"I have seen the future, and it works"
Lincoln Steffens, after his 1919 visit to the Soviet Union
In addition to Proposition 121, the Professional Fire Fighters of Arizona (PFFA) has also endorsed Arizona Proposition 204, the Arizona Sales Tax Renewal Amendment. Proposition 204 would make permanent the temporary one cent state sales tax increase that Arizona voters approved as Proposition 100 in May 2010. Proposition 100's intent was to close a large budget shortfall and prevent cuts to education. The sales tax will end on May 31, 2013 if Proposition 204 is not approved in November.
Proposition 204 mandates how revenue would be spent with the bulk going to education and smaller amounts designated for social programs and infrastructure. Proposition 204 also puts several restrictions on the state legislature. These include setting a minimum spending level on education and restricting how vehicle license tax and highway user funds can be used.
As with Proposition 121, we again see the influence of California politics in another ballot measure, but a little more history is in order in the case of Proposition 204. In 1988 California voters approved Proposition 98, the Classroom Instructional Improvement and Accountability Act, which amended the California Constitution to require that 40% of general fund revenue go to K-12 education and community colleges. The rallying cry at the time was similar to that of supporters of Arizona's Proposition 204: legislators can not be trusted to fund education and a designated revenue stream is needed to bring the state's schools up to where they need to be.
Proposition 98 has done such a fantastic job solving California's education funding problems that, flashing forward to the present, Governor Jerry Brown is now pushing a new referendum. Proposition 30, the Sales and Income Tax Increase (2012), will raise the state sales tax by a quarter of a cent from 7.25% to 7.50%, as well as income tax on those earning over $250,000 a year. These new revenues would again be used to fund K-12 education and community colleges. The income tax increase is listed as temporary and is supposed to expire seven years after enactment.
Financially pressed California voters are currently being treated to veiled threats of blackmail. College students are being threatened with tuition hikes, parents are being warned about the harm to their children, and all citizens are being warned about dire conditions if they do not vote for Proposition 30.
This should make Arizona taxpayers feel like Ebenezer Scrooge when the Ghost of Christmas Future showed him what lay ahead if he did not change his ways. Arizonans are being sold the same nonsense that Californians were in 1988. The revenue designated for education in 1988 was never about quality education but was meant to lock up funds for those special interests involved in education, mainly school and college employees and their union representatives.
The citizens of Arizona did a noble and unselfish thing in 2010 by approving a temporary one cent sales tax to close a historic budget gap. Now supporters of Proposition 204 are trying to flog them with their own kindness. Voters should realize that no amount of funding will ever be deemed enough by those advocating Proposition 204. Voters may be frustrated by their legislators, but there still exists some influence over them through the ballot box. If Proposition 204 passes, voters will further lose control of how Arizona is governed, empower special interests, and push Arizona closer to California's dysfunctional nightmare.
As general guidance, voters would be wise to reject any idea that comes from California. Vote NO on Proposition 204.
Monday, October 15, 2012
Sunday, October 14, 2012
California Dreaming: Why Arizonans should vote NO on Proposition 121
Yesterday I received the Professional Fire Fighters of Arizona (PFFA) endorsement guide. PFFA President Tim Hill's introductory letter explains PFFA's rationale for its endorsements and urges members to vote in November. In addition to this standard verbiage, he also takes the opportunity to give a pitch for Proposition 121, the Open Elections/Open Government Initiative (aka "Top Two" Initiative).
Proposition 121seeks to eliminate partisan primaries and allow all voters, regardless of party, to vote in a single primary. The two candidates receiving the most votes would advance to the general election, even if they belonged to the same party. Californians passed a similar referendum, Proposition 14, in 2010.
Ostensibly this would appear to be a good idea, which allowed all voters, including independents, to pick the two candidates they like best. Ideally, candidates would be forced to appeal to the greatest number of voters along the political spectrum in order to push themselves into the top two slots. However, elections do not work under ideal conditions.
