State Senator Marty Block, San Diego Democrat, decided not to seek a second term, but as the ever-vigilant Dan Walters notes in the Sacramento Bee, on December 5, just in time for the holidays, Block “got a lucrative consolation prize from Gov. Jerry Brown – a $146,609 per year appointment to the state Unemployment Insurance Appeals Board.” In fact, the governor designated Block as chairman. As Walters observes, “The UI appeals board and other similar bodies have often been landing places for legislators who lose elections or retire.”
As we noted, California’s high-speed rail project, also known as the bullet train, is a giant bait-and-switch project. Even if completed, it would be slower and more expensive than air travel. On the other hand, the California High Speed Rail Authority helpfully provides a board post for Lynn Schenk, a former congresswoman and chief of staff for retired governor Gray Davis. Consider also California’s state stem-cell institute.
The California Institute for Regenerative Medicine has spent nearly $3 billion but failed to produced any of the life-saving cures and therapies it promised voters in 2004. CIRM paid huge salaries and channeled more than 90 percent of its funding to institutions with representatives on its governing board. In the early going, San Diego businessman Duane Roth offered to serve as vice-chairman and take no salary. CIRM bosses opted to make Roth co-vice-chairman along with former state senator Art Torres. CIRM promptly tripled Torres’ salary from $75,000 to $225,000.
With that kind of dough from California taxpayers, no need for Torres, a lawyer, to work at his craft. Same for Jerry Brown’s newly minted Unemployment Insurance Appeals Board chairman Marty Block, an attorney and former faculty member at San Diego State. For California’s ruling class, it’s always the most wonderful time of the year.
This week, we’ve been focusing on how lavish pension benefits promised by the officials of local and state governments across the U.S. have combined with the extremely poor returns that those officials have realized on the pension funds they have been investing on the behalf of public employees to produce an insolvency crisis for the governments, where their pension funds are rapidly approaching bankruptcy.
Yesterday, one local government in the U.S. reached a crisis point, where in the city of Dallas, Texas, the reaction of the city’s mayor and its pension board was to act to deny the city’s police officers and firefighters the right to protect themselves and their retirement pension wealth from the city’s mismanagement by making lump sum withdrawals of their portion of the pension funds invested on their behalf.
Tristan Hallman of the Dallas Morning News reports:
The Dallas Police and Fire Pension System’s Board of Trustees suspended lump-sum withdrawals from the pension fund Thursday, staving off a possible restraining order and stopping $154 million in withdrawal requests.
The system was set to pay out the weekly requests Friday. Pension officials said allowing the withdrawals would leave them without the liquid reserves required to sustain the $2.1 billion fund.
“Our situation is currently critical, and we took action,” board chairman Sam Friar said.
Pension officials and many police and firefighters have blamed Dallas Mayor Mike Rawlings for forcing the latest run on the bank. Dozens of retirees rushed to request withdrawals after Rawlings filed a lawsuit Monday to stop the withdrawals.By then, more than $500 million had already gushed from the fund since the board proposed benefit cuts in August.
The article goes on to describe just how lavish the city’s pension benefits are for public employees, which are a major contributing factor to why the pension fund was “hurtling toward insolvency” in the words of one pension board member:
On Wednesday, the city officially unveiled its plan to save the fund. The biggest target was the lump-sum program officially called the Deferred Retirement Option Plan, or DROP.
That plan, originally intended as a retention perk for veterans, made hundreds of officers, firefighters and retirees into millionaires. DROP allowed them to retire on paper, continue working and meanwhile defer their pension benefit checks into a separate account. Once they actually retired, they could remain in DROP and continue deferring their checks.
For years, DROP guaranteed at least 8 percent interest on the money. That hurt the entire fund when the investment returns couldn’t keep up. The problem was made worse when the pension’s current administration revealed that their predecessors had significantly overvalued risky real estate investments.
The city is looking for a $1.1 billion taxpayer bailout to paper over its pension fund insolvency crisis, which it will seek to obtain through imposing higher taxes on Dallas residents, cuts to city services, and new borrowing.
What Dallas is experiencing is what the end of the road looks like for governments that rack up excessive liabilities and debt.
That overly lavish promised pension benefits and incompetent management of pension investments are responsible for the Dallas pension funds problems are driven home in an earlier Dallas Morning News article by Michael Schnurman:
The more you pay, the more they need.
That’s one takeaway from the crisis at the Dallas Police and Fire Pension, and everybody has a right to be angry.
