators have touted the plan in national recruiting efforts when they try to lure educators to Boston, union officials said.

About 80 percent of benefits paid by the fund are for dental and eye care, according to the trust’s most recent tax filings. The money allows the union to operate a vision center at its headquarters in Dorchester, employing a full-time optometrist and other staff.

But at $1,423 per teacher, the total cost of the perk is more than double what Boston pays for dental and vision for most other employees, who did not gain the coverage until 2001, according to city officials. The most popular health plan — a Harvard Pilgrim HMO — already includes es very basic vision coverage, city officials said. The majority of Boston employees are covered by the state’s dental trust fund, which costs the city roughly $700 per employee each year.

If the teachers union “was covered by the same plan as other union members in the city for dental insurance . . . it would save money,’’ said John McDonough, the School Department’s chief financial officer, who has done some “ballpark analysis’’ of the costs. “It is significant.’’

Spending by the trust fund for other perks ranked much lower, with $9,849 one year for recreation, which includes a softball league and a fun run. Another year the fund spent $11,026 on funeral expenses for a benefit that will reimburse up to $1,000 for services when a teacher dies, according to the union’s website.

The almost $1.3 million that taxpayers spent for the teachers’ legal services goes to a separate trust fund. Union members use the money most commonly for real estate transactions, to designate health care proxies, and to draft wills, according to Patrick Connolly, a union trustee. The benefit cannot be used to fight felony charges, Connolly said, or for disputes in the classroom and other school-related issues. Last year the legal fund paid $672,000 in benefits for roughly 1,300 claims, according to the union and tax filings.

“When all of these things were established, it was a totally different fiscal environment in terms of pay scales,’’ said Michael G. Contompasis, a former Boston schools superintendent and chief operating officer who served on the contract bargaining committee for 15 years. “Every time you ask to get something back in lieu of something that’s been given, it always comes with a price.’’

The contract negotiated by the White administration doubled the payment in 1969, giving $100 to the fund per teacher. With each new contract over the past four decades, the taxpayers’ contribution increased, often at the same rate as pay hikes. When the city pays almost $8.4 million this year, the health and welfare fund will cost six times the original deal cut in 1968 after adjusting for inflation.

“We view it as part of the total compensation package,’’ said Connolly, the union trustee, who noted that other unions have their own benefits, such as uniform allowances. “The city has a certain amount of money for wages. If we allocate part of that to an increase in the health and welfare fund, it takes it out of the pot of money that’s there.’’

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NOTE: In accordance with Title 17 U.S.C. section 107, this material is distributed without profit or payment to those who have expressed a prior interest in receiving this information for non-profit research and educational purposes only. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml

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Every tax is a pay cut . . .

A tax cut is a pay raise

Visit the CLT website

Citizens for Limited Taxation - PO Box 1147 - Marblehead, MA 01945 - 508-915-3665

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I don't know much about the East Coast but I pay a little attention to California. Some of their major municipalities are set to go bankrupt by 2014 or 2015. If municipalities beg for bail outs, I'm they will get them from the state or federal government. The state of California has a budget problem on its own, so if they're going to take on municipal debt the party will have to end a bit sooner. Washington has potential bail outs for a few states on its hands within the next decade unless the states introduce austerity measures like the European countries. Meanwhile, Washington has rising budget deficits of its own, and will have to bail out the entire financial sector again if they choose to raise interest rates. The end result of all these budget deficits, whether at the city, state, or federal level, will be inflation from

.

As you can see from this article, even the Old Left can't stand California's policies, which are simply to buy as many votes as possible from the public sector unions.

EWV, I disagree with their characterization of the public sector pensions and benefits as anything like the housing bubble. The housing bubble had to do with the economy, this has to do with government spending. I'm not sure the concept "bubble" can apply to government spending like this. Investors are not investing in public school teachers with an anticipation of ever higher profits. Although I admire what they're doing, nobody on the right is talking about the real underlying problems in the US economy except for Austrians.