California's Proposition 14 is currently in effect and has already produced a situation in which a heavily Democratic district will have two Republicans candidates on the general ballot because four Democratic candidates split the vote to the point that none of them got enough to be in the top two. This would not appear to be the wishes of the voters in this district. However, this will most certainly be the last time something like this happens in this California district because future primaries will have no more than two Democratic candidates on the ballot.
Therein lies the problem with California Proposition 14 and Arizona Proposition 121. These types of referenda will end up limiting voter choices by forcing parties to coalesce around a single candidate in an evenly split district or a pair of candidates in a district dominated by one party. If a party runs too many candidates, they risk the possibility of having none of them on the general election ballot. Someone will have to pick the one or two candidates on the primary ballot, and it will be party leaders, not voters. This is redolent of the proverbial smoke-filled rooms of politics past where party bigwigs hand-picked candidates for office. Instead of reducing the power of political parties, it will actually enhance it. (Note: according to this October 9, 2012 Arizona Republic article, Proposition 121 would create a 'top 2' primary in Arizona, the Arizona Republican party is officially opposed to Proposition 121, while the Arizona Democratic party has not officially taken a position, but has expressed reservations about it.)
Furthermore, the ability to disrupt primaries through the entry of bogus candidates to split an opposing party's votes will further turn primaries into a farce. The other beneficiary of Proposition 121 will be special interests, who will exert more influence in the selection of primary ballot candidates and see a reduced slate of viable candidates.
Mr. Hill writes that Proposition 121 "will do more to moderate our state than anything we have ever seen," but moderation is neither the goal nor the purpose of elections in Arizona or anywhere else. Elections express the will of the people, a noble goal in and of itself. Proposition 121 will limit the choices of voters and put more power in the hands of political parties and special interests.
Vote NO on Proposition 121.
Proposition 121seeks to eliminate partisan primaries and allow all voters, regardless of party, to vote in a single primary. The two candidates receiving the most votes would advance to the general election, even if they belonged to the same party. Californians passed a similar referendum, Proposition 14, in 2010.
Ostensibly this would appear to be a good idea, which allowed all voters, including independents, to pick the two candidates they like best. Ideally, candidates would be forced to appeal to the greatest number of voters along the political spectrum in order to push themselves into the top two slots. However, elections do not work under ideal conditions.
California's Proposition 14 is currently in effect and has already produced a situation in which a heavily Democratic district will have two Republicans candidates on the general ballot because four Democratic candidates split the vote to the point that none of them got enough to be in the top two. This would not appear to be the wishes of the voters in this district. However, this will most certainly be the last time something like this happens in this California district because future primaries will have no more than two Democratic candidates on the ballot.
Therein lies the problem with California Proposition 14 and Arizona Proposition 121. These types of referenda will end up limiting voter choices by forcing parties to coalesce around a single candidate in an evenly split district or a pair of candidates in a district dominated by one party. If a party runs too many candidates, they risk the possibility of having none of them on the general election ballot. Someone will have to pick the one or two candidates on the primary ballot, and it will be party leaders, not voters. This is redolent of the proverbial smoke-filled rooms of politics past where party bigwigs hand-picked candidates for office. Instead of reducing the power of political parties, it will actually enhance it. (Note: according to this October 9, 2012 Arizona Republic article, Proposition 121 would create a 'top 2' primary in Arizona, the Arizona Republican party is officially opposed to Proposition 121, while the Arizona Democratic party has not officially taken a position, but has expressed reservations about it.)
Furthermore, the ability to disrupt primaries through the entry of bogus candidates to split an opposing party's votes will further turn primaries into a farce. The other beneficiary of Proposition 121 will be special interests, who will exert more influence in the selection of primary ballot candidates and see a reduced slate of viable candidates.
Mr. Hill writes that Proposition 121 "will do more to moderate our state than anything we have ever seen," but moderation is neither the goal nor the purpose of elections in Arizona or anywhere else. Elections express the will of the people, a noble goal in and of itself. Proposition 121 will limit the choices of voters and put more power in the hands of political parties and special interests.
Vote NO on Proposition 121.