Taxpayers pony up nearly 28 percent of those workers’ pay for their retirement. That’s roughly three times more than most workers get from their employer with Social Security and a typical 401(k) match.
Police and firefighters get triple the standard benefit and their retirement fund is going broke?
Incredibly, this isn’t unusual. Nationwide, state-run retirement systems are underfunded by over $900 billion, according to Pew Research. Throw in local pension systems, such as police and fire plans, and the nationwide gap is projected to top $1.5 trillion in 2015.
The article goes on to describe the mismanagement of investments and some of the lavishness of the pension benefits for city employees.
In contrast to the 28% of city worker’s pay that taxpayers pony up to support their retirement pension income, in the private sector, employers are required to match 6.2% of their employees’ income through their portion of Social Security’s payroll taxes. In addition, private sector firms will also provide roughly an additional 3% match on average toward their employees contributions to their defined-contribution 401(k) retirement plans, which do not carry the same risks of underfunding the way that traditional pensions like those enjoyed by government workers often do.
But that was an option considered and rejected by the officials who have overseen and contributed to the Dallas public employee pension funds growing insolvency crisis. Unfortunately, better and more competent oversight would have done little to avoid its core problems:
But there’s no assurance that more Dallas oversight would have prevented the problems. In other cities, politicians have traded pension increases for smaller employee raises or cut back on annual contributions because of tight budgets. Such moves kick the costs down the road, and they usually grow significantly.
“There’s no consequence, except that the city accumulates debt that taxpayers will have to pay off,” said Leonard Gilroy, director of the pension integrity project at the Reason Foundation, a libertarian think tank.
Dallas leaders looked at several options for the pension, including switching to Social Security and a direct-contribution plan. They’re sticking with what they have.
Apparently, the city’s leadership prefers the option to stick the bill to Dallas residents by hiking their property taxes by 130%. The more you pay, the more they need.
President-elect Donald Trump finds “tremendous waste, fraud and abuse” in the federal government, and proclaims, “we’re going to get it.” When it comes to the military, which Trump wants to rebuild, that is going to be a tough task.
As Craig Whitlock and Bob Woodward note in the Washington Post, “The Pentagon has buried an internal study that exposed $125 billion in administrative waste in its business operations.” The 1.3 million troops on active duty are the fewest since 1940, but the Defense Department “was paying a staggering number of people – 1,014,000 contractors, civilians and uniformed personnel – to fill back-office jobs far from the front lines.”
The Pentagon’s purchasing bureaucracy counted 207,000 full-time workers, with 192,000 in property management and, count ‘em, 84,000 in human-resource jobs. The Army alone employed 199,661 full-time contractors, as Woodward and Whitlock note. That’s more than the combined workforce of the Departments of State, Agriculture, Commerce, Education, Energy, and Housing and Urban Development. Average yearly cost for each contractor was $189,188. The Navy had 197,093 contractors at $170,865 a pop, and the Air Force 122,470 at $186,142 apiece. And so on. No wonder the Pentagon sought to bury the study.
Whitlock and Woodward show how that evasion played out, and how military officials defend the status quo. Deputy Defense Secretary Robert O. Work is on record for having said, “We will never be as efficient as a commercial organization. We’re the largest bureaucracy in the world. There’s going to be some inherent inefficiencies in that.”
Over at the Pentagon, the swamp is truly fathomless, with “tremendous waste, fraud and abuse,” as Mr. Trump said. Taxpayers should be on full alert to see how much of the $125 billion in “inherent inefficiencies” Trump can trim. Taxpayers should also see if the waste scandal prompts President Trump, commander-in-chief of the Armed Forces, to tell anyone: “You’re fired,” just as he did as a businessman.
The Kersten Institute for Governance and Public Policy at Stanford University has a project that tracks the liabilities of pension funds for state government workers across the nation, where the liabilities represent the gap between the money that the pension funds hold and how much they would need in order to pay 100 percent of the retirement pension benefits that state government officials have promised to pay state government workers.
In California, the gap totals approximately one trillion dollars, which if equally divided among all Californian households, meaning each would have to give up $93,000 in either taxes, state government services, or both in order for California’s government workers to enjoy the lavish pensions they’ve been promised.
After extracting California and national data from the Kersten Institute’s database, ZeroHedge featured a chart comparing the growth of California’s household burden of state government employee pension liability with the average household’s state government pension liability in the United States, for the years from 2008 through 2015.
