The whopper government pension of Mike Wiley, outgoing boss of Sacramento Regional Transit, continues to make news, but not just because it draws on the RT operating budget. As Tony Bizjak notes in the Sacramento Bee, Wiley is eligible for a pension of $278,000, a full $48,000 more than Wiley’s final salary of $230,000 and $68,000 higher than the federal pension maximum of $210,000. What did Wiley do to deserve this largesse?
“Shortly after signing Wiley’s contract,” writes Bizjak, “RT slipped into financial duress from which it has yet to recover. The agency has tapped reserve accounts in the last three years to balance its budget, leaving it with virtually no emergency funds this summer. RT raised rider fares 10 percent on Friday, making its buses some of the most expensive to ride in the country.” Looks like Mike Wiley was a major bust, but he still gets the big bucks. The outgoing RT general manager plans to select a pension option that will pay him some $220,000 a year, still $10,000 above the federal pension maximum of $210,000. As Mr. Bizjak observes, Mike Wiley is not alone in that regard.
According to the California Public Employees’ Retirement System (CalPERS), 684 retired government employees get benefits above the federal maximum of $210,000. To pay for the extra amount, the cities, school districts and other government agencies that employed the retirees must come up with the additional money. As Bizjak observes, “the supplemental money is more like an ongoing salary paid to the retiree, rather than a formal pension.” In similar style, Regional Transit had considered paying the “retired annuitant” Mike Wiley a personal services contract of up to $50,000.
Meanwhile, RT board chairman Jay Schenirer explains that new boss Henry Li does not have a pension supplement deal like Wiley’s. “We are trying to be responsible stewards of the public money,” Schenirer told the Bee. Sure you are, Jay, just like the legislature. Taxpayers get that.
Last week, on June 29, 2016, President Obama signed a bill designed to help Puerto Rico’s government restructure its excessive debts into law – the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). CNN reports:
On Thursday, President Obama signed a bill known as PROMESA (Spanish for “promise”) to help Puerto Rico get out of its massive economic crisis.
The island has run up nearly $70 billion of debt about $20,000 per resident). At the same time, the island’s population has shrunk dramatically. Puerto Ricans are moving to Florida, Texas and elsewhere in the mainland U.S. for better paying jobs.
PROMESA was a bipartisan compromise with the Republican House and Senate. Both chambers approved the bill by a large margin.
Now law, PROMESA allows the territorial government of Puerto Rico to be able to restructure the terms of its debt obligations in a process similar to bankruptcy, but with the provision that the territory’s finances will now be under the control of an independent board that will be appointed by the President and the U.S. Congress, rather than under the exclusive control of Puerto Rico’s government as it was before.
Two days after PROMESA was signed into law however, on July 1, 2016, the U.S. territorial government of Puerto Rico officially defaulted on another $2 billion of its total $70+ billion debt anyway, an amount that included for the first time some $779 million of the portion of the government’s debt that is supposed to be guaranteed to be paid to its creditors by the territory’s constitution. The Wall Street Journal has the story:
Puerto Rico will default on its constitutionally guaranteed debt for the first time Friday by failing to make most of some $1 billion in payments due, officials said on Friday.
The island’s Government Development Bank said the territory faces an imminent cash crunch and that its cash balances have dropped to “dangerously low” levels. As a result, the government isn’t likely to make any of the $779 million payment on general obligation bonds due Friday.
The default will be particularly expensive to the U.S. insurance companies that underwrote Puerto Rico’s government debts:
A default would force the three major insurers backing Puerto Rico’s debt to pay out as much as hundreds of millions of dollars to bondholders. Ambac Financial Group backs $122 million in Puerto Rico debt due Friday, company disclosures show. National Public Finance Guarantee Corp. backs $173 million in general obligation debt coming due Friday, records show. Assured Guaranty Ltd. backs $428 million coming due in the third quarter, most of it also due Friday.
Puerto Rico’s government took the action to officially default on making its debt payments due on July 1 just minutes after President Obama signed the PROMESA bill into law.
Puerto Rico’s default on its constitutionally guaranteed General Obligation debts marks the first time that any state or territorial government in the United States has defaulted on such constitutionally guaranteed debt since Arkansas did in 1933, during the Great Depression.
The existence of perverse incentives explain a lot of the bad behavior that we see among government bureaucrats.
A perverse incentive can be said to exist whenever an incentive to achieve a specific goal instead creates an unintended and undesirable result, which is often entirely contradictory to the intentions of the people who created the incentive.