The truth is that the housing bubble is probably still here. They didn't fix any of the underlying problems that caused it so homes are still overvalued. There is also a massive bubble in university education that hasn't popped yet. But the most worrying thing to me (and the thing that the entire media and most economists would argue is not a problem at all) is the consumption and services bubble in the US. They say all the time on the news that through the miracle of globalization Americans don't need to produce anything anymore, they can just have a service sector economy while China produces everything they consume. This has been caused by decades long distortions in the economy like the easy money handed out by the Fed. Americans have started to save again in the last year or two but they had negative savings rates before the bubble popped. They are buying flat screen TV's, cars, everything on debt. At the same time, America is bleeding manufacturing jobs. Even when the jobs data reports increased job numbers they are all service sector jobs.

Neither the right nor left will really talk about this. Both believe that spending and consumption are the drivers of the economy. Both seem to think savings are bad. They all think that China, Japan, and South Korea can do the producing for us while we just consume it and give them IOU's. The situation is very fragile. China might decide that instead of working all day so Americans can consume things, they will consume their own products, so they let their currency rise. Asian countries may decide they want to slowly reduce their US treasury holdings which will force the US to pay for its budget deficits with inflation. Anyway, something will cause imported goods to become more expensive and that will mean the US will have to shift from consumption to production. The question at that stage will be: Why would anyone open a factory in the US? There will just be massive unemployment and increases in the cost of living.

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EWV - I saw that 60 minutes segment. It was sobering.

Duke - Have you heard Peter Schiff's anecdote about the guys from different countries being stranded on a desert island? I'll try to find it and put it here. In short, the American decides that his job is to eat. :)

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I have hesitated to reply to this thread because it seems most Objectivist are in full or mostly full agreement with Austrian economist of which I am not so the disagreements can be large and fundamental. With that stated there still are major areas of agreement such as production and consumption.

I have a lot of wealthy clients (and poor ones also) that come to me every week and make statements or ask questions about the economy turning around. These people state things like, "closed a big deal this week which means things are looking up." One big deal being closed in contrast to two years ago when they closed mulitiple big deals per week on a consistent basis does not really mean much. Others will make statements like "the numbers on spending have just come out and they show an increase." A 0.09 spending increase is not what will turn the market around nor does it even mean we are producing anything and most likely it means what has already been discussed here already, just an expansion of debt.

It seems that most of America's population has accepted the idea that consumption is the end measure of an entities/countries financial status and hence they keep spending until the hole of debt overwhelms them. It does not have to be that way and I disagree with waiting around (such as some have put forth) and buying up companies for cheap as there will be almost nothing left by that time except chaos.

As a concrete examle I offer a situation that I observed just yesterday. For years I have been a member of Borders Books rewards program (which is free) which offers weekly dicounts on items and "Borders Bucks" which people can use to purchase any item. Because of this membership I received an email from the CEO of Borders stating that they had filed paperwork for bankruptcy earlier this week. And because of this membership I received an email stating that one of the local Borders were closing and they were offering 40-70% off of all items in the store (which turned out to be a lie). I decided to go to this specific Borders and see if they might have any books that I have been waiting to buy. One of the first things that amazed me about where this Borders is located is the fact that it is now a very run-down area compared to just a few years ago. I did not take an exact count of the business store-fronts that were empty but I offer that it is close to half or slightly more. As a matter of a fact, from where I parked I passed five empty store-fronts on my way to the Borders. When I was done looking around in Borders my wife and I went to get some lunch at Baja-Fresh which was surrounded by empty store-fronts. Inside Baja-Fresh there were only two people working, at lunch time, one at the counter and one doing the cooking which would have been abnormal just a few years ago.

Unless Americans (and others) begin to understand the basics of economics and that production is the key to growth then what I have been witnessing, along with others, is just the start. Fortunately, pain can act as that slap from reality that motivates one to rethink their premise and change for the better, there is still time.

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What do you think will trigger a recovery? I have to admit that I'm woefully ignorant of what has caused recovery in past recessions, even in my lifetime.