Warren Meyer describes his reaction to the trend:
All that money you thought you were saving for retirement — it may be you were really saving it for your friendly neighborhood DMV worker’s retirement.
Why are California’s state government employee pensions such a problem? Writing at Forbes, Adam Andrezejewski of OpenTheBook finds the state is awash in gold-plated pensions for the state’s government employees:
The California Public Employee Retirement System (CalPERS) is the USA’s largest pension fund with $301 billion in assets. It’s also a lucrative transfer mechanism helping 1,251 local governments confer ‘highly compensated’ pensions to tens of thousands of public employees. Updated numbers displayed at OpenTheBooks.com show there is a $2.8 billion annual cost to payout 21,862 six-figure public-sector retirees via CalPERS.
It’s a massive payout equivalent to the combined income tax payments of nearly 1.6 million individual California taxpayers.
OpenTheBooks provides the following chart indicating California’s Top 10 state pensioners, who are collecting the biggest annual pension paychecks:
Andrzejewski continues to describe how California’s government employee pensions are a ticking time bomb for the state’s taxpayers:
The golden state of government pension largess just might collapse under its own weight. Recently, CalPERS projected that there’s up to a one in three chance of entering a ‘crisis point’ of doomsday underfunding sometime in the next 30 years.
Still, there may some hope and relief coming soon. In August, a San Francisco based state appellate court held that reasonable benefit cuts are permissible in the pension system.
As is the case in pensions systems across the country, CalPERS shows that handing out lavish benefits to everyone – or the many – creates retirement security for no one.
California’s retirement pension plan for its government employees has become a national model of what not to do.
Representative Elijah Cummings, Maryland Democrat, charges that Ben Carson is “woefully unqualified” to lead the federal Department of Housing and Urban Development, and even some of Carson’s supporters cite his lack of experience. For his part, Carson believes he can make a “significant contribution particularly by strengthening communities in need” and “ensuring that our nation’s housing needs are met.” Dr. Carson might want to consult Andrew Cuomo, HUD boss under Bill Clinton.
“I set out to help save an agency Republicans had written off, and at times, tried to abolish,” Cuomo wrote in his 2014 memoir, All Things Possible: Setbacks and Success in Politics and Life. Cuomo had seen “effective programs and examples of creative government” and wanted clear up the nation’s “large-scale urban ills.” President Clinton duly issued an executive order “directing HUD to break the cycle of homelessness in America.”
Cuomo took the lead but found that HUD was not up to the task. Former HUD boss Henry Cisneros described the federal agency as “a bureaucracy far more attentive to process than results, characterized by slavish loyalty to nonperforming programs.” That accords with Cuomo’s own observations.
“HUD had taught me,” he explains, “that a central-government-knows-best approach rarely produces the best results.” In fact, according to Cuomo, “even the physical space at HUD was dysfunctional”—not exactly a ringing endorsement.
The late Republican Jack Kemp, a former NFL quarterback and outspoken conservative, set out to clean up the “swamp” and make HUD work to help the poor and homeless. One would be hard pressed to consider Kemp’s efforts a success, and as Andrew Cuomo confirmed, HUD remains resistant to reform.
Republicans no longer speak of abolishing HUD and appear to believe that, under new management, the federal bureaucracy can do great things. No one doubts that, as president-elect Donald Trump says, Ben Carson has a “brilliant mind.” On the other hand, in a federal agency where even the physical space is dysfunctional, a brilliant mind can easily go to waste.
Property tax bills showed up back in October in envelopes reading: TAX BILL – OPEN IMMEDIATELY. Note the light touch, sort of like “hand over the wallet, Jack!” This year, many taxpayers will have to dig deeper in their wallet, but not because California’s county governments are providing them more and better services. The property tax bill is not tied to government performance of any kind. Counties such as Sacramento have determined that the property is now worth more, so they jack up the bill as much as possible under voter-approved Proposition 13. Even so, the bill is not negotiable and taxpayers can’t seek a better deal at Fred and Donna’s government down the street.
Taxpayers don’t have to pay the property tax bill immediately. They can pay the first installment by December 10, thoughtfully timed for the holiday season, when families are hard pressed for cash. If taxpayers miss the deadline, the government slaps them with penalties. The second installment is due next April, right around the deadline for income tax returns. On the other hand, tax abuse is always in season.
The government withholds money from workers’ paychecks, which means that the government gets the workers’ money before they do. This money grab dates from World War II, and it was supposed to be temporary. Good luck with that. As Milton Friedman said, nothing is so permanent as a temporary government program.