PSPRS: broke or broken promise
For PSPRS members, calculating one's pension is easy: take the average of your high three (or five) years of salary and multiply it by a percentage between 50-80% based on your years of service. This amount is the annual retirement you will receive for the rest of your life. However, the simplicity of this calculation belies the more complex system inside PSPRS where actuaries use mathematical models to project costs into the future and financial professionals have to make critical decision about where to invest funds in order to meet those cost projections.
The danger for PSPRS members is to simply think of the promise that is implied in their retirement calculation and not the mathematical and financial reality behind it. The attempts to reform PSPRS are often portrayed as a breach of faith by government, despite the fact that Arizona's public employers have fulfilled their obligations to PSPRS and all other state pensions. Unlike some public employers in other states, Arizona has not delayed or withheld funding to PSPRS or tried to hide its obligations in pension bonds, so the breach of faith explanation does not hold water.
The financial problems of PSPRS and other public pension are often portrayed as a broken promise since this idea is easier to sell instead of the reality that PSPRS has to survive in the same world as IRA's, 457(b) accounts, Social Security, and every other investment account. PSPRS does not exist separately in its own financial realm where the only problem is legislators reducing funding or benefits. Amity Shlaes addresses this situation very starkly in her September 28, 2012 article (Election won't prevent pension crash).
If it was financial self-delusion to think that dot.com companies could enrich investors without earnings or that home prices could rise indefinitely, then it is equally dangerous for PSPRS members to think their pension is isolated from market forces, common sense, or arithmetic. Anyone who tells members that PSPRS' financial problems are only about broken promises is setting them up for disaster.
The danger for PSPRS members is to simply think of the promise that is implied in their retirement calculation and not the mathematical and financial reality behind it. The attempts to reform PSPRS are often portrayed as a breach of faith by government, despite the fact that Arizona's public employers have fulfilled their obligations to PSPRS and all other state pensions. Unlike some public employers in other states, Arizona has not delayed or withheld funding to PSPRS or tried to hide its obligations in pension bonds, so the breach of faith explanation does not hold water.
The financial problems of PSPRS and other public pension are often portrayed as a broken promise since this idea is easier to sell instead of the reality that PSPRS has to survive in the same world as IRA's, 457(b) accounts, Social Security, and every other investment account. PSPRS does not exist separately in its own financial realm where the only problem is legislators reducing funding or benefits. Amity Shlaes addresses this situation very starkly in her September 28, 2012 article (Election won't prevent pension crash).
If it was financial self-delusion to think that dot.com companies could enrich investors without earnings or that home prices could rise indefinitely, then it is equally dangerous for PSPRS members to think their pension is isolated from market forces, common sense, or arithmetic. Anyone who tells members that PSPRS' financial problems are only about broken promises is setting them up for disaster.
Friday, October 12, 2012
The future is the past
The comparison between defined benefit pensions and defined contribution pensions is often portrayed as a moral choice. Defenders of defined benefit pensions believe that they are an obligation that caring employers owe to their employees, while the defined contribution pensions are viewed as a cold-hearted abandonment of employees to their own retirement fate. This good vs. evil model sets up those who advocate for defined contribution pensions as the bad guys.
This simplistic model is complicated by financial reality. The principal justification for the defined contribution pension is that it allows the employer a way to predict costs. By paying a known cost based on wages and salaries, the employer knows that there will be no future surprises that could affect their ability to operate. In the private sector, this also benefits employees of a company that later liquidates by keeping their retirement funds in the control of the employee. The public sector has an decided advantage over the private sector because public sector entities, though they can and do go bankrupt, will never cease to exist or lose the ability to bring in revenue.
However, the public sector still has to budget and predict future costs, and the inability to do this is what caused the public sector pension crisis. At the time most public sector pensions were established the honest belief was that defined benefit pensions could be managed and funded in perpetuity, but unfortunately, political and financial reality intruded. Now public employees will go into the future with uncertainty about their retirement benefits hanging over their heads.