Perhaps the best example in recent years of perverse incentives at work within the U.S. government is the performance bonuses that provided a financial motive for the Department of Veterans Affairs’ supervisors and scheduling staff to create the phony wait lists that were at the heart of the scandal that resulted in American veterans being denied medical care.
Although the performance bonuses had been established with the intention of rewarding those supervisors who succeeded in reducing the amount of time that veterans seeking medical treatment had to wait before seeing a VA doctor, the VA’s supervisors and staff realized that they could more easily pocket the money if they kept two sets of appointment books to make it look like the veterans were getting the care they were seeking within a short period of time, which then allowed them to claim they were meeting the goal of the performance incentive, entitling them to claim bonuses.
For thousands of veterans, the fraudulent wait lists meant that instead of their getting to see a VA doctor more quickly, they were instead told they had to wait months or even years to even get an appointment, with the consequence that hundreds of veterans died waiting to get care – the exact opposite intention of the performance incentive to shorten the time that veterans had to wait for medical treatment.
Not long ago, we identified a perverse incentive that would give the U.S. government a financial motive for creating instability elsewhere in the world. Because global investors avoid investing in other parts of the world that become consumed by instability, their flight from risk can benefit the U.S. government because it can lower its cost of borrowing money as they seek the relative safety of investing in U.S. Treasury securities.
For a nation whose national debt is well over 80% of the way to doubling in the 7+ years since January 20, 2009, such an incentive would be fairly powerful and could very well influence how it goes about achieving its foreign policy objectives. Or rather, how it goes about failing to achieve its stated foreign policy objectives, where its failure to achieve success in its stated objectives results in an increase in international instability, where the primary benefit that the U.S. realizes in continuing its ineffective policies without reform exists because of its perverse incentive.
It can be argued that the financial turmoil of the recent Brexit vote is just such an example, where President Obama’s April 2016 comments to the British people produced the opposite effect of the President’s stated desires, with the result of increasing instability overseas and with the benefit of having the interest rates that the U.S. pays on its national debt fall significantly as a result of the heightened political and economic turmoil produced by the vote’s outcome.
Lower borrowing costs are not the only benefits a nation might realize from the political or economic instability in other nations. Alberto Ades and Hak Chua considered whether a nation might realize positive gains in trade if its neighboring countries were experiencing turmoil. In the following passage, note that no distinction is made with respect to whether the cause of a nation’s political turmoil is homemade or if it has been fomented by external actors:
There are however cases in which countries may benefit from political unrest in neighboring countries. If neighbors compete for a scarce pool of foreign capital or aid, political instability in the rival country can lead to a larger share of that pool. If neighbors are competing oligopolists of a good or resource, production disruptions in a rival country can lead to an improvement in the terms of trade as well as an increased share of the export market. Neighboring countries may also benefit from the huge capital flight and the migration of talented people that often occur in countries with political turmoil.
Ades and Chua go on to note that such benefits can be completely overwhelmed in the case where instability spreads beyond the affected nation’s borders and produces instead a strong adverse effect, harming all nations in the affected regions through the disruption of trade and the diversion of resources toward military expenditures rather than toward productive investments that might grow the economies of all the nations.
The same principle would apply to the pursuit of the perverse incentive of increased international instability as a means to lower a nation’s cost of borrowing money to finance an excessively large national debt. Such a strategy would undoubtedly be overwhelmed in time by more negative political and economic outcomes that would outweigh whatever hoped benefits might be realized. As a general rule, if you think you can profit by going out and causing trouble in the world, eventually the world’s trouble is going to come looking for you with a bigger bill than you can ever hope to pay.
According to a report by Adam Ashton in the Sacramento Bee, California will net a large portion of Volkswagen’s $14.7 settlement for cheating on emissions. Some $10 billion will go to buy-back programs and $4.7 billion toward state and federal air-quality programs, and “California stands to gain $1.18 billion of that money.” Mary Nichols, chairwoman of the California Air Resources Board (CARB), a 2007 appointee of governor Arnold Schwarzenegger, announced that the agency would keep a sharp eye on Volkswagen’s repair plan. “As you can imagine with our history with this company,” she said, “we’re not going to take anything on its face.” Taxpayers have good reason to show the same skepticism with CARB
Hien Tran, manager of the Health and Ecosystems Assessment Section in CARB’s Research Division, authored the 2010 report “Methodology for Estimating Premature Deaths Associated with Long-term Exposure to Fine Airborne Particulate Matter in California.” Dr. S. Stanley Young of the National Institute of Statistical Sciences found the report too flawed to be done by a capable statistician, but according to CARB Tran had recently earned a PhD in statistics from the University of California at Davis. In reality, Tran’s PhD came from Thornhill University, a diploma mill located in a New York City UPS office.