With all the talk of draining the swamp, no politician aims to eliminate withholding. Some talk of tax reduction, but workers should be on guard for politicians’ rhetorical tricks. If workers somehow get to keep more of what they earn, the government does not thereby “give” them anything. Taxpayers might keep that in mind as they write those checks before the December 10 property tax deadline, lest they suffer a penalty. And remember, you are not getting more and better government service. You are only giving the government more of your money. Happy holidays, everybody!
Sanctuary cities decline to enforce U.S. immigration laws and comply with federal customs and immigration enforcement. President-elect Donald Trump’s crusade against sanctuary cities is supposed to be a blow against criminals, but as Chriss W. Street of Breitbart shows, California could suffer serious consequences.
There are some 300 sanctuary cities and counties nationwide and four Democrat-controlled “Sanctuary States” that also defy federal immigration law. Due to low population, Connecticut, New Mexico, and Colorado receive relatively small amounts of federal dollars. On the other hand, California, with the nation’s largest population, is “the top receiver of federal funds in the nation.”
By Street’s count, of California’s $252.5 billion in total estimated government spending for fiscal year 2015, the federal government kicked in $93.6 billion, a full 37 percent, and “that works out to a stunning $6,451 for every man, woman and child in the state.” Health and Human Services gets the biggest chunk, at 52 percent, and 25 percent goes to local government general revenues for “Labor and Workforce Development.” Education gets 14 percent, and transportation 6 percent, with 2 percent for “Legislative, Judicial and Executive.” General government gets only 1 percent, but that includes the environment, natural resources, and “Corrections and Rehabilitation.”
Moody’s Global Credit Research finds California to be the “least prepared large state to weather the next recession” and has warned municipal bondholders that plummeting financial conditions would result in “large numbers of municipal bankruptcy findings.” Given the state’s precarious financial condition, Street warns, “any cut-off of federal funds by the Trump Administration could bankrupt California and many of the state’s local government entities.”
That’s what happens in a wasteful, overspending state with little accountability and heavy dependency on the federal government. Meanwhile, California’s status as a sanctuary state for criminals and fugitives is not a new development. Dennis Banks of the American Indian Movement was convicted of riot and assault for a 1973 courthouse gun battle in South Dakota. Banks fled to California and Governor Jerry Brown refused to extradite him.
For years now, many high-ranking state and local government officials around the United States have been exceptionally generous in promising and providing big pensions to the police, firefighters, and civilian government employees in return for their their political activism and support in their communities.
At the same time, they have been counting on getting exceptionally big returns on the money they’ve set aside, from their state and local government tax collections, to invest through their public pension funds to pay for the retirement benefits of state and local government employees.
And for years now, those investments haven’t been returning anywhere near what these high-ranking officials have needed them to yield in order to deliver the lavish pension benefits that they have promised. In many communities, officials have even encouraged their pension funds to pursue increasingly risky investments, in hope of delivering the big investment returns they need to sustain their promised public employee retirement benefits.
In some communities, like Dallas, Texas, the big risky bets these officials have encouraged have so badly failed to pay off the needed big returns, that the pension funds are at risk of becoming insolvent. Bloomberg‘s Darrel Preston reports:
The Dallas Police and Fire Pension System, once applauded for a diverse investment portfolio that included Hawaiian villas, Uruguayan timber and undeveloped land in Arizona, finds itself needing to dig out of a deep hole.
A $1.2 billion change last year in the difference between the value of its assets and what the pension owes retirees left the $2.6 billion fund with just 45 percent of the assets needed, down from 64 percent at the end of 2014. The pension, which was 90 percent funded a decade ago, could be out of cash in 15 years at the current rate of projected expenditures, according to a Segal Consulting report last month.
The sudden burgeoning deficit shows the bind public officials across the country are grappling with as investments and funding lag promised benefits. The city and pension fund members now send an amount equal to 36 percent of officers’ pay to the pension, but that percentage needs to more than double to fully fund the pension over the next 40 years, according to Segal.
“It’s hard to cut benefits,” Dallas City Councilman Philip Kingston, a member of the pension’s board, said in an interview. “But this plan needs a lot of capital and it’s hard to know where it’s going to come from.”
With no way other than imposing huge tax increases and cuts in city services to bail out Dallas’s failing public-employee pension fund and keep it afloat, the city’s government employees have begun implementing their own personal bail out plan—they have begun withdrawing their promised pension benefits in lump sum payments.