This leaves the good vs. evil model a tired argument, but it is still being sold to citizens and public employees. The real test is if a defined contribution pension can allow governments to plan for costs (and avoid bankruptcy) and provide a fair and adequate retirement for their employees. The following articles show that it can be done:
This simplistic model is complicated by financial reality. The principal justification for the defined contribution pension is that it allows the employer a way to predict costs. By paying a known cost based on wages and salaries, the employer knows that there will be no future surprises that could affect their ability to operate. In the private sector, this also benefits employees of a company that later liquidates by keeping their retirement funds in the control of the employee. The public sector has an decided advantage over the private sector because public sector entities, though they can and do go bankrupt, will never cease to exist or lose the ability to bring in revenue.
However, the public sector still has to budget and predict future costs, and the inability to do this is what caused the public sector pension crisis. At the time most public sector pensions were established the honest belief was that defined benefit pensions could be managed and funded in perpetuity, but unfortunately, political and financial reality intruded. Now public employees will go into the future with uncertainty about their retirement benefits hanging over their heads.
This leaves the good vs. evil model a tired argument, but it is still being sold to citizens and public employees. The real test is if a defined contribution pension can allow governments to plan for costs (and avoid bankruptcy) and provide a fair and adequate retirement for their employees. The following articles show that it can be done:
(How three Contra Costa cities avoided the doomsday of pension plans)
(Social Security by Choice: The Experience of Three Texas Counties)It is amazing that the three California cities were able to resist the siren song of CalPERS and public employee unions when they were peddling financial snake oil. The city officials who resisted these appeals had an unusual grasp of finance and a rare concern for their citizens and workers. The Texas counties are similarly remarkable for rescuing their employees from the losing proposition of Social Security. These long-retired officials in California and Texas are exemplars, not only for their ability to design retirement plans that were mutually beneficial to taxpayers and employees, but also for their sober and realistic attitude about future costs and benefits. Regardless of what eventually happens to public sector employee pensions, this same attitude should be the standard mindset going forward.
Friday, October 5, 2012
The usual suspects, part 6
This series of posts on the usual suspects concludes on a rather depressing note. The public sector pension crisis is an unfortunate manifestation of several groups all doing what is best for themselves. Some might also include public pension actuaries in this stew, but while they may be guilty of overly rosy expectations, they are bound by the laws politicians enact and must invest in a volatile and unpredictable market. Neither politicians, Wall Street, nor public sector employee unions intended to create the public sector pension crisis, and the reader can make a judgment as to who has the most responsibility. However, blaming any or all of them is pointless.
The previous five posts were meant neither as a defense nor an indictment of politicians, Wall Street, or public sector employee unions. Instead, it was to show how each group acts in the best way it knows to maximize benefits for itself. The more suspicious readers may believe that this is part of a conspiracy in which politicians, public sector employee unions, and Wall Street all collaborate to fleece the taxpayer. Politicians promise public employee unions generous pay and benefits without the revenue to pay for them. These promises eventually become unsustainable, so underfunded pensions are forced to invest in riskier and riskier Wall Street products in a losing game to bring pensions back to full funding. Wall Street reaps large fees that they can also channel back to politicians in a neverending cycle. Each group then points the finger at the others to confuse the taxpayer about the shared culpability.
The truth is much simpler and sadder. There was simply no one who would stand up to the absurd and dangerous groupthink that afflicted politicians, Wall Street, and public sector employee unions. The politicians in Stockton already had adequate evidence of the harm done by passing unsustainable pension costs into the future, yet when Lehman Brothers told them they could again push costs further into the future, they went for it. They did this despite their own skepticism and professed ignorance of the bond market. This never addressed the fundamental problem that got them into the mess in the first place--promising more than they could ever pay for--and kept right on with their standard behavior.
As for public sector employee unions, it is possible to see the dangerous groupthink here in Arizona. The reforms to PSPRS are slowly being chipped away. The public employee unions never really accepted the changes made to PSPRS, and they are fighting them out of sight of the public in the courts and legislature. The notion that a benefit could be taken away is anathema to unions, and the cost, sustainability or fairness of a benefit is not a consideration, even if its existence affects the long-term health of PSPRS.