At the root of the whole problem is the acceptance of irrational government policies, economic policies and of course philosophy. But in this specific context, what would trigger a recovery would be deregulation and the cutting of spending and taxation. Prosperity cannot begin when all of one's profits/productivity are taxed or regulated away.

I recommend that if you have a concern to learn more about past recessions and recoveries that you begin with Richard Salsman's writings and lectures especially "The Cause and Consequence of the Great Depression" which is very good at giving great insight into what you ask. I also offer a few other books by non-Objectivist that range in quality (not philosophically integrated) but do a good job of giving the facts.

The Roosevelt Myth by John T. Flynn

FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression by Jim Powell

And as always I recommend Jean-Baptiste Say's A Treatise on Political Economy which I consider to be the best book written on the subject.

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What has been interesting is that US data has been coming out stronger than expected (to the point that some market participants are pricing in rate hikes before 2012).

An theory I read about recently, not from an academic but a trader/trader's newsletter, was that as firms had to "get more efficient" to cope with the new Obamaniac conditions coupled with a fall in demand for their products, they forced their staff to take on more responsibilities and work harder with no or little pay rise. As these workers, who were already middle-upper class with proportionally large income compared to the rest of the country, worked harder, they treated themselves more to compensate. As the top 30% of buyers drive most of the spending (due to their disproportionate spending power and higher profit margins in those markets) it pulled US corporate data up whilst implementing a virtuous circle of earnings in the more visible parts of the US economy.

That would explain the data. I still expect the second leg of the collapse. As Rosenberg keeps pointing out, the numbers may look stronger than what the folks on Wall Street are predicting, but they're still several % below what is expected post-recessions, and this with full blast money printing theoretically inflating the numbers. I'm massively bearish in the medium term, especially the USD. At least, in Europe central bankers happily admit that inflation also covers the cost of food and energy. The US denial on that subject is one of the biggest scams ever perpetrated by the academic establishment in service of free spending socialist madmen.

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Unless Americans (and others) begin to understand the basics of economics and that production is the key to growth then what I have been witnessing, along with others, is just the start. Fortunately, pain can act as that slap from reality that motivates one to rethink their premise and change for the better, there is still time.

Completely agree, although it is an inescapable fact that so far the vast majority of people are reaching the wrong conclusions.

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...As a concrete examle I offer a situation that I observed just yesterday. For years I have been a member of Borders Books rewards program (which is free) which offers weekly dicounts on items and "Borders Bucks" which people can use to purchase any item. Because of this membership I received an email from the CEO of Borders stating that they had filed paperwork for bankruptcy earlier this week. And because of this membership I received an email stating that one of the local Borders were closing and they were offering 40-70% off of all items in the store (which turned out to be a lie). I decided to go to this specific Borders and see if they might have any books that I have been waiting to buy. One of the first things that amazed me about where this Borders is located is the fact that it is now a very run-down area compared to just a few years ago. I did not take an exact count of the business store-fronts that were empty but I offer that it is close to half or slightly more. As a matter of a fact, from where I parked I passed five empty store-fronts on my way to the Borders. When I was done looking around in Borders my wife and I went to get some lunch at Baja-Fresh which was surrounded by empty store-fronts. Inside Baja-Fresh there were only two people working, at lunch time, one at the counter and one doing the cooking which would have been abnormal just a few years ago.

It sounds like we live in similar towns, or the same town. In my area it is not unusual to see an entire strip of shops empty. So, maybe we're worse off. I have noticed many restaurants very empty at times they should be busy. The other day I went to the golf course to hit a bucket of balls. It was sunny, warm, calm and 9am - on a Saturday. The course was dead. I couldn't believe it. At least the beautiful redhead was there serving beers at the bar.

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This thread is too depressing for me to read. Maybe later. Japan has had a relentless twenty-two years of gov't economic "help," rescues, bail-outs, and stimuli. Their recession isn't over yet. And, pray note, they seem to have learned nothing about the goodness of capitalism and badness of welfare statism. In my view, America's Recession/Depression could be just as bad as Japan's. Or worse. :)

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