According to the New York Times, so many city employees seeking to protect their promised retirement assets have done so that the pension fund is now at risk of full financial collapse, in the modern-day equivalent of the kind of run on failing financial institutions and banks that occurred in the U.S. during the gloomiest days of the Great Depression.
Over six recent weeks, panicked Dallas retirees have pulled $220 million out of the fund. What set off the run was a recommendation in July that the retirees no longer be allowed to take out big blocks of money. Even before that, though, there were reports that the fund’s investments — some placed in highly risky and speculative ventures — were worth less than previously stated.
What is happening in Dallas is an extreme example of what’s happening in many other places around the country. Elected officials promised workers solid pensions years ago, on the basis of wishful thinking rather than realistic expectations. Dallas’s troubles have become more urgent because its plan rules let some retirees take big withdrawals.
Now, the Dallas Police and Fire Pension System has asked the city for a one-time infusion of $1.1 billion, an amount roughly equal to Dallas’s entire general fund budget but not even close to what the pension fund needs to be fully funded. Nothing would be left for fighting endemic poverty south of the Trinity River, for public libraries, or for giving current police officers and firefighters a raise.
At a minimum, this situation, which exists to varying degrees for state and local governments across the United States, points to the need to reform public-employee pension plans to protect both government workers and taxpayers from such failures.
Options for reforms might include a combination of measures such as transforming defined-benefit pensions into defined-contribution, 401(k)-style pension plans, imposing strict restraints on both how and when public employees can collect their pension payouts, and requiring public employees to contribute much larger shares of their current incomes toward their retirement plans.
Meanwhile, the government-employee pension funds themselves should be required to establish “living wills“, similar to what large U.S. banks have been required to do since the fiscal crisis of 2008, such that if independent regulators or rating agencies determine that they have become insolvent, their remaining assets might be liquidated in an orderly fashion and fairly distributed among their public-employee beneficiaries.
Without such reforms, state and local government officials would only be ensuring that public-employee pensions will remain at risk of failure. As the example of Dallas reveals, public-pension shortfalls badly hurt people in the community that the government officials are supposed to serve.
It’s a list that none of us wanted to see, but thanks to the wasteful spending of the federal government, one that has been dutifully assembled by U.S. Senator James Lankford: Federal Fumbles: 100 Ways the Government Dropped the Ball, Vol. 2.
Like its predecessors, U.S. Senator Jeff Flake’s Wastebook (formerly produced by James Coburn) and former Senator William Proxmire’s Golden Fleece Awards, Federal Fumbles highlights some of the most extreme examples of wasteful spending done by federal government bureaucrats in the name of doing their jobs. And in some cases, doing the same jobs as other federal government bureaucrats!
Here’s a short list of 10 items from the full list of 100 that stood out from the rest.
There is however just no getting rid of the smell from wasteful spending.
The United States government has deployed central planning through schemes such as the Agricultural Marketing Agreement Act of 1937. Authorized by Congress during the New Deal, the Act set up cooperative boards and conscripted growers into reserve set-asides. As we noted, in recent years the government targeted raisins in California. In 2003, Fresno raisin growers Marvin and Laura Horne would have to give up more than 30 percent of their crop, receiving nothing in return. To the Hornes this looked like theft, so they grew, packaged and sold raisins apart from government planners. The U.S. Department of Agriculture responded with a fine of $695,000, so the Hornes duly appealed and the case reached the U.S. Supreme Court.
Last year, Chief Justice John Roberts ruled that “Raisins are private property, the fruit of the growers’ labor, not public things subject to the absolute control of the state,” adding “Any physical taking of them for public use must be accompanied by just compensation.”
The court ruled 5-4 in favor of the Hornes and the only justice who filed a dissenting opinion was Justice Sonia Sotomayor, who bills herself as a “wise Latina.” The Justice Department argued that the statute of limitations had run out but a new ruling by the U.S. Court of Federal Claims rejects that argument. Marvin and Laura Horne may continue their “takings” case in quest of the just compensation they deserve. The real issue is government intervention in agriculture.
“Central planning was thought to work very well in 1937,” observed the late U.S. Supreme Court Justice Antonin Scalia during arguments in the raisin case, “and Russia tried it for a long time.” Justice Elena Kagan slammed the whole USDA raisin program as “ridiculous,” and she is right about that. Nearly 80 years after the Agricultural Marketing Agreement Act of 1937, it is time to stop government colonization of the market.
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