There is not a lot to say about Wall Street. Pensions must work with Wall Street to earn the returns they need to pay retired members what they were promised, but pensions are under no obligation to buy or utilize defective products. Wall Street is just as prone to groupthink as the others and will follow any trend that makes them money. They will have no qualms about selling a popular or profitable product, even if there is a potential for poor returns or default. Pensions should not count on Wall Street to help them earn enough to make up for bad political and financial decisions .
If this is the way the system continues to work, the public employee pension crisis can only end with the bankruptcy of defined benefit pensions and their replacement with defined contribution pensions. Simple arithmetic tells us that costs can not be deferred infinitely to the future and that benefits can not accumulate infinitely without a way to finance them. The only salvation will be if politicians and public sector unions begin to accept reality and honestly deal with the crisis before courts and angry taxpayers do.
The previous five posts were meant neither as a defense nor an indictment of politicians, Wall Street, or public sector employee unions. Instead, it was to show how each group acts in the best way it knows to maximize benefits for itself. The more suspicious readers may believe that this is part of a conspiracy in which politicians, public sector employee unions, and Wall Street all collaborate to fleece the taxpayer. Politicians promise public employee unions generous pay and benefits without the revenue to pay for them. These promises eventually become unsustainable, so underfunded pensions are forced to invest in riskier and riskier Wall Street products in a losing game to bring pensions back to full funding. Wall Street reaps large fees that they can also channel back to politicians in a neverending cycle. Each group then points the finger at the others to confuse the taxpayer about the shared culpability.
The truth is much simpler and sadder. There was simply no one who would stand up to the absurd and dangerous groupthink that afflicted politicians, Wall Street, and public sector employee unions. The politicians in Stockton already had adequate evidence of the harm done by passing unsustainable pension costs into the future, yet when Lehman Brothers told them they could again push costs further into the future, they went for it. They did this despite their own skepticism and professed ignorance of the bond market. This never addressed the fundamental problem that got them into the mess in the first place--promising more than they could ever pay for--and kept right on with their standard behavior.
As for public sector employee unions, it is possible to see the dangerous groupthink here in Arizona. The reforms to PSPRS are slowly being chipped away. The public employee unions never really accepted the changes made to PSPRS, and they are fighting them out of sight of the public in the courts and legislature. The notion that a benefit could be taken away is anathema to unions, and the cost, sustainability or fairness of a benefit is not a consideration, even if its existence affects the long-term health of PSPRS.
There is not a lot to say about Wall Street. Pensions must work with Wall Street to earn the returns they need to pay retired members what they were promised, but pensions are under no obligation to buy or utilize defective products. Wall Street is just as prone to groupthink as the others and will follow any trend that makes them money. They will have no qualms about selling a popular or profitable product, even if there is a potential for poor returns or default. Pensions should not count on Wall Street to help them earn enough to make up for bad political and financial decisions .
If this is the way the system continues to work, the public employee pension crisis can only end with the bankruptcy of defined benefit pensions and their replacement with defined contribution pensions. Simple arithmetic tells us that costs can not be deferred infinitely to the future and that benefits can not accumulate infinitely without a way to finance them. The only salvation will be if politicians and public sector unions begin to accept reality and honestly deal with the crisis before courts and angry taxpayers do.
Monday, October 1, 2012
The usual suspects, part 5
According to the Bureau of Labor Statistics' 2011 data, the rate of union membership in the private sector is 7.2 million workers, representing 6.9% of the private sector workforce. Union membership in the public sector is 7.6 million members, representing 37.0% of the public sector workforce. This 37% of public sector union membership is greater than the 35% all-time high of private sector union membership achieved in the mid-1950's.
The high level of public sector unionization is in addition to civil service systems that provides many job protections to public sector workers not available in the private sector. So what accounts for this seeming incongruity of the data? Do public sector workers do more dangerous work, work longer hours, or have a more contentious relationship with management than private sector workers do? The answer, of course, is no, so another explanation is necessary.