The falsifying of academic credentials is a serious matter and can easily end a career. CARB, however, did not fire Tran, opting instead for a suspension and demotion. And CARB used Tran’s flawed study in heavy-handed diesel regulations, a costly state policy.
For CARB boss Mary Nichols, the affair was “a very annoying distraction,” and no legislator called for her resignation. Based on a history of indulging fakery, taxpayers should never take anything from CARB at face value.
As we recently noted, the Regional Transit authority in California’s capital of Sacramento cut 20 administrative positions, saving taxpayers $1.5 million. In similar style, the salary of incoming business manager Henry Li is $14,000 less than that of outgoing boss Mike Wiley. Those reductions set a good example, but all is not well at Regional Transit.
As Tony Bizjak writes in the Sacramento Bee, RT officials wanted to keep Wiley through the end of the year, even though new manager Li does not need him. RT is considering a personal services contract with Wiley as a “retired annuitant” that would last until November 2017. Wiley’s pension is another matter.
His initial deal gave him a whopping $285,612 a year, “including $75,000 a year that would come out of RT’s operating budget.” A new deal would drop the pension to $279,000, but still grab money from the Regional Transit operating budget, reducing the amount by only $6,730 per year. Operating budgets are for operations, not pensions, so this is hardly an example of responsible management. Fabrizo Sasso, executive director of the Sacramento Central Labor Council, told Tony Bizjak that even with the proposed reductions, Wiley’s package is out of line, and called the personal services contract “insane.” Sasso is right on both counts, but Regional Transit is hardly the only place where things are out of line and insane.
In California and across the nation, extravagant government pensions are depleting budgets and threatening vital public services. For that story see Lawrence McQuillan’s California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis.
It’s a well established fact that unlike previous U.S. Presidents, President Barack Obama made an unusual practice of bowing to foreign leaders, and particularly China’s and Japan’s leaders as he greets them, which is a major breach of diplomatic etiquette in that by doing so, the President appears to be acknowledging that he is of lower status than the officials to whom he bows.
To his credit, since his repeated diplomatic protocol mistakes, the President has largely restrained from publicly bowing to the leaders of these two nations, who also happen to also be the United States’ two largest foreign creditors, to whom the U.S. government owes large amounts of money. Here is an estimate of just how much money that is in the case of China:
How much money does the U.S. federal government owe to China?
Answering that question is a bit harder than it sounds, because in addition to its own financial institutions and those of Hong Kong, China loans money to the U.S. indirectly through a number of foreign intermediaries – most notably in the international banking centers in the United Kingdom, Belgium and in recent years, Ireland.
Using historic data trends to estimate the portion of each nation’s reported holdings of the U.S. national debt likely belong to each nation, we then assigned any surplus in those holdings to China. The chart below reveals what we found for the ten year period from January 2006 through January 2016.
In the 10 years from January 2006 through January 2016, we estimate that China nearly quadrupled its holdings of U.S. Treasuries, from roughly $500 billion to almost $2 trillion. China therefore accounts for approximately $1 out of every $7 that the U.S. federal government has borrowed from the public in order to sustain its spending at levels that are considerably elevated over the revenue it collects through taxes and also the payments it receives for federal direct student loans.
Meanwhile, through January 2016, China holds roughly $1,875 billion of U.S. government-issued debt securities (9.9% of the U.S.’ total public debt outstanding at that time), which is down from $2,027 billion, or 11.5%, in March 2014, as China has liquidated a significant portion of its holdings through its Belgium-based intermediaries.
The Japanese are the second biggest foreign holders of the debt securities issued by the U.S. government whenever it borrows money. The U.S. government owes the Japanese some $1.137 trillion as of March 2016 – a decline of $87.5 billion in the year since March 2015.
Back in 2013, some 8,000 members of the Service Employees International Union (SEIU) rallied at the California state capitol in Sacramento chanting, “We’re letting them know this is our house!” In 2012, the government employee unions had helped elect big-government, tax-hiking politicians such as Jerry Brown, and they were now clamoring for more money and benefits. In his first stint as governor, taxpayers might recall, Brown authorized collective bargaining for state employees, and that boosted the cost of government.
As Jon Ortiz reports in the Sacramento Bee, a tentative contract for California’s state craft and maintenance workers “hikes costs to taxpayers more than any deal bargained by the union in at least 11 years.” According to the state legislative analysis, the deal with the International Union of Operating Engineers Unit 12 “adds a total $473 million over four years to the state’s pay and benefit costs.” As the legislative analyst noted, the deal would “increase annual state costs more than any of the Unit 12 agreements ratified since at least 2005.”
Sweet deals for government unions, however, do not always result in productivity. As we noted, CalTrans pays some 3,500 employees to sit around. The legislative analyst sought to trim these positions but Bruce Blanning, executive director of Professional Engineers in California Government, defended the comfy arrangement. In his view, CalTrans should keep idle staff on hand to prepare future projects, and outsourcing work to independent contractors “wastes taxpayer money.”
The powerful SEIU, meanwhile, has been fighting legislation requiring government employee unions to publicly post itemized financial records and hold annual bi-annual elections. So SEIU local 1000 president Yvonne Walker, like other government union bosses, still has a strong case that the state capitol is “our house.” That’s a bad deal for taxpayers.
According to the U.S. Treasury Department, the federal government has borrowed over $1.036 trillion to loan money to U.S. college students through the Federal Direct student loan program through April 2016, with over 86% of that amount having been added since January 2009.
David Jesse of the Detroit Free Press reports that for the over $605 billion of federal student loans that have come due for payment, all is not going well with respect to former students paying back the money they borrowed from Uncle Sam:
Twenty percent of all federal loan borrowers have defaulted on their loans, according to new data released by the federal government last week,” the Free Press reports. “That translates into $121 billion of loans in default. That same data show 40 percent of all borrowers are not making any payments, and are in some sort of forbearance, delinquency or default.
For students who have fallen behind on their student loan payments, or who are in default, the decision to borrow money from the U.S. government to go to college is looking more and more like an extremely poor choice.
For U.S. policy makers, the exceptionally high rates of payment delinquencies and defaults mean their best intentions have backfired, with the result of harming the people they intended to help the most. The Wall Street Journal‘s Josh Mitchell writes about how what was supposed to be an investment in “human capital” has instead turned toxic:
The U.S. government over the last 15 years made a trillion-dollar investment to improve the nation’s workforce, productivity and economy. A big portion of that investment has now turned toxic, with echoes of the housing crisis.
The investment was in “human capital,” or, more specifically, higher education. The government helped finance tens of millions of tuitions as enrollment in U.S. colleges and graduate schools soared 24% from 2002 to 2012, rivaling the higher-education boom of the 1970s. Millions of others attended trade schools that award career certificates....
New research shows a significant chunk of that investment backfired, with millions of students worse off for having gone to school. Many never learned new skills because they dropped out—and now carry debt they are unwilling or unable to repay. Policy makers worry that without a bigger intervention, those borrowers will become trapped for years and will ultimately hurt, rather than help, the nation’s economy.
The article indicates that some 7 million Americans have defaulted on their federal student loans, which for $121 billion worth of student loans in default, puts the average value of a student loan in default at $17,285.
A monthly payment for a federal student loan with the current interest rate of 4.29% for undergraduates over a typical 10 year term is $177.39 according to the Student Loan Calculator at Bankrate.com, or $2,128.68 per year.
Because the money is owed to the federal government, Americans who are chronically unable to make the monthly payments on their on their student loans are not able to have the debt discharged through bankruptcy.
Instead, many of these former students will find themselves placed on the federal government’s Income Based Repayment plan that will instead take up to 10% of their discretionary income out of their pay each month for the next 20 years. The amount of discretionary income that can be subjected to an Income Based Repayment plan depends upon things like how many people are in the household of the student loan borrower.
In practice, except for expiring after a 20 year period, the federal government’s Income Based Repayment plan for student loans is no different from the income tax. Until that period expires, it should be considered to be an additional income tax – one that is specifically imposed on poor and lower middle class Americans.
Just like many of the 7 million Americans who could not afford to continue making an average $177.39 per month payment on their student loans and are now in default upon them. Just like an additional 7 million Americans who have fallen behind on their student loan payments.