As was detailed in the prior post, public sector unions inherited the DNA of private sector unions. They understand the importance of politics and politicians because that is where their power ultimately derives. They also embrace the concept that benefits approved are benefits earned, and these benefits should never be given up without a fight. However, these values are complicated by the different labor-management relationship in the public sector.
The most militant union member in the private sector knows that there is a limit to his demands. If a business is driven into bankruptcy or liquidation, all previous agreements become subject to a court's discretion, and the court can diminish or eliminate benefits previously awarded. The public sector unions have no concerns about a government entity ceasing to exist and municipal bankruptcy courts have so far protected promised benefits. Public sector unions also have the unique ability to influence the choice of their ultimate bosses, politicians, through elections. In the private sector, unions can not replace owners, and boards of directors choose CEO's of corporations. Finally, the notion of a fair share of revenue that private sector unions can legitimately negotiate with management over does not exist in the public sector as their wages are paid with taxes.
This combination of private sector union values in conflict with public sector attributes makes for an interesting battleground. The battles in Wisconsin over the past 18 months show how ingrained the values of private sector unions are in public sector unions. The elected government of Wisconsin fulfilled the promises they made to voters and acted within their legal authority to change the law in Wisconsin. This is how politicians, as representatives of taxpayers, are supposed to act. Public sector unions responded with a series of recalls, legal challenges, and mass protests. The rhetoric used by public sector unions attempted to frame this conflict as a regression to a mythical dark time in the history of public sector labor, rather than the governor and legislators doing what they thought was best for taxpayers, workers, and public school students.
The situation in Wisconsin brought to the surface the private sector tendencies of public sector unions by a clear and open challenge to their power and benefits. The usual modus operandi is to influence politics behind the scenes in order to increase benefits whenever possible and fight any changes in benefits. This has been a very effective strategy over the years and explains why union membership is so high in the public sector.
The high level of public sector unionization is in addition to civil service systems that provides many job protections to public sector workers not available in the private sector. So what accounts for this seeming incongruity of the data? Do public sector workers do more dangerous work, work longer hours, or have a more contentious relationship with management than private sector workers do? The answer, of course, is no, so another explanation is necessary.
As was detailed in the prior post, public sector unions inherited the DNA of private sector unions. They understand the importance of politics and politicians because that is where their power ultimately derives. They also embrace the concept that benefits approved are benefits earned, and these benefits should never be given up without a fight. However, these values are complicated by the different labor-management relationship in the public sector.
The most militant union member in the private sector knows that there is a limit to his demands. If a business is driven into bankruptcy or liquidation, all previous agreements become subject to a court's discretion, and the court can diminish or eliminate benefits previously awarded. The public sector unions have no concerns about a government entity ceasing to exist and municipal bankruptcy courts have so far protected promised benefits. Public sector unions also have the unique ability to influence the choice of their ultimate bosses, politicians, through elections. In the private sector, unions can not replace owners, and boards of directors choose CEO's of corporations. Finally, the notion of a fair share of revenue that private sector unions can legitimately negotiate with management over does not exist in the public sector as their wages are paid with taxes.
This combination of private sector union values in conflict with public sector attributes makes for an interesting battleground. The battles in Wisconsin over the past 18 months show how ingrained the values of private sector unions are in public sector unions. The elected government of Wisconsin fulfilled the promises they made to voters and acted within their legal authority to change the law in Wisconsin. This is how politicians, as representatives of taxpayers, are supposed to act. Public sector unions responded with a series of recalls, legal challenges, and mass protests. The rhetoric used by public sector unions attempted to frame this conflict as a regression to a mythical dark time in the history of public sector labor, rather than the governor and legislators doing what they thought was best for taxpayers, workers, and public school students.
The situation in Wisconsin brought to the surface the private sector tendencies of public sector unions by a clear and open challenge to their power and benefits. The usual modus operandi is to influence politics behind the scenes in order to increase benefits whenever possible and fight any changes in benefits. This has been a very effective strategy over the years and explains why union membership is so high in the public sector.
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