According to a new whistleblower, supervisors at the the U.S. Department of Veterans Affairs’ central office are abusing their power in ways that include physical and verbal intimidation, sexual harassment, and orders to their staff to not cooperate with Congressional investigations of wrongdoing at the federal government entity. Ashleigh Barry of Phoenix’ KPHO/KTVK News reports:
The employee, a U.S. Air Force veteran and information security officer who chose to conceal his identity, took his concerns all the way to the top and yet little to nothing has been done about them....
Case in point, he says, is his direct supervisor, whom he accuses of threatening him because he recently reported problems and even illegal activities within the facility.
“That’s when he grabbed the arm of the chair and he lunged at me and he yelled at me and said, ‘I’m your supervisor. I’m telling you it’s wrong,’ then he ordered me not to report anything without his permission,” the whistleblower explained....
“I have had it put in writing to me that I am not to cooperate with investigators, specifically congressional investigators,” he said. “My personal belief is that they don’t want their dirty laundry exposed.”
Given the nature of the multiple allegations of misconduct, that would be something of an understatement.
There are three things that caught my attention in this story. First, the whistleblower praised the Phoenix VA’s new director, which suggests the problems at that particular branch of the VA are finally starting being addressed more effectively than they have in the past. Given how deep seated those problems are however, it will take considerable time for real progress in reforming the Phoenix VA to be made.
The second thing that caught my attention is the whistleblower’s reported background. As an actual veteran, he is in a real minority working in an administrative position at the VA, because of a clause in the Department’s contract with the American Federation of Government Employees, which gives “first and full consideration” to current employees of the federal government for administrative positions, and not to veterans. The effect of the VA’s hiring policy is to give preference to federal government union employees over veterans for its white collar positions.
The third thing to catch my attention is that the VA’s multiple problems with supervisor misconduct is strongly embedded in the VA’s Central Office. This reported fact confirms that the VA’s corruption scandals in rationing the provision of health care to America’s veterans through phony wait lists and other means is not the result of the rogue misconduct of individual VA employees or branches, but rather is the result of corrupt practices that have become institutionalized throughout the VA.
New leadership at the VA’s top leadership positions is the correct place to begin to remedy that situation, but fully remedying the VA’s ethical ailments will require a large scale flushing throughout its managerial ranks. Displacing the current occupants of many of these supervisory positions at the VA with actual veterans who have a real stake in the VA’s provision of health care to veterans could go a long way toward fixing what is clearly an institutional problem at the VA.
To be effective, more progress in that area needs to be made much more quickly than is currently being made, or else risk losing the little progress that has been made by corrupt supervisors outlasting the reformers. The new VA whistleblower’s story is a reminder of both how extensive the VA’s problems remain and how much bad wood needs to be cleared out before true accountability at the VA can be established.
As Craig Eyermann observed last year, veterans who survive combat face health care rationing by the federal Department of Veterans Affairs. Contrary to official proclamations, veterans wait months before they can even get on a schedule to receive care. In Phoenix, as many as 40 veterans died before receiving care, all due to a secret rationing system that could only happen with the knowledge of VA bosses. The rigors veterans face, unfortunately, are not limited to the federal system.
As Rachel Cohrs writes in the Sacramento Bee, the California Department of Veterans Affairs (CalVet) has indulged an “expensive failure,” a $28 million on a computer system that “launched years later than planned, wastes staff time and has not been fully implemented.” The comprehensive computer system was intended to give veterans “consistent and integrated care” throughout the state, but state auditor Elaine Howle found that CalVet failed to hire a contractor for three years, and then dropped the ball on oversight plans. At one facility for elderly and disabled veterans, data entry with the new system took twice as long as the old system, and another facility reverted to paper records. CalVet bosses were aware of the problems in 2012 but did nothing until 2013 and then blamed problems on employees’ alleged unfamiliarity with the system. CalVet wants to replace the $28 million bust with another system it “hopes can be implemented next year.” Good luck with that.
The state auditor recalled a series of government technology failures in data security, the payroll system, and licensing board software. She might have mentioned Covered California, the wholly-owned subsidiary of Obamacare, which spent $454 million on a dysfunctional computer system. “This is the same system that has cost nearly half a billion dollars so far,” wrote Emily Bazar, the Center for Health Reporting. The system may have helped “multitudes” apply for health insurance, but “it also is responsible for countless glitches and widespread consumer misery.” As with the VA and CalVet, the misery is inherent in the system